The continuing rise in house prices and borrowing risks a 'significant market correction', the Reserve Bank says
Household debt is up, investment mortgages have increased and house price inflation continues to climb in almost every town and city, according to new Reserve Bank data.
The exception is in Auckland, where the annual growth rate has fallen by a little over 10 percentage points.
Data show annual house price inflation in urban areas increased considerably in most places.
Annual inflation in Queenstown in 2015 was 8.4 per cent, increasing to 29.8 per cent this year.
House price inflation has jumped to double figures from single figures in many centres and the Auckland house price to income ratio of 9.6 was among the highest in the world, the report said.
"House price pressures continue to spread to the rest of the country, with most cities experiencing annual house price growth above 10 per cent. Credit to the household sector is growing rapidly and...rising house prices continue to reflect low interest rates, steady income growth, and an imbalance between population growth and the rate of house building.
"There is a risk that a reversal of any of these factors could cause a significant market correction."
Wellington's real estate inflation in 2015 was 2.6 per cent, but has jumped to 21.1 per cent while the growth rate in Auckland - the country's largest and most expensive market - decreased from 24.4 per cent inflation in 2015 to 13.8 per cent this year.
There were significant risks from increasing house prices, the bank's financial stability report says.
Reserve Bank governor Graeme Wheeler said the New Zealand economy was growing and stable but there were continuing risks from the housing market.
The central bank sets institutional lending criteria but does not directly regulate the housing market.
Auckland was the country's most expensive region relative to incomes.
"House price to income ratios in the region remain among the highest in the world and prices are continuing to rise rapidly in the rest of the country.
"There is a significant risk of further upward pressure on house prices so long as the imbalance between housing demand and supply remains," Wheeler said.
The bank's report said Auckland prices were significantly overvalued compared to incomes.
"While many other regions have seen rapidly rising house prices, prices have grown from a lower base and generally have not reached the same levels of overvaluation as Auckland.
"Nevertheless, price-to-income ratios are rising throughout much of New Zealand and further strong house price inflation would see prices continue to stretch relative to incomes.
"The risk of a sharp house price correction outside of Auckland is increasing as prices become more stretched, particularly in urban areas near Auckland."
Strong demand was driving house price growth in Auckland and across the country. High immigration, low interest rates, and limited housing construction were also supporting house price growth.
On the supply side, construction was slow in meeting increased demand in Auckland and household debt was also growing.
Banks appeared to be engaged in new lending where the debt to income ratio was more than a factor of five. Borrowers with high levels of debt relative to income were more susceptible to interest rate spikes or job market shocks as they were less able to sell houses to pay off debts if shocks coincide with a housing downturn.
"International evidence from past housing market downturns shows that highly indebted households are more likely to default on debt and reduce consumption by more during downturns, leading to spillovers to other sectors and amplified bank losses during a housing market downturn.
"The availability of loans to borrowers with debt to income ratios greater than five has increased substantially since the global financial crisis, as high house price inflation has reduced affordability and low interest rates have increased the debt capacity of borrowers.
"The share of lending at ratios over five has increased for all buyer types since 2014.
"Another concerning trend is the share of new mortgage lending obtained by investors. In the year to June, property investors' share of new residential mortgage commitments increased from 32 per cent to 38 per cent."
That trend, in turn, led to the Reserve Bank tightening lending to residential property investors.
The bank has asked Finance Minister Bill English to agree to add a debt to income option to the Reserve Bank's financial system regulation toolkit. Wheeler said they were not proposing to use the tool at the moment.
Broadly, the idea behind debt to income restrictions prevents people from taking on unmanageable levels of debt and reduces the scale of mortgage defaulting in a downturn.
A debt to income ratio is used in the United Kingdom, where banks are limited to 15 per cent of their borrowers given loans no more than 4.5 times their household earnings.