Reserve Bank points to housing and dairy as increased risk factors but stops short of introducing any new macro-prudential measures

Reserve Bank points to housing and dairy as increased risk factors but stops short of introducing any new macro-prudential measures

It's looking increasingly likely that New Zealand will introduce debt-to-income ratios to curb the housing market.

The Reserve Bank says risks to financial stability from the housing market and the dairy sector have increased, but it has stopped short for now of introducing any new macro-prudential measures.

However, in the press conference given by Reserve Bank Governor Graeme Wheeler and Deputy Governor Grant Spencer after release of the bank's latest Financial Stability Report, there were clear indications given that further measures are under consideration.

Specifically mentioned were debt-to-income ratios, which were introduced in the UK. The RBNZ has been collecting information on the subject. Significantly, Treasury has already signalled enthusiasm for such a policy. Such ratios are not currently in the 'macro-prudential toolkit', so, would have to be approved by Finance Minister Bill English. But given that English's own department has already spoken out in favour, this would appear to be a formality.

Neither Wheeler nor Spencer would be drawn on when new macro-prudential measures might be announced.

The comments given in the press conference went rather further than the RBNZ's FSR document.

"I think it is fair to say we are becoming increasingly concerned about the Auckland housing market," Wheeler said.

"...Investor activity is driving a lot of that market." He said in the past three months 42% of Auckland housing transactions were driven by investors, while for the rest of New Zealand it was about 40%.

"So, would we look at further macro-prudential? Yes, we are."

He said more analysis was needed, but indicated more data from smaller banks would now be collected regarding debt-to-income ratios.

Specifically asked about debt-to-income ratios, he said: "It is something we would look at. It has been successful in other countries, particularly the UK."

Spencer said the debt to income issue was "definitely a relevant area".

The Kiwi dollar initially jumped by half of an American cent when the FSR was released, as the market took the non-announcement of new measures as reducing the chances that the RBNZ will cut interest rates at its next Official Cash Rate review in June. However, a short time ago the dollar had retraced some of its gains and was up about a quarter of a cent, at just under US68c.

On the rising house market, Spencer said the central bank was "closely monitoring developments to assess whether further financial policy measures would be appropriate".

On the dairy sector, Spencer said the level of problem loans was expected to increase significantly over the coming year, "although we expect that dairy losses will be absorbed mainly through reduced earnings" by the banks.

Spencer, said that in the banking system capital and liquidity buffers were strong and profitability was high. “However, the system faces challenges.  Internationally, credit spreads have widened, placing upward pressure on the cost of funds for New Zealand banks."

While there has been speculation in the past week that the RBNZ would take more steps against the housing market, the central bank had indicated it wanted to see meaningful housing data from March and beyond before deciding whether the restrictions it imposed on Auckland investors late last year needed further following up on. It is unlikely therefore the RBNZ has had enough time to pull anything together at this stage - but the probability of more measures being applied later this year against particularly the Auckland market has been heightened by today's statement. 

There will now be further interest to see whether the Government does something more to support the housing situation in its May 26 Budget.

In a note headed: 'Kicking for Touch', ANZ chief economist Cameron Bagrie and senior economist Philip Borkin said it seems inevitable that the RBNZ will need to do more on the macro-prudential policy front with regard to housing.

"There remain significant conflicts between its inflation and financial stability mandates, given clear re-leveraging behaviour (from already extended levels)," they said.

"Interest rates need to be lower according to global currency market themes, but higher with respect to housing – so a wedge needs to be driven between retail and wholesale rates.

"The RBNZ looks to have kicked the issue to touch for the time being, but we suspect it to return later in the year."

This is the RBNZ's latest Financial Stability Report statement:

New Zealand’s financial system is resilient and continues to function effectively, but risks to the financial stability outlook have increased further in the past six months, Reserve Bank Governor, Graeme Wheeler, said today when releasing the Bank’s May Financial Stability Report.

"Although New Zealand’s economic growth remains solid, the outlook for the global economy has deteriorated. Despite highly accommodative monetary policies and low oil prices, growth is slowing in a number of trading partner economies.

"Dairy prices remain low with global dairy supply continuing to increase. Many farmers now face a third season of negative cash flow with heavy demand for working capital.

“Imbalances in the housing market are increasing with house price inflation lifting again in Auckland, after cooling in late 2015 and early 2016 following new restrictions in investor loan-to-value ratios and government measures introduced in October.

