Property boom concerns Reserve Bank

The recent property boom has seen New Zealand's household debt increase into "uncharted territory" and major banks turn to risky loans to win market share, the Reserve Bank says.

The RB today released its twice yearly Financial Stability Report which gives an overview of the finance sector's fitness.

RB Governor Allan Bollard said while the financial system as a whole was in sound shape "the risks to investors, households and some firms had been increasing".

Higher household debt and riskier lending by banks were of increasing concern, especially if there was an economic downturn Dr Bollard said in commentary accompanying the report.

"Household and farm sector indebtedness has continued to increase and these developments could result in some financial strain if the economy slows, the boom in agricultural export prices does not last, or the New Zealand dollar appreciates further".

Household sector debt was at unprecedented levels, having increased to $116.94 billion by March 2005 from $25.04 billion in December 1990 in nominal terms or $32.66 billion adjusted for inflation.

Today the RB said household borrowing, 90 per cent of which is in residential mortgage debt, had increased by 15 per cent in the year to April 2005 fuelled by low interest rates.

The borrowing had outstripped growth in incomes and the ratio of debt to disposable income and the ratio of debt-servicing costs to disposable income, had both risen into "uncharted territory".

The bank did not see rising household debt as a major direct source of financial sector instability, but warned "more heavily indebted individual households will experience some financial stress".

"Also there is a possibility that the household sector as a whole could curtail discretionary spending, resulting in a lower level of economic activity and weaker credit conditions generally."

Unsurprisingly the rise in household debt has seen the major banks record strong growth in lending and earnings recently.

The return on assets for New Zealand's four major banks during 2004 was 1.1 per cent, slightly better than the international standard of "good" performance of 1 per cent.

However, Dr Bollard said it was possible in the prevailing competitive environment, banks would try to maintain lending and earnings growth by taking on higher risk business.

He noted there had been signs of lending on less traditional terms such as "low doc" mortgages and by lending the total value of a property.

Low doc loans have proved popular in Australia where they comprise about 15 per cent of residential lending. They allow customers to self-certify their income levels rather than supplying proof of what they make. Two of New Zealand's major banks are currently offering the loans.

"The Reserve Bank will be watching to ensure that the banks maintain appropriate credit standards, and that they have adequate capital to support the risks they take," Dr Bollard said.

Dr Bollard also said the RB would be taking an interest in non-bank finance companies, particularly the one third of them in the fast-growing sector lending primarily for property investment and development.

"Experience indicates that recent rapid growth can be a marker for greater risk. A number of domestic finance companies will face the first real test of their soundness if the economy slows."

While today's report highlighted some of the risks to the finance sector in the event of an economic slow down, Dr Bollard told reporters the bank did not take such a gloomy view of recent economic data as some commentators.

Recent data was broadly in line with the bank's expectations at the time of its March Monetary Policy Statement.

"We don't see some of the weakness in the data that some people seem to be seeing," he told reporters.

- NZPA