NZ households, banks weathering the global storm, says RBNZ

By Craig Howie The Reserve Bank's much anticipated report card on how we are coping with the global economic and financial crisis provided a cautious reassurance that New Zealand is weathering the storm. In his half-yearly Financial Stability Report, Governor Alan Bollard was focused on soothing concerns about the New Zealand financial system's ability to manage its way through many more months of unprecedented economic challenges - rather than rolling out new crisis-fighting initiatives. But he did provide fresh insights into how New Zealand households are bearing up. Here, too, the news was mildly encouraging - suggesting the scale of mortgage defaults among New Zealand homeowners will fall well short of those ripping through the United States. "We have been entering a period of extreme disorder in international financial markets," Dr Bollard said. "Despite that, New Zealand's financial and payments systems have held up well. "The financial impact from all of this is far from over. But we do believe that New Zealand banks, and the Australian parents of our major banks, are well-positioned to withstand the economic downturn." Reiterating that New Zealand banks had not experienced the significant housing loan losses that have been at the heart of the financial meltdown in the United States and Europe, Dr Bollard said global market conditions had, nevertheless, affected the cost and accessibility of offshore funding so crucial for New Zealand banks. "Over the past two months, even well-rated institutions, such as the Australasian banks, have found it very difficult to borrow in global wholesale markets, given the extreme risk aversion among foreign investors. "As a result, the availability of credit for New Zealand households and businesses has been tightening." Like other governments and central banks, New Zealand has taken several steps in recent months to soften blows from world markets - including cutting interest rates; providing a guarantee for retail deposits; subsequently introducing a wholesale funding guarantee scheme; and oiling the domestic financial system by improving liquidity. One of the most revealing aspects of the Reserve Bank's Financial Stability Report is the light it sheds on the financial state of New Zealand households. While many households face difficulties as the economy slows and the housing market falters, the Reserve Bank draws on Statistics New Zealand data to conclude that households entered the global economic crisis in reasonable overall shape last year. Household Expenditure Survey figures show that the credit risks to banks from housing lending did not change materially between 2001 and 2007 and that, as of last year, only a small minority of households had mortgages with loan-to-value ratios (LVRs) of more than 80 per cent. The figures also suggest rising house prices between 2001 and 2007 more than offset the increase in debt levels during this period. "Mortgage debt tends to be disproportionately held by high income households and loan-to-value ratios are generally quite manageable," the Reserve Bank says. The lowest income group - households earning a median $27,000 a year - also had the lowest average loan-to-value mortgages at less than 15 per cent. Those in the middle income bracket - earning a median $87,000 a year -  had an average loan-to-value ratio of 33 per cent. Even the top one-fifth of households by income - those earning a median $137,000 a year - had an average loan-to-value ratio of only 36 per cent. Combining the loan-to-value data with figures on debt servicing as a proportion of disposable income, the Reserve Bank concludes that New Zealanders are nowhere near approaching the level of home loan stress being seen in the United States. For example, a simultaneous "severe shock" to unemployment, interest rates and house prices would push an estimated 3.6 per cent of households - or nearly 7 per cent of mortgage debt - into the high-risk category. "This is a substantial rise, but given that only a portion of vulnerable debt would lead to losses, this would still not lead to delinquencies and banking sector stress on the scale being seen in the US," the Reserve Bank says. "The expected continued reduction in interest rates should also help ease pressure on many homeowners. "Overall, while some households will be under strains and the banks are likely to see higher residential loan impairment in the next couple of years than at any time in the previous decade, loan losses are likely to be manageable."