“House prices have also begun increasing strongly in a number of regions across New Zealand, although house prices outside Auckland are generally much lower relative to incomes.

“The Bank remains concerned that a future sharp slowdown could challenge financial stability given the large exposure of the banking system to the Auckland housing market. Further efforts to reduce the imbalance between housing demand and supply in Auckland remain essential. This includes measures such as decreasing impediments to densification and greenfield development and addressing infrastructure and other constraints to increased housing supply.”

Deputy Governor, Grant Spencer, said: “In the banking system capital and liquidity buffers are strong and profitability is high.

“However, the system faces challenges. Internationally, credit spreads have widened, placing upward pressure on the cost of funds for New Zealand banks.

“The level of problem loans in the dairy sector is expected to increase significantly over the coming year, although we expect that dairy losses will be absorbed mainly through reduced earnings.

“While the moderation in house price inflation has been transitory, the LVR restrictions have substantially reduced the proportion of risky housing loans on bank balance sheets. This is providing an ongoing improvement to financial system resilience.

“The Reserve Bank is closely monitoring developments to assess whether further financial policy measures would be appropriate.

“The Reserve Bank continues to make progress on key regulatory initiatives. Consultation papers on proposed changes to the outsourcing policy for banks and on changes to bank disclosure requirements will soon be released. A consultation paper has also recently been released on crisis management powers for financial market infrastructures.”

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I wonder how much Wheeler gets backhanded by his banking buddies to let the Ponzi keep going?

I dont get the impression wheeler sees the housing situation as a desirable thing.

In deep contrast to the ministers who created it.

He's not doing anything about it though is he. Actions speak louder than words.

The BIS said prior to him introducing LVR's that they hadn't worked elsewhere in the world yet he still proceeded with them. Why did he proceed if they had been shown ineffective elsewhere?

If anything, LVR restrictions pumped the market as buyers rushed to beat the new rules.


Wheeler has just lobbed the ball back over the net to English who ,armed with yesterday's dubious foreign investment data, will do....nothing. Surely she all has to blow sometime?


Time to leak this. Looks authentic to me:

‘Hey Graeme,

Listen up. I’m talking about inflation. And I gotta good question. Like where is it? We got the economics nailed, but you gotta job to do too. Just one little thing - hit the simple goddam target.

Go take a look up and down the street. There’s money moving all over the place. Van loads. They’re doing deliveries or picking the stuff up all day long. And money moving round, more than used to be, well, heck, that means inflation. That’s the whole rule book. That’s economics right there.

We got everything in place for you. We’re bringing it in – new, fresh money - as fast as they can print it. From other countrys. You know what I mean. But this isn’t to talk about, where or how they got it. Anyways we got new people coming in, tensa thousands of them, loaded up with whatever they can sneak - whatstha word - carry out - as much as the planes can hold. They got money. And we got a home for it. Or, hey, listen - we got homes for it! Homes! You like that?

The next generation, we got them well and truly sorted. The way we see it, they got three choices. One, they live with their mum and dad. Two, they’re on the street, where plenty belong. Three, they load up some real debt. And I’m talking a houseful. Once the house prices hit this sorta high, you got em, as good as hooked for life, paying up month in month out. And then they gotta furnish it. Get a table and chairs. That’s more money just flying around.

Sure, you’re doing real good with the old folks. No more topping things up, few extra groceries, with a bit of interest on savings. No way. They gotta spend real money – capital, whatever they got – justa stay alive. So all their money too, it’s practically blowing down the street.

So we’re shaking free all this money. And all we ask you is take care of inflation. Heck, it’s practically one big bullseye. You just have to take a shot and hit it! Things the way they are you hardly even have to point!

There isn’t even any opposition – none. They just got pea shooters, cap guns. They can’t even hold them straight. Or they’re half blind or something. Anyways, things have never been so good as now.

And all the news I get of you is you’re all tetchy and upset with Mediaworks, just because they was talking to people, sharing information, like in private. Mediaworks for godsake. They aint national radio. They’re like family. Family. You hear. We fixed their tax problems for them few years ago, like we do for people. These guys dumped John Campbell. That reality tv woman they got, put her on the flag panel. Produced the goods, coupla ferns, no problem. And little Weldon, the front guy, he near single-handed cleaned out all their news busybodies. You listening?

