housing prices key to financial stability

RBNZ Says Housing Sector Still Main Risk To Fincl Stability

-Risk From House Price Inflation Up Since May Report

WELLINGTON (MNI) - Imbalances from the housing market are still growing, the Reserve Bank of New Zealand warned in its twice-yearly Financial Stability Report published Wednesday.

The RBNZ said while the country's banks are well capitalised and new loan to value rules are now in place, the risk from house price inflation has grown since the last report in May.

"The household sector has high levels of indebtedness relative to both historical international norms," RBNZ said.

"House prices in the Auckland and Christchurch markets, which together account for just over half of house sales, have risen by 17% and 8% respectively over the past year."

Nationwide, house price inflation is 9.8% for the year, and both the IMF and the OECD have warned house prices in New Zealand are "significantly over-valued", the RBNZ said.

Household debt is at 146% of disposable income and over the past year growth in household debt has outpaced growth in household income, the RBNZ said.

"Interest servicing costs are at their lowest level in about 11 years, reflecting mortgage interest rates which, until recently have been at 50 year lows.

"However with fixed mortgage rates already starting to increase, and interest rate increases projected to occur in 2014, debt servicing costs can be expected to increase..Borrowers with high debt-to-income ratios could find themselves increasingly stretched to meet their debt commitments."

The RBNZ's new loan to value (LVR) policy, introduced in early October, is still bedding in and it is not clear what impact it will have over the longer term, he said.

The rule restricts the proportion of loans banks can lend for low deposit house lending, that is, loans covering to 80% or more of the value of the property can be now more than 10% of new mortgages sold by each bank.

It is expected this will be the equivalent of a 30 basis point rise in interest rates in the first year, although with lesser impact subsequently, and this has been cited as one reason the RBNZ can hold off any official cash rate (OCR) increases until next year

The policy is also forecast to lead to between 3% to 8% fewer house sales, 1% to 4% lower house prices inflation, and 1% to 3% lower credit growth over the first year.

RBNZ said it is too early to assess the impact of the new rule even though early evidence showed a significant reduction in high LVR approvals.

"The early evidence shows banks have significantly reduced high LVR lending approvals, while increasing the cost of high LVR loans.

"However it is too early to assess the impact of the measures on house price inflation," the RBNZ said.

--MNI Sydney Bureau; tel: +61 2-9716-5467; email: srodrigues@mni-news.com