Housing 'not a flashing red alert but it's a concern', says Reserve Bank

Wednesday, 5 May 2021

The Reserve Bank has honed in on the housing market and 'increased risk taking' as key threats to the stability of the financial system.

The Reserve Bank has honed in on the housing market and 'increased risk taking' as key threats to the stability of the financial system in the wake of Covid, warning it may need to take more action on housing.

Deputy governor Geoff Bascand said the house price situation was 'not a flashing red alert, but it is a concern, and what we are expressing is a desire to see some stabilisation'.

The drivers of house inflation were probably softening due to slower population growth, more house building, and tax changes announced by the Government, he said.

But he indicated that even without an expectation of further strong prices rises, the bank believed there was 'a greater risk of correction than in a number of years prior'.

* Insurers and non-bank deposit takers, Reserve Bank's biggest worry

* Reserve Bank governor gives word to cap official cash rate at 0.25 per cent for a year**

Reserve Bank deputy governor Geoff Bascand reiterated concern that a high proportion of new bank lending had high debt-to-income and loan-to-value ratios (LVRs).

The economy had so far come through the Covid pandemic better than initially feared, governor Adrian Orr said in the central bank's latest six-monthly financial stability report.

Reserve Bank former chief economist, John McDermott, explains how inflation is measured and how it manifests itself.

'Successful public health measures along with substantial monetary and fiscal policy support, helped to prevent many business failures and a larger rise in unemployment,' he said.

'Key New Zealand export prices have also been resilient, with dairy prices at their highest level in several years.'

But Orr said border restrictions, supply chain disruptions, and social distancing meant some businesses remained vulnerable.

'We are also seeing the impact of low global interest rates resulting in increased risk-taking and higher asset prices,' he said.

'This is an international phenomenon, with the New Zealand impact most visible in higher house prices.'

Bascand said a drop in the unemployment rate to 4.7 per cent in the March quarter was encouraging.

'Clearly, unemployment is one of those things that impedes households' ability to service debt.

'A strong economy helps a strong financial system, so we are very pleased with that.'

But he reiterated concern that a high proportion of new bank lending had high debt-to-income and loan-to-value ratios (LVRs).

'This makes recent borrowers more vulnerable to a rise in mortgage rates and exposes households and the financial system to a decline in house prices.'

The recent tightening of LVR requirements, particularly for investor lending, would help to mitigate some of the risks and 'support more sustainable house prices', he said.

'We will be watching how market conditions respond to the Government's recent policy changes,' he said.

But, if required, the bank was prepared to 'further tighten lending conditions for housing using LVR requirements or additional tools that we are assessing', he said.

The Reserve Bank gave some hints it might be leaning towards introducing debt-to-income limits that would cap mortgages to some multiple of borrowers' income, if it did intervene again.

Assistant governor Christian Hawkesbury suggested it could expect 'diminishing marginal benefits' from instead further tightening LVRs.

But at this stage the Reserve Bank still appears to be in 'wait and see' mode.

Bascand said it was 'not at the point of specific decision making' regarding the further steps it might take to cool the market.

Government support and 'strong capital and liquidity buffers' meant that the pandemic had had a limited impact on financial system soundness, but further resilience was needed, the Reserve Bank said in its report.

'Overall banks are in a strong position to keep supporting their customers and the economy.'

The Reserve Bank updated its schedule for implementing new, tougher capital requirements for banks. These will start to apply from October with increases in minimum capital requirements kicking in from July next year.