Key backs banks after S&P warning over Auckland property market

Prime Minister John Key is confident the country's lenders are strong enough to weather a downturn in Auckland if the property market in New Zealand's biggest city has a correction.

The country's major lenders have assured Key their stress testing shows their respective loan books are strong enough to withstand a drop in Auckland property prices, which has been singled out as the biggest risk to New Zealand's financial stability by the Reserve Bank, and more recently, by ratings agency Standard & Poor's.

"We ask the banks themselves how they see things and they have on numerous occasions say they stress test their balance sheets, they've done significant stress testing when it comes to the Auckland property market, including really ramping up their models in terms of unemployment, interest rates and the like, and they're quite confident their lending is stable and secure," Key told his weekly post-Cabinet press conference in Wellington. "They tell me 'look we've stress tested our books every which way and we're very confident that our lending is appropriate and well placed'."

Last week, S&P lowered the standalone credit profiles for the nation's four biggest banks - ANZ Bank New Zealand, ASB Bank, Bank of New Zealand, and Westpac New Zealand - due to the rapid rise in Auckland house prices amplifying the risk of a sharp correction, even if such an event was still unlikely. The standalone credit profile is a component of an entity's credit rating which doesn't include the potential for a bailout by a related group or the government.

In May, the Reserve Bank said the potential for a sharp correction in Auckland's property market had increased, prompting the regulator to impose second set of lending restrictions on property investors, which come into effect in October. The central bank has struggled to curb house price escalation in the country's biggest city as it's maintained stimulatory monetary policy through low interest rates, thanks to tepid inflation elsewhere in the New Zealand economy, while housing supply has failed to match demand for residential property amid record inbound net migration.

Key said the Reserve Bank oversees the bank is taking a "very active look at what's going on" and that he was "pretty confident" the lending banks were right in their assessment.

S&P's assessment accounted for the Reserve Bank's restrictions on high loan-to-value ratio mortgage lending, which have been in place since October 2013, and said the tools had been effective outside Auckland, but only had a temporary effect in the country's biggest city.

"This is contrary to our previous base case expectation that the macro-prudential tools would be more effective in stemming house price inflationary pressures across the country," it said.

(BusinessDesk)