The Reserve Bank’s (RBNZ) says the stability of the financial system as a whole is robust, despite there being pockets of vulnerabilities and a number of uncertainties ahead.
There were no surprises in the RBNZ’s biannual Financial Stability Report, released on Wednesday.
The RBNZ reiterated its focus remains on housing-related financial stability risks.
Having reimposed loan-to-value ratio (LVR) restrictions, which are now at tighter levels for both investors and owner-occupiers than pre-Covid, the RBNZ doesn’t appear to be in a rush to introduce debt serviceability restrictions.
It reiterated it will start consulting on these in late-November (the consultation was initially due to begin in October, but was pushed out due to Covid-19).
It noted implementing a debt-to-income limit could take “at least six months” following the design and calibration of the tool. Setting interest rate floors on the test interest rates that banks use in their debt serviceability assessments could be implemented sooner.
However, the RBNZ said, “We expect banks to be more cautious about high debt-to-income loans given the risks of rising interest rates and to the economic outlook.”
Indeed, BNZ last week announced it won’t lend (initially only via its broker channel) to both investors and owner-occupiers seeking debt worth more than six times their annual income.
The RBNZ recognised how the flood of support provided to the economy by both central banks and governments around the world had boosted asset prices. The question now is how the removal of this support will affect these prices.
“Should inflationary pressure prove more persistent, and inflation expectations increase, this could prompt a faster increase in interest rates,” the RBNZ said.
“Coupled with weaker growth, such a scenario could lead to declines in asset valuations and lead to a sudden tightening in financial conditions.”
The RBNZ repeated what Governor Adrian Orr said in a speech on Tuesday - that New Zealand house prices are “above what is sustainable”.
“Market momentum has been maintained at a strong level, although at a slightly slower pace in recent months,” the RBNZ said.
“Valuation metrics such as price-to-rent ratios highlight that prices are vulnerable to a decline as interest rates increase from their recent lows.”
However the RBNZ walked back a little from the house price projections published in its August Monetary Policy Statement, saying the “precise timing” of the house price moderation it projected for over the coming year is “uncertain”.
The RBNZ in August forecast annual house price inflation peaking at 30% in September 2021, before falling to 17% by March 2022, 5% by September 2022 and negative territory by March 2023.
Again, the RBNZ made the point that in aggregate, households can absorb “sizeable” falls in house prices. In the 18 months to June 2021, total household net wealth rose by more than 27%. Property - mainly the land component - accounted for half of this gain.
In aggregate, household loan-to-value ratios have accordingly fallen.
But, recent homeowners with massive mortgages are the vulnerable ones, who will feel a rise in interest rates.