Rising Auckland house prices put lenders at risk, RBNZ says

The Government's new housing measures are 'pertinent' to Auckland, says the Real Estate Institute. Photo / Doug Sherring

Surging Auckland house prices would put New Zealand's lenders at risk if there was a significant downturn, according to the Reserve Bank, which was 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 it sees as the biggest risk to the country's financial stability.

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When the central bank 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 per cent of the minimum requirements.

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

"The Reserve Bank's assessment is that stress test results would be worse if the exercise was repeated now," it said in a consultation paper issued today on its proposals to impose higher loan to valuation ratios on houses purchased in Auckland.

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

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

At the same time, 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 that 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 said.

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 per cent in the first year, and reduce price growth by between 2 per cent and 4 per cent, while increasing sales outside the nation's biggest city by 4 per cent, and lift non-Auckland house prices by 1 per cent.

The Reserve Bank also confirmed last week that 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.