Australia’s big four banks are facing a new crackdown on lending to key sectors of the NZ economy – a move that could force them to allocate more capital.
The Reserve Bank of NZ said in its latest Financial Stability Review that it is looking at new controls to restrict lending to the property and dairying sectors- the two sectors of the Kiwi economy that are threatening stability.
And the central bank has asked the NZ national government to take action in housing to improve supply.
The report and comments from the central bank saw the Kiwi dollar rise 1% yesterday and analysts say the concerns have probably ruled out a further rate cut from the RBNZ next month.
In its first Financial Stability Report of 2016, the RBNZ concluded that while the banking system was generally sound, risks were increasing. These ranged from increasingly volatile international money markets, the likelihood of further troubles in the dairy sector to house prices increasing strongly across the country.
Governor Graeme Wheeler asked Prime Minister John Key’s government to take action to increase supply of housing. "Reducing the imbalance between housing demand and supply in the Auckland region remains essential if house price appreciation is to be contained over the longer term," the Reserve Bank’s report said.
"Increasing housing supply is key and further efforts on a range of fronts should be considered to address the supply and demand imbalance. These include measures such as decreasing impediments to densification and greenfield development, and addressing infrastructure and other constraints to increased housing supply."
Chief economist with the ASB bank (part of the Commonwealth) Nick Tuffley told the media that while it may take time to convince the Reserve Bank that action was essential, further lending restrictions were likely this year.
"It will likely take a few months of housing data before the [Reserve Bank] is confident in its assessment of the Auckland housing market. But, given the market trends, we think it is likely that Auckland house price gains will prompt the [Reserve Bank] to act in coming months,” Mr Tuffley said.
“In the report, Mr Wheeler said "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.
“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.
“House prices have also begun increasing strongly in a number of regions across New Zealand, although house prices outside Auckland are generally much lower relative to incomes.
“The Bank remains concerned that a future sharp slowdown could challenge financial stability given the large exposure of the banking system to the Auckland housing market.
“Further efforts to reduce the imbalance between housing demand and supply in Auckland remain essential.
“This includes measures such as decreasing impediments to densification and greenfield development and addressing infrastructure and other constraints to increased housing supply.”
The Auckland property market seems to be heating up again after a brief slow down in the wake of new rules on tax, investment and offshore buyers late last year.
NZ house prices rose 12% in April from a year earlier, according to Quotable Value New Zealand, a government property research company. That was the first acceleration since November.
The lending rules already introduced – and new government regulations implemented October 1 to tax capital gains on property held for less than two years – helped slow the Auckland housing market late last year. Since then prices have picked up again, rising 1.5% in the three months ended April to a record average of NZ$942,760, a move that saw fears of a price boom re-emerge.
And there are also signs that non-Auckland housing markets are starting to feel speculative heat with price rises noted across the country.
RBNZ Deputy Governor Grant Spencer singled out the problems in dairying, saying:
“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.
“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,” Mr Spencer said.
