The Reserve Bank is cautiously optimistic about the financial stability of New Zealand, but has highlighted the risks posed by the housing bubble and the dairy industry as factors which could cause challenges.
In the six-monthly financial stability report released today Reserve Bank Governor Graeme Wheeler noted that “Soft global growth and momentum in global commodity production have contributed to weak prices for New Zealand’s commodity exports. Dairy prices remain low with global dairy supply continuing to increase. Many farmers now face a third season of negative cash flow with heavy demand for working capital. Problem loan levels are expected to increase significantly over the coming year, although losses in the banking sector are likely to be absorbed mainly with profits.”
The Reserve Bank has also indicated that it is looking to take measures to cool the housing market, particularly in Auckland. This would take the form of either new lending restrictions or a tightening of the current loan-to-value ratios.
The NZ Herald reports that 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.