Rising Auckland house prices put lenders at risk: RBNZ

Surging Auckland house prices will put New Zealand's lenders at risk if there is a significant downturn, the Reserve Bank says. 

Happy with the lenders' ability to stay within regulatory requirements just six months ago, the central bank is seeking feedback on plans to impose new macro-prudential restrictions on residential property investors' ability to buy highly-leveraged housing, which the bank sees as the biggest risk to the country's financial stability. 

When the RBNZ ran stress tests on New Zealand's financial system last year, it found the country's lenders could withstand a significant housing market downturn concentrated in Auckland, with capital ratios falling to within 1% of the minimum requirements.

Since the scenarios for the test were finalised early last year, Auckland house prices have climbed 18 percent and the bulk of lending has gone to Auckland, with property investors' share of housing purchases increasing.

"Our assessment is that stress test results will be worse if the exercise is repeated now," the bank says in a consultation paper issued today on its proposals to impose higher loan to valuation ratios on houses bought in Auckland.

RBNZ governor Graeme Wheeler last month announced the plans to introduce new restrictions, which will apply from October and require investors to have at least a 30% deposit.

The bank says property investors, rather than home buyers, increased their share of borrowing to about 40% of the property market from 35% before the first set of loan-to-value ratio speed limits was imposed in October 2013. 

At the same time it introduces the new Auckland investor rules, the RBNZ plans to ease LVR limits outside Auckland, where modest levels of house price inflation are not causing concern.

"While there is a risk there could be a re-emergence of house price pressures outside of Auckland, it would take a sustained period of strong growth before valuations became as stretched as in Auckland," the paper says.

The Reserve Bank says residential property investment loans have relatively low default rates during normal economic times, but a downturn would bring a rising rate of defaults.

The new measures are expected to cut Auckland house sales by 8% in the first year, and reduce price growth by between 2% and 4%, while increasing sales outside the nation's biggest city by 4%, and lifting non-Auckland house prices by 1%.

The Reserve Bank also confirmed  it will press ahead with plans to introduce a new asset class, carving out residential property investors as a sub-set of bank loans, and requiring banks to hold more capital against those loans. The micro-prudential initiative is needed to impose the broader restrictions on highly leveraged lending to property investors.

(BusinessDesk)