NZ banks face higher risk from skyrocketing house prices.

Unprecedented house price growth of more than 30 percent in the past year is exposing New Zealand banks to rising economic risks, according to Standard and Poors, the credit rating agency. 

S&P has warned that the banks could face a greater risk of a disorderly correction in house prices if the sharp growth persists and prices continue to build.  

This could result in higher credit losses for New Zealand financial institutions in the longer term, leading the rating agency to lower its stand-alone credit profile of some banks.  

“While the government and the regulator have taken various actions to mitigate the risks to financial system stability from the resurgent house prices, these initiatives have so far been less effective in restraining house price inflation than we previously anticipated,” S&P added. 

“We now see a heightened risk that property price growth continues unabated.” 

 Growth continues unabated 

Prices have soared in recent months on the back of improving economic activity, low retail interest rates, and persistent supply and demand imbalances. 

S&P believes that the New Zealand government's housing policy package will also support a slowdown in property price growth. The package includes extending the bright-line test (tax rules aimed at curbing speculation) to 10 years from five years, removing the ability of property investors to offset interest expense against rental income for tax purposes, and lifting the price and income caps on first-home buyer grants and loans. 

Further, the ratings house anticipates that the recent agreement between the government and the central bank to add debt serviceability restrictions - such as a debt-to-income (DTI) limit or an interest rate floor - to the macroprudential regulatory toolkit will assist in slowing house price growth. 

“However, any decision on applying a DTI limit will be preceded by a full public consultation process and a regulatory impact assessment. Consequently, implementation of such measures and their impact on house prices could take many months. 

“Nonetheless, downside risks are increasing, in our view, particularly if policy support measures are unsuccessful in curbing property price growth.” 

S&P forecasts that the New Zealand banks' credit losses will return to pre-covid levels in the next one to two years.  

“This reflects the New Zealand economy's faster recovery from the effects of the pandemic than most advanced economies, supported by the government's fiscal stimulus.  

“Credit losses could rise well above our base case if house prices were to unwind in a disorderly manner or there was a material recurrence of a Covid outbreak and containment restrictions, resulting in a deep and prolonged recession. 

Nevertheless, S&P’s issuer credit ratings on the six rated New Zealand banks and two rated nonbank financial institutions will likely remain unchanged due to strong parent support. The ratings agency expects to keep the ratings on the four major New Zealand banks on par with their Australian parents. 

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