So I gotta ask, Graeme. What’s going on? Sometimes I wonder if you’re looking at things through both eyes. The job you got is inflation.

And don’t come the wise guy about dairy prices. We know all that. I don’t have time to fill you in all the detail now, but the farmers, well there aren’t too many of them. And far as we’re concerned they brought it on themselves. It’s gonna free up some land too. We got buyers waiting, you know what I mean. And the banks, they’re sweet with it. We’re gonna make it up to them, like any farm losses, on housing, by letting prices rip. And aren’t they going gangbusters! You got property, Graeme? Take some advice. Get some houses. Every day here we look at what they’re worth and compare. You wanna hear the hoots all round the beehive! Both sides, all the sides! High fives! No difference!

OK, anyways, now read this real careful. I’m gonna send you another letter. Like more formal. We got people here who can write the stuff. You wanna read some of it! You’d think we was choirboys. This other one we can release. Not this one. You hear me straight now. Tell whoever opens your mail this is strictly between you and me. I don’t wanna open up the newspaper some morning and have this come jumping out at me.

From me,

PS. Hey before I go. Did you hear John K is mates with Richie McCaw? Yeah. He’s telling everyone. What a guy. You ever seen him on the tv? He sure has some neck, don’t he? Whatever they got on him, he dont know nothing. Where’d we be without him!

And that reminds me. An ole buddy from New York was on the phone. Like he says, you can’t have the OCR jumping up and down like a damn yoyo the whole time. Him and these other guys, like dealers, they gotta game going on, they’re trying to make honest money. So you gotta remember all the time whose side you’re on, whose paying you.

Something else. I hear sometimes about you wanting to put the brakes on things. Right now I’m saying these stories are joking. And they better be. Because we’re in business here, growing the economy, and we got it going great guns. That don’t fit with holding it back. Come 11th May, we’ll be watching just whatya say. You be sure you don’t thinka letting us down. I’m trusting you on this, just like about inflation.’

The time line....

1) So it is likely the government has seen these figures for at least a week or two.

2) Then last week John Key talks up the foreign buyer land tax.... pretending he will take action

3) Now the Government says 4% buyers (as 35% of the buyers are students and temp workers are conveniently not part of the LINZ foreign buyers category)

4) No action required by the Government....

Like a movie script.....

As for Wheeler he is part of the problem not the solution and will go down as the worst Reserve Bank Governor we have ever had. Regions are shooting up he should have applied the LVR across the country and loan to income ratios on investors.

2008-2017 will be known as the years of inaction.

Million dollar Auckland here we come !!!


Trying to get to Million Dollar Auckland but I'm stuck in traffic.

So the NZD rose quite sharply on the RBNZ news which will put more pressure on the over indebted dairy farm sector , will put more pressure on reaching inflation targets, which should put more pressure on the RBNZ to lower rates. Central banks stuck in a circular logic.The very fact it does not wish to introduce additional or at least effectoive macroprudential tools suggests financially New Zealand cannot afford a downturn in the housing market. Ireland introduced mortgage to income limits a year ago. It has stopped house price rises , in particular Dublin in their tracks , avoiding another financial disaster. How close is New Zealand .

Yes, any down turn in property will reveal the real one trick pony we are relying on to continue forever. Shame it's utterly delusional and suicidal for everything and everyone

Sounds like time to purchase a rental property in Tauranga. The party/madness will continue for some time yet.....

NZ doesn't bother learning lessons from abroad. We don't need stamp duty on investors. We don't need loan to income ratios. Let other countries bring in controls to keep house prices in check.

We know better in NZ. Our market only ever goes up so no need to do anything.

Contrary to the headline the risks haven't increased only the perception of them has. These risks have been there the whole time.

Disagree. The risk (likelyhood) of a sharp correction is higher the more extreme the imbalances become.


I think the front wheels of our economy are going over the cliff now. Not an ounce of willingness to act by anyone. No surprise at all

It's like we are standing on the train tracks, there's a light coming for us and Wheeler says 'BTW the train is going to hit us'

So where do you think will crash first? Auckland? How far behind do you think the rest of the country will be, as it was slow taking off. Then how far do we go into a crash before LVR rules are removed to stimulate growth.

