The Reserve Bank has today highlighted housing and dairy debt as major risks to New Zealand's economy and indicated it is looking at the possibility of introducing new lending restrictions or tightening existing ones such as those on loan to value ratios (LVRs) in the Auckland market.
"Imbalances in the housing market are increasing with house price inflation lifting again in Auckland, after cooling in late 2015 and early 2016 following new restrictions in investor loan-to-value ratios and government measures introduced in October," Reserve Bank Governor Graeme Wheeler said in a statement.
"While the moderation in house price inflation has been transitory, the LVR restrictions have substantially reduced the proportion of risky housing loans on bank balance sheets. This is providing an ongoing improvement to financial system resilience.
"The Reserve Bank is closely monitoring developments to assess whether further financial policy measures would be appropriate."
Deputy Governor, Grant Spencer, said the banking local system remained strong and profitable but faced challenges.
"Internationally, credit spreads have widened, placing upward pressure on the cost of funds for New Zealand banks," he said. "The level of problem loans in the dairy sector is expected to increase significantly over the coming year, although we expect that dairy losses will be absorbed mainly through reduced earnings."
The New Zealand dollar rose to 67.93 US cents after the report was released, from 67.60 cents immediately before because there had been speculation Wheeler would impose further measures to cool the housing market, clearing an impediment to him cutting the official cash rate as soon as next month.
The amount of high loan-to-value ratio home lending by banks has tumbled since the Reserve Bank in October 2013 imposed a 10 per cent speed limit on lenders writing residential mortgages with a deposit of less than 20 per cent. It added Auckland-specific restrictions last November. Banking mortgage lending at LVRs above 80 per cent were at 25 per cent of total home lending in September 2013, before the first restrictions were imposed. In March this year those loans had fallen to 7.9 per cent of the total, Reserve Bank figures show.
- with BusinessDesk