Houses are overvalued, according to the Reserve Bank, and housing affordability has worsened "considerably" since the 1990s.
But the central bank is effectively ruling out any controls on how much banks can lend on the value of a home, for now.
The central bank also warned yesterday that with houses overvalued on some measures, banks needed to stay alert to the risks of a big leap forward in credit growth in the household sector.
If demand for loans were to rise significantly and banks were willing to lend, household debt could start moving back up, "eroding households' resilience to shocks", the bank's latest Financial Stability Report says.
New Reserve Bank governor Graeme Wheeler told a parliamentary select committee yesterday it was working on an agreement with the finance minister and Treasury on how potential "loan- to-value ratio" or LVR controls would work.
Such controls would mean buyers would need a greater deposit for a home rather than, say borrowing almost all the money to buy. The controls could also potentially apply to small business lending that is secured on a home.
But that sort of control would be used only when "asset bubbles build up" and when bank lending grew rapidly, feeding into rising prices, Wheeler said.
Controls on loan-to-value ratios are used in many other countries, including Israel, which this week increased loan-to-value ratios while cutting interest rates. Such moves are designed to prevent house-price bubbles forming.
The controls were also used in Canada, Asia and in northern Europe.
Wheeler said while there were controls on home loan-to-value ratios for banks in some countries, it was not something it would want to do now, even if it had the power.
The central bank would have to see a systemic risk in the banking system before it would consider such controls.
However, the report out yesterday also says that high loan-to- value ratio loans were now starting to make up "a significantly larger share of new mortgage lending than has been the case for most of the period since the global financial crisis" hit. The relaxation of lending standards partly reflected weak loan demand, the report says.
Wheeler also pointed out that household debts levels remained high. So borrowers were vulnerable to a "potential" fall in house prices, despite cutting debt levels in recent years.
While the central bank would not put a figure on how overvalued the housing market was, Wheeler said housing affordability had worsened significantly since the 1990s. Between 2001 and 2007, New Zealand had the most rapid rise in house prices in the OECD.
House prices rose to five times the average household disposable income in 2007, but had since dropped back to 4.5 times, he said.
"That's quite a bit higher than the 1990s, when it was three times household disposable income," Wheeler said.
If there were a big correction in house prices, "you don't want people sitting there with a lot of debt".
Prices could drop if people became more concerned about their high debt levels, if banks found it harder to fund home loans, or if there were a big terms-of-trade shock - falling export prices because of a slowdown in Asia, especially China.
The key in the housing market was to get more homes built, because "there is a supply shortage", deputy governor Grant Spencer said. The shortage would not be solved by throwing more bank loans at people to push prices up even more. "The more that happens, the greater the risk is you could have a greater correction [fall] of house prices," he said.
Key points of the Financial Stability Report include:
- New Zealand's financial system has strengthened, despite a challenging international environment, with banks getting better access to global financial markets.
- The global economy remains weak, Europe is in recession, and there has been a slowdown in China.
- Uncertainty about global growth remains high, given people paying off debt and growth could be further undermined by government belt-tightening in the United States.
- "The external environment poses significant risks for the New Zealand financial system," Graeme Wheeler says
- Households and firms had generally continued to reduce their reliance on debt, though household debt remained relatively high.
- "Many borrowers are still vulnerable, especially to any correction in house prices."
- © Fairfax NZ News
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