RBNZ worried about recent first-time homebuyers amid rising interest rates
The Reserve Bank (RBNZ) says the stability of the financial system as a whole is strong, despite pockets of vulnerability and a number of uncertainties ahead.
There were no surprises in the RBNZ biannual Financial Stability Report, published Wednesday.
The RBNZ reiterated its focus on financial stability risks related to housing.
After reimposing loan-to-value (LVR) restrictions, which are now at tighter levels for investors and homeowners than before Covid, the RBNZ appears in no rush to introduce restrictions on the service of the debt.
He reiterated that he would start consulting on this at the end of November (the consultation was originally scheduled to start in October, but was pushed out due to Covid-19).
He noted that implementing a debt-to-income limit could take “at least six months” after the tool is designed and calibrated. Setting interest rate floors on the test interest rates that banks use in their debt service assessments could be implemented sooner.
However, the RBNZ said: “We expect banks to be more cautious about high debt-to-income ratio loans given the risks of rising interest rates and the economic outlook.”
Indeed, BNZ last week announcement it will not lend (initially only through its brokerage channel) to investors and homeowners seeking debt worth more than six times their annual income.
The RBNZ acknowledged how the flood of support to the economy from central banks and governments around the world had inflated asset prices. The question now is how the removal of this support will affect these prices.
“If inflationary pressure turns out to be more persistent and inflation expectations rise, it could lead to a faster rise in interest rates,” the RBNZ said.
“Coupled with weaker growth, such a scenario could lead to lower asset valuations and lead to a sudden tightening of financial conditions. “
The RBNZ reiterated what Governor Adrian Orr said in a speech Tuesday – that house prices in New Zealand are “above what is sustainable”.
“Market momentum has remained at a high level, albeit at a slightly slower pace in recent months,” RBNZ said.
“Valuation measures such as price-to-rent ratios underscore that prices are vulnerable to falling as interest rates rise from their recent lows.”
However, the RBNZ deviated somewhat from the house price projections released in its August monetary policy statement, saying the “precise time frame” for the house price moderation it projected for the year to coming was “uncertain”.
The RBNZ predicted annual house price inflation in August to peak at 30% in September 2021, before falling to 17% in March 2022, 5% in September 2022 and into negative territory in March 2023.
Again, the RBNZ pointed out that overall, households can absorb “large” declines in house prices. In the 18 months to June 2021, total household net worth grew by more than 27%. Real estate – mainly the land component – accounted for half of this gain.
Overall, household loan-to-value ratios have therefore declined.
But, recent homeowners with massive mortgages are the most vulnerable, who will feel higher interest rates.