While the Reserve Bank does nothing the house prices increase as does equity so the financial risk actually reduces. The GFC only saw a 10% house price reduction so not really any risk to the financial stability at all as equity levels have increased well beyond 10%. THe market never crashes just has a slight reduction and if you don't panic sell it soon recovers. We will likely have sub 4% mortgage rates for the next 10 years. The 40% of house buyers who are offshore or foreign students or on temporary work visas are bringing cash in from the homeland so no real risk if you have no mortgage.

Prices didn't fall much in 2008, therefore they cannot fall now. Questionable logic.

While the Reserve Bank does nothing the house prices increase as does equity so the financial risk actually reduces. The GFC only saw a 10% house price reduction so not really any risk to the financial stability at all as equity levels have increased well beyond 10%. THe market never crashes just has a slight reduction and if you don't panic sell it soon recovers. We will likely have sub 4% mortgage rates for the next 10 years. The 40% of house buyers who are offshore or foreign students or on temporary work visas are bringing cash in from the homeland so no real risk if you have no mortgage.

My advice to any FHB's out there is don't, don't do it. You are being set up for a major failure. Let investors and speculators outbid one another until the inevitable result

Agree...Or move out of Auckland, rather than pay sky high rents

No crash I agree while the gates are open and investors (Local , foreign which includes students and Temp Visas) are allowed to buy there will always be plenty of demand.

Just a shame that FBHs will be the one that experience the pain due to govt inaction. The government has traded away the chances of FHBs getting on the ladder to investors.

As we get nearer an election I can't see anything being done that is going to upset the perceived wealth of home owners. National needs the votes of home owners.

That's the big question, do I buy, or not? I'm not you're typical FHB, over 40, recently got citizenship, renting for 7 years now saving my deposit, good income. I can buy entry level now, and leaving a 2-3% interest rate buffer will be able to service the loan. What do I do?

If you just want a home and plan to own it long term buy what you want now. If you want to "time the market" or couldn't handle the idea of the value of your property declining don't buy now.

I feel your pain. Am in similar position. Yes if you in it for the long term best to bite the bullet. I don't foresee an almighty crash. More a long term flattening and slight decline.

It's a very difficult question to answer. I wish I knew.

When you have the highest house prices relative to income in the world and it still not time to act you have got to wonder what are they waiting for ?

or are now at the stage where NZ housing is TOO BIG TO FAIL so we need to keep it propped up until hopefully incomes increase ?

What are they waiting for?

They are waiting for the first sign that they personally will lose money, the second that happens you watch them go.

The message is clear: Carry on. In the words of an old poster we don't see much any more "haw haw".

Mr Wheeler sitting on hands, methinks. I assume this is done on purpose in order to put pressure on the government to sort things out. Arguably it is the right thing for him to do. The government are balancing the budget, which means we have no inflation as other countries devalue their currencies as fast as they can.

If the government ran a 3% deficit and actually did something about the ridiculous planning laws then Mr Wheeler could adjust interest rates up or down as required and the system would work. As it is he can't put rates up to stop the hosuing boom, and if he puts them down he adds fuel to the fire.

It is unfair to blame the government for the farce over planning laws. We have only ourselves to blame. We chose MMP, which effectively made such changes all but impossible and froze the existing framework in place. National would probably go too far in dismantling the current framework under first past the post, but at least we would change with the times.

Expect tax cuts from Bill English, it helps the RBNZ, it helps National get re-elected, it helps New Zealanders.

The government will provide more buyer subsidies. As sure as night follows day. The voters will lap it up, not connecting the dots as it goes straight into the pockets of property developers and land bankers.

And it pushes up prices further...subsidies add fuel to the fire, more money chasing same houses

Yes, sigh, you are probably right. I much prefer tax cuts, particularly for those under the median wage.

The bods in the public service don't seem to realise that if you leave more money in the hands of the less well off then they will spend it on whatever seems best to them. Money that goes to the better paid gets saved and ends up pushing up house prices, which they see as investment. The two groups use money differently based on their circumstances.

So what does this mean for the OCR? Does this mean on hold? Parts of the economy seem ok, so maybe. Employment is good, we've had a bit of wage inflation. The currency is up on the back of todays release, and could go further against the AUD if the RBA cut again (unlikely I think with an election right around the corner). Against the USD, maybe the FED will come to the party later this year, it seems Yellen wants to, just needs a sniff of good data to justify it. medium term pressure on kiwi could be down. I can see how they'd justify a hold.
Or they could cut. Housing's the governments problem, financial stability is the RBNZs. They talked about bank funding cost, maybe an interest rate cut doesn't flow to mortgages on this basis.

