IMF still not happy about house prices

It has issued a concluding statement, describing the findings of IMF staff's visits to New Zealand.

“By historical and international comparisons and most measures of affordability, New Zealand’s house prices appear elevated. With house price inflation running high, there remains the risk that expectations-driven, self-reinforcing demand dynamics and price overshooting could take hold," the report said.

"The government’s steps to help alleviate supply bottlenecks, measures to tighten standards for mortgage lending, and an increase in mortgage rates should help ease price pressures. But a sudden price correction—possibly triggered by a shock to household incomes or borrowing costs—could reduce consumer confidence, impact overall economic activity, and hurt banks’ balance sheets.”

It said the Reserve Bank's prudential measures were welcome.  The macroprudential framework would give the central bank the ability to safeguard financial stability and take additional measures when necessary to guard against the risks that would arise out of an unsustainable acceleration in house price inflation, it said.

"As a longer-term measure, policies to address housing supply constraints will continue to play an important role in containing price pressures and increasing affordability."

A sharp slowdown in China was still the biggest external threat to the country's economy, the report said.

But overall, the IMF said New Zealand's financial system was sound. It said the banks were well-capitalised and non-performing loan ratios were declining. "Stress tests show that the major banks would be able to withstand a series of sizeable shocks."

But there were structural issues that would remain sources of risk over the medium term. "The four largest banks are systemically important with broadly similar business models, and their reliance on offshore funding, while declining, is still high by international standards and represents a risk," it said.

"Residential mortgages and agricultural lending account for most of banks’ assets, sectors vulnerable to price fluctuations and where leverage is still high. Although as subsidiaries the major banks are not dependent on borrowing from their Australian parents, they are still vulnerable should a parent get into trouble which could affect their access to offshore borrowing."