Increasing pressure in a housing market where supply is failing to meet demand is posing a growing risk to New Zealand's financial stability, according to the Reserve Bank.
In the bank's six-monthly financial stability report, governor Graeme Wheeler said the country's financial health is still sound, though growing private sector credit and rising house prices which are already high pose a concern to the central bank. The fears have emerged as Auckland and Christchurch stand out as struggling to meet demand for housing and as banks become more tolerant of lending on smaller deposits.
"Further price escalation will worsen the potential damage that could result from a housing downturn following an economic or financial shock," Wheeler said in a statement. Housing pressures, arising from pent up demand, limited supply and the lowest interest rates in 50 years are being felt particularly in Auckland and Christchurch, where supply constraints are greatest."
The housing market has become a growing headache for the central bank, as Auckland sale prices hit new record highs in a rapidly heating market, while at the same time a strong currency has limited the bank's ability to stoke lending growth with lower rates.
One of the reasons behind the increase in higher loan-to-value ratios being offered was the improvement in bank profitability, with the banking system now earning a return on assets near the pre-global financial crisis level of 1 per cent per annum. Mortgage lending with an LVR of 80 per cent of more now accounts for about 20 per cent of banks' total residential loan books, and has made up about 30 per cent of new ending.