Reserve Bank says risks to financial stability have increased

The Reserve Bank says it’s closely monitoring developments in the housing market to assess whether it needs to impose further mortgage lending restrictions.

The existing loan-to-valuation ratio (LVR) restrictions “have substantially reduced the proportion of risky housing loans on bank balance sheets,” the central bank says.

“This is providing an 'ongoing' improvement to the financial system resilience.”

Reserve Bank governor Graeme Wheeler says while New Zealand’s financial system is resilient and functioning effectively, risks to the outlook have increased in the last six months.

"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,” Mr Wheeler says.

“Dairy prices remain low with global dairy supply continuing to increase. Many farmers now face a third season of negative cashflow with heavy demand for working capital,” he says.

As well, imbalances in the housing market are increasing and house price inflation reigniting after cooling in late 2015 and early 2016.

The Real Estate Institute is expected to release figures on house sale prices in April later today.

 “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,” Mr Wheeler says.

He remains concerned about the impact of a future sharp slowdown in the housing might have on financial stability.

“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.”

The central bank says it expects problem dairy loans to increase significantly over the coming year "although we expect that dairy losses will be absorbed mainly through reduced (bank) earnings."

RAW DATA: Financial Stability Report

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