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The Reserve Bank (RBNZ) warns of the threats posed by a sharp drop in house prices or a rise in unemployment.
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Soaring prices increase the risk of a sharp correction. Source: 1 NEWS
In his semi-annual financial stability report, Governor Adrian Orr said that the major financial shocks from the pandemic have yet to be felt due to various official supportive measures.
“The relatively resilient economic performance means that New Zealand’s financial system has not been tested as severely as it could have been. The banking system has maintained strong capital and liquidity buffers, and the insurance sector remains well capitalized.
“The government’s fiscal support, particularly the wage subsidy scheme, has stabilized the labor market and household income.”
But the central bank report noted that low-deposit home loans had risen and Lieutenant Governor Geoff Bascand said that, if left unchecked, it could threaten financial stability.
“High leverage in the housing sector poses risks if house prices fall sharply or unemployment rises, reducing the ability to repay loans. That is why the Reserve Bank intends to reimpose LVR [loan-to-value ratio] restrictions to guard against the continued growth of subprime loans and ensure that banks remain resilient to a future housing market downturn. “
The report noted that the recent growth in house prices increased the risk of a strong correction in the medium term, if the supply and demand imbalances were resolved.
The RBNZ report said that despite the economic stress facing businesses and households that are not yet shown in banking metrics, significant downside risks remain.
“The continued spread of Covid-19 around the world, continued international travel link closures, and the risk of more domestic outbreaks are affecting companies’ investment intentions.”
Demand for business credit has been weak overall, and outstanding credit has contracted about 8 percent since March.
Bascand reiterated the point that retail banks should continue to lend and had ample financing to meet customer needs.
“For its part, the Reserve Bank remains committed to supporting the long-term financial stability of our economy, which is why we have undertaken a series of temporary regulatory measures to ensure that banks have sufficient capacity to continue to provide support. continued capital and a continuation of bank dividend constraints support the continued provision of credit, particularly to the corporate sector. “
The report was written before the government asked the RBNZ how it could help cool rising house prices.