Put the brakes on inward migration to this country if housing is such a concern.

So clearly the government or RBNZ aren't putting exporters, farmers or young people on their priority list. And why should they? They are hardly important to the future of this country are they?

No, we are building the worlds largest pyramid under the mantra of 'borrow & build it and they will come'. And what's even more amazing is we aren't actually physically building anything other than a private debt bubble like the world has never seen.....since the likes of 2008 that is. We sure are special down here! Such visionaries

"Interest rates need to be lower according to global currency market themes, but higher with respect to housing – so a wedge needs to be driven between retail and wholesale rates.

Is that so? - seems as though the foreign wholesale funding firms are getting their pound of flesh, while the domestic savers are subsidising these costs so banks' NIMs can widen.

From the Financial Stability Report

Page 5 (7 of 66)
The heightened volatility early in the year contributed to higher funding
costs for New Zealand banks. This has continued the trend from 2015,
with the cost of issuing in both domestic and offshore long-term markets
having increased to the highest levels since early 2013. There is a risk
that the cost of long-term wholesale funding could increase further if
heightened market volatility returns.

This situation may be exacerbated by the need to fund strong bank credit
growth. Following the GFC, strong retail deposit growth and a moderation
in credit growth from pre-GFC levels limited the need for banks to access
higher cost long-term wholesale funding (figure 2.3). However, over the
past 18 months, credit growth has accelerated across the household,
agriculture, and business sectors, with aggregate credit growth now
outpacing deposit growth. This may induce banks to compete more
aggressively for retail deposits, or to increase their reliance on long-term
wholesale funding, either of which could place upward pressure on bank
funding costs. Higher funding costs would keep lending rates up relative
to the OCR and short-term wholesale rates.

Page 22 (25 of 66)
Heightened volatility in global financial markets has contributed to a
further pick-up in long-term wholesale funding spreads, continuing the
trend since early 2015. New Zealand banks that have issued in offshore
markets this year have seen costs rise by about 50 basis points relative
to domestic swap rates. This increase is attributable to both an increase
in foreign currency bond spreads and rising costs of hedging exposures
into NZD.

Or is this just another nonsensical diatribe confirmed by the recent registered increase in under one year funding to 82.64%? View RBNZ table.

Banks now have an official excuse to maintain higher lending rates while in receipt of lower funding costs via the local short end swaps and deposit funding base driven lower by OCR cuts past and future.

could you explain in lay person's terms please?

"park the bus".

My interpretation is that the banks win both ways. They lend at higher rates and pay less interest on savings and term deposits. New Zealand ends up worse off.

Loan to income caps should provide amusement given the ridiculous multiples being shovelled out at the moment.

yes would be interesting for some when they go to refix and the banks now deem them as not within acceptable limits.
as for it happening any time soon very unlikely, the pace they move at 2 years away

It's likely to apply to any new lending as when rules have been applied like that in the past they have caused collapses. However if someone started missing payments some of the brutal clauses in the mortgage contracts might be applied.

Not one mention of the big dry on the East coast of the South Island......large numbers of farmers going into winter with low and often no feed reserves will always choke the many farmers have had to cut production, cut stock numbers, graze out stock, sell capital stock, buy in feed, had crop failure etc?
I see issues on the horizon for NZ.....lower lambing and calving numbers this coming spring due to the drought conditions now will have an effect......

Good question notaneconomist. The productive sector is now invisible. What drought, what commodity slump...? As long as we can keep pumping up the Ponzi for 18 more months and we can cram more buses through the Homer tunnel, why should anyone care?

I reckon the next election is going to be spectacularly volatile, like springbok tour of 1980's.

I don't think the hot real estate market poses a significant risk to the economy, seriously ! When did NZ house prices fall 25% in value or more... NEVER BEFORE. When things turn sour, stocks tumble but most people tend to sit on their houses which creates a small decline in value followed by a long time of steady values.

that's a fair comment Yvil, but a large correction can happen for the first time. When the imbalances are too great the snapback will be equally powerful.
Its actually the economy that poses a risk to the real estate market. When jobs are lost ,houses follow. Once that pendulum turns it can gain momentum as well but in the other direction.

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