Reserve Bank expects more caution from banks amid risk of house price correction

Wednesday, 3 November 2021

A Westpac advertisement for a one-year fixed mortgage rate on a bus shelter in Auckland.

The Reserve Bank has warned there is a heightened risk of a “correction” in the housing market and expects banks to become more cautious in their mortgage lending.

But it provided a reassurance that the financial system itself was resilient to the challenges posed by Covid in the “uncharted waters ahead”.

The bank reiterated its past warnings that recent home buyers were borrowing more relative to their income, and might be vulnerable to higher mortgage rates or a fall in house prices.

The Reserve Bank made the comments in a financial stability report published on Wednesday.

* Adrian Orr says Reserve Bank only has 'bit role' in unsustainable house prices

* Why central banks are back in the spotlight

A law change will allow landowners in Auckland, Hamilton, Wellington, and Christchurch to build up to three storeys without resource consent. (Video first published in October 2021)

On Tuesday, Reserve Bank governor Adrian Orr downplayed the role of the central bank in creating “unsustainable” house prices, saying they were more determined by international factors than the bank’s monetary policy which he said had only a “bit role”.

Economists expect the Reserve Bank to raise the official cash rate by either 25 or 50 basis points when it releases its next monetary policy statement on November 24, in the second of what is expected to be a long series of hikes.

Meanwhile, the average asking price of a house has been rapidly closing in on $1 million.

The combination of rapid price rises and rising mortgage rates has raised the risk of some recent home buyers falling into negative equity and being unable to service their loans in a correction.

That could have consequences for banks, which Orr noted on Tuesday had directed more than 60 per cent of their lending to mortgages.

The Reserve Bank is consulting on introducing controls on the amount of debt home buyers can take on, relative to their income.

But Orr on Tuesday described the tools that it could use as “limited”.

Deputy governor Geoff Bascand said that the Reserve Bank expected banks to be more cautious about high debt-to-income loans in the interim, given the risks of rising interest rates and to the economic outlook.

“The unpredictable nature of future economic stresses reiterates the importance of resilience for our financial institutions so that they are in a strong position to keep supporting their customers and the economy,” he said.

But he said a “stress test” the Reserve Bank conducted this year to check banks’ ability to cope with a “severe but plausible economic downturn” showed they were more resilient because they held more capital.

“Capital requirements for banks will progressively increase from July and it is encouraging to see them increasing ahead of these requirements,” he said.

ASB chief economist Nick Tuffley said it expected the impact of any new controls on mortgage lending to be about six months away, given the need for consultations and implementation.

“With its ‘financial stability’ hat on, the Reserve Bank assesses the financial system as remaining ‘sound’ and that financial institutions are ‘robust,” he said.