The risk of a significant NZ house price correction is slowly moderating, Moody's says

The risk of a significant NZ house price correction is slowly moderating, Moody's says

By Gareth Vaughan

Credit rating agency Moody's says the risk of a significant New Zealand house price correction is slowly moderating thanks to steps taken by the Reserve Bank and efforts to boost housing supply.

In a report on the New Zealand banking system Moody's Sydney-based analyst Daniel Yu says the housing market "exuberance" of the last year raises some longer-term concerns, but the current house-price appreciation hasn't been fuelled by excessive credit growth.

"Moreover, the risk of a significant house price correction is slowly moderating, as a result of Reserve Bank restrictions on high LVR (loan-to-value ratio residential mortgage) lending, higher capital requirements on such loans, the tightening of monetary policy, and the coming measures to boost housing supply. All these are helping to cool down the market, as evidenced by a slowing of house sales and price growth," says Yu.

"Elevated household debt remains a key sensitivity of the household sector. But our expectation is for the Reserve Bank to tighten monetary policy gradually."

Nonetheless Yu says Moody's expects the regulatory environment in the next 12 months to be dominated by a continued focus on managing the risks banks face from rising property prices.

Moody's outlook on New Zealand’s banking system is stable, Yu says, reflecting an expectation of sustained economic growth and stable asset quality in the next 12-18 months. Although the banks could face "mild pressure" on their loan margins as monetary policy gradually tightens, low credit costs will help preserve profits and allow banks to maintain strong capital buffers, says Moody's.

Moody's says its central scenario assumes slightly above-trend GDP growth of 3.3% in 2014 and 2.9% in 2015. Moody's expects a gradual and modest rise in interest rates over this period.

Yu's comments on the moderating risk of a significant house price correction come after he told in April last year New Zealand banks faced a number of risks and Moody's was starting to see more evidence of these risks "coming through the banking system."

Moody's has Aa3 ratings with stable outlooks on ANZ NZ, ASB, BNZ, Kiwibank and Westpac. See credit ratings explained here.

This is an abridged version of this article. The full version was published in our email for paying subscribers. See here for more details and how to subscribe.

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

We welcome your comments below. If you are not already registered, please register to comment.

Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.


Funding conditions are also expected to remain favorable, as deposit growth continues to exceed loan growth. Consequently, the banks will not have to increase the proportion of their funding from wholesale sources. However, at 29% of total funding, with a sizeable foreign component, the banks' reliance on wholesale funding remains a key credit sensitivity. Read more
So, is it the case, in addition to high risk foreign wholesale lenders funding a significant portion of bank lending, unidentified cash rich foreign property buyers fuel an increase in the domestic deposit base greater than loan growth?

Nonetheless Yu says Moody's expects the regulatory environment in the next 12 months to be dominated by a continued focus on managing the risks banks face from rising property prices.
I would like some clarifiacation here - Moody's doesn't believe banks face any risks from collapsing property prices?

I don't believe commercial Airliners are at risk of being blown out the sky flying international routes -- ooopppss Ukraine - but no such unexpected surprises will affect the financial markets - -oooopppss - Leman Bros better quit predicting while I'm ahead!!!!!

The US housing crash was due to high interest rates according to this research. 
So what is NZs OCR 'neutral'?
the NZ economy will implode with an OCR of 5% etc 

... nothing to do with them having built 2 million more houses than the market needed at the time ?
Whereas in NZ we've built way too few .... the exact opposite of the Yanks ...

True. Still, it will be interesting how NZ copes with mortgage rates of 8% plus again. 
What we need for home owners in NZ is fixed rates for 15 years as in the USA then this constant fluctuation for locals can be put to rest.  

Hopefully house prices will fall!! Wouldn't that be great!
Regards to US rates think again, Greenspan left rates far too low for too long, to the point they couldn't be raised - see "the Greenspan put". Yes there was some over building but not in some of the bubble hot spots like California. Mostly it was a broken mortgage securitisation chain, broken regulation, irrational exuberance, adjustable rate mortgages and too low interest rates!!
NZ property speculators don't know how lucky they are to have an RBNZ governor like Wheeler - you think you'd prefer a Greenspan but look where US property prices are now...

Fact is that the RBNZ is one of the most reasonable central banks around. In a world of blind the one-eyed is king :-)
Good luck to NZ that it can keep its relative prosperity in the face of structural economic weakness because the mismanagement of so many other nations turns it into an unlikely safe haven.

However, we seem to be operating settings independently of global settings.  
If most other developed countries are running very low rates plus QE, why do we persist with our old normal? All for the sake of the Auckland housing market.  

Yes, independently, and better. NZ does not have to have QE (= money printing) because it is so small that the money printing of the other countries covers NZ capital demands easily. Also, QE is always a sign os desparation and not of confidence, so QE in NZ would undermine the meanwhile established safe haven attribute.
NZ also does not need ultralow rates as it is in another phase of the growth cycle as most other OECD countries. 
In other words, it looks like the RBNZ is doing an above average job. Stability is always a good thing for mum&pops and also investors. Crowning achievement would be if the politicians would use the favourable conditions to restructure the NZ economy and set it up for the future e.g. by modernizing manufacturing, massively improving infrastructure and attracting high tech startups. That's a fail, however, so unfortunately no reason to be overly optimistic. 
However, so far so good. RBNZ has done a good job.