Addressing housing market risks - RBNZ

Reserve Bank Governor Graeme Wheeler

New Zealand’s financial system is sound, but it still faces significant risks – and the housing market continues to be one of those, the Reserve Bank said in its latest Financial Stability report.

Reserve Bank governor Graeme Wheeler said house price inflation in Auckland has softened in recent months but it is uncertain whether this will be sustained.

Auckland’s house price growth remains high at 9.3% in the year to October and, at 9.6, the region’s house price to income ratio remains among the highest in the world, he said.

“House prices are continuing to rise rapidly in the rest of the country, with most cities experiencing annual house price growth above 10%.

“There is a significant risk of further upward pressure on house prices so long as the imbalance between housing demand and supply remains.”

According to the report, rising house prices continue to reflect low interest rates, steady income growth, and an imbalance between population growth and the rate of house building.

But there is a risk that a reversal of any of these factors could cause a significant market correction.

Deputy governor Grant Spencer said the Reserve Bank’s LVR policy is increasing the resilience of bank balance sheets to a downturn in the housing market.

“However, the share of bank mortgage lending to customers with high debt-to-income (DTI) ratios has been increasing.

“This could increase the rate of loan defaults during a housing downturn.”

For this reason, the Reserve Bank has formally asked Finance Minister Bill English for the ability to add a DTI ratio tool to the memorandum of understanding on its macro-prudential policy.

ASB chief economist Nick Tuffley said the Reserve Bank has highlighted the housing market as a concern for a long time, but the report indicates there has been a shift in their focus on this front.

“It seems to have become more comfortable with the share of high LVR lending on the bank balance sheet, but has become concerned about the increases in debt relative to income.”

Despite the Reserve Bank’s move on the DTI front, Tuffley and other economists don’t believe DTIs will be introduced any time soon.

NZ Property Investors Federation executive officer Andrew King can understand why the Reserve Bank wants to have as many tools as possible at its disposal.

But he also thought it was pretty unlikely that the Reserve Bank will end up introducing them.

“Auckland seems to be nearing the end of its boom,” he said. “This is still a supply and demand imbalance but affordability issues are kicking in and the market has probably run its cycle.”

Markets around the rest of New Zealand were not growing at an unsustainable degree, rather they were growing at a normal rate in terms of their cycle.

King said he would hope that the Reserve Bank wouldn’t overdo it and introduce DTIs when they weren’t really necessary.

As a point of interest, he said that when DTI ratios were introduced in the UK, they were introduced for homebuyers but not for rental property owners.

In the post-report media conference, Wheeler would not be drawn on the level at which a DTI ratio could be set if it is introduced.

He said that if the Reserve Bank did have DTI ratios at its disposal, it wouldn’t introduce them at this time.

But the Reserve Bank is monitoring the housing market closely as the ongoing combination of low interest rates and strong migration means it is unclear whether house price moderation will continue.

Wheeler said the bank would need to see a strong credit-related resurgence in house price inflation in Auckland and also nationally before introducing DTI ratios.

While there has been an increase in high DTI lending, there has also been a significant decline in the value of housing loan commitments, he added.