"Despite some recent softening, house price growth in Auckland remains high at 9.3 per cent in the year to October, and Auckland's house price-to-income ratio, at 9.6, is among the highest in the world."
While loan to value restrictions had reduced the share of risky loans on bank balance sheets and improved bank resilience to house price falls it said that could be undermined if the growth in high debt to income lending continued.
"High-DTI [debt-to-income] loans are at a higher risk of default in the event of an economic downturn, so an increasing concentration of this lending is of concern."
Deputy Reserve Bank Governor Grant Spencer said it would not need to use the tool at the moment but if house price inflation picked up again and credit growth continued it could become necessary.
He said there was always going to be some lending at the five or six times ratio but higher borrowing rates also drove house prices higher.
"If people have more money to spend they will spend it."
He said borrowers needed to take care with how much debt they took on.
"People have to be very careful - if they are going to have a large mortgage - they have to make sure they can service it, not just now but in years to come."
The central bank also expressed concerned about banks having to fund more of their lending through the international money market.
Spencer said over the last year retail deposit growth had slowed down where as credit growth had continued.
That meant the gap had to be filled by wholesale funding - either from domestic sources or international sources.
Spencer said it was happy for banks to go to the international market for funding but had a preference for long term funding and was nervous about relying too much on international funding.
Spencer said international markets could be very fickle. When unsettling events happened globally the price of funding tended to go up.
"The most likely event is it just becomes more expensive. [it would be] very unusual for the tap to be turned off."
Spencer said international funding costs had already risen and that had flowed through to consumers in terms of what banks were prepared to pay to local depositors and how much they charged borrowers.
Fixed mortgage rates for terms of three years and longer have risen across the banks in the last few weeks while deposit rates have also gone up.
Spencer said he was not concerned about rising borrowing costs affecting new housing supply.
"I think new houses are getting plenty of funding."
But he said banks were justified in getting more nervous about apartment developments.
Spencer said it was not just the cost of funding those which concerned the banks but their level of exposure to development projects.
"They are nervous about having too much in the pipeline," he said.
Spencer said the Reserve Bank was happy with cautious approach banks were taking on developments.
"We know that can be a risky area."
Past cycles had shown that developments were often the first projects to fall over in a down-turn.
That was because apartment developments could take two years to be completed and in that time people who bought off the plan could disappear and developers could decide they may not have enough money to complete a project.
For banks it could mean a big loss on a single exposure, he said.
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