The latest Reserve Bank of New Zealand (RBNZ) Financial Stability report continued to express concerns surrounding the housing sector.
House prices in Auckland have softened in recent months, but it is uncertain whether this will be sustained. Price to income ratios remain among the highest in the world at 9.6 in the latest data and prices are continuing to rise rapidly in the rest of the country, with annual price growth above 10%. The overall household debt-to-disposable income ratio now stands at a record high. According to the RBNZ, there is a significant risk of further upward pressure on house prices so long as the imbalance between housing demand and supply remains.
Restrictions on lending to property investors, which came in to force on October 1st, will increase the resilience of the banks to a downturn in the housing market, but the RBNZ is also concerned over the risks associated with lending to consumers with high debt-to-income (DTI) ratios and wants the powers to restrict DTI ratios if the RBNZ considers this necessary.
As far as the dairy sector is concerned, the increase in prices over recent months should return the sector to profitability, but the increase in debt built up over the past two years leave the sector vulnerable to future shocks.
Although the banking sector has strong capital funding buffers and profitability remains high, the reliance on offshore wholesale funding has increased and banks could become more susceptible to increased funding costs and reduced access to funding in the event of increased market volatility.
Given these financial-stability concerns, it will be very difficult for the RBNZ to justify further easing of monetary policy given that further rate cuts would exacerbate the debt concerns.
There was no significant market reaction with the New Zealand dollar fractionally lower after the release, but NZD/USD still registered gains of close to 0.75% on the day at 0.7125.