LVRs won’t halt house price growth – S&P

Earlier this week, Standard & Poors warned that strong house price inflation, coupled with an increase in private sector credit growth, has made for increased economic risks for New Zealand’s banks.

Following that warning, the agency has made a presentation on New Zealand’s banking sector and the Reserve Bank’s macro-prudential tools were a focus.

Standard & Poors analyst Andrew Mayes said the new investor-targeted LVRs, which are set to come into force on October 1, will provide a further degree of financial stability.

The LVRs introduced previously have had some success in achieving a decline in the proportion of high LVR loans held by the banks, he said.

“We would expect to see that decline continue. They do impose more onerous conditions so we think we will see some impact on house prices from them, especially in regions out of Auckland.

But while there might be a slight slowdown in house price growth, Standard & Poors expects to see some house price imbalances continue to grow.

Mayes said one of the reasons for this is that interest rates are at an all-time low.

“There are also a number of issues that are out of the control of the Reserve Bank. These include immigration, housing supply, and a tax regime that favours household debt.”

In his view, the Reserve Bank is likely to introduce further restrictions, such as capital overlays or debt-to-income ratios or even more LVRs.

Mayes said that, as the Reserve Bank hasn’t done anything about the serviceability of loans, debt-to-income ratios were likely to be next on the cards.

“If you look at the debt serviceability ratio – it has been trending down due to falling interest rates.

“But we suspect, especially for some of the newer loans, that it is probably headed north given how much debt individuals have taken on.”

Given debt is not likely to decrease nor wages likely to increase much, that situation won’t change, he said.

This means there is a strong possibility that the Reserve Bank will decide to act on it in the name of financial stability.

However, in the presentation, it was emphasised that, while the economic risks to New Zealand’s banks have increased, the country’s banking system is not a risky system.

Standard & Poors analyst Nico DeLange said it was important to look at where the country sits internationally.

“New Zealand is roughly in the top third of all the banking systems we assess so, even if the risks have increased, it is not in the high risk category of countries.”

It is supported by a resilient economy and a conservative but proactive bank regulator, he said.

“There is also a low risk appetite that supports the system. It is still very profitable so the banks don’t need to take unwarranted risks to improve their performance.”

It is unlikely that there is a bubble brewing in New Zealand, he added.

“Our base case is that any heightened economic imbalance will unwind in an orderly manner with no major increase in material losses, including in the residential mortgage area.

“Also, the overall economic outlook is quite benign compared to its international peers.”