Central bank UPDATE 1-NZ says financial system vulnerabilities remain
WELLINGTON, May 5 (Reuters) – The Reserve Bank of New Zealand (RBNZ) said the country has weathered the COVID-19 pandemic better than initially feared, but financial vulnerabilities remain and more actions might be needed to control a bloated real estate market.
“Successful public health measures, coupled with substantial support for monetary and fiscal policy, have helped prevent numerous business failures and a further rise in unemployment,” Governor Adrian Orr said in the report on the financial stability (FSR) of the bank.
But border restrictions, supply chain disruptions and social distancing have reduced activity in affected sectors, and some businesses remain vulnerable, he added.
Orr said low interest rates have resulted in increased risk taking and higher asset prices, with the most visible impact being rising house prices.
The bank tightened mortgage lending to investors earlier this year, while the government imposed new taxes on investors in the real estate market after a rapid acceleration in house prices.
The RBNZ said that a high proportion of new loans had high debt-to-income and loan-to-value (LVR) ratios. This makes recent borrowers more vulnerable to rising mortgage rates and exposes households and the financial system to falling house prices.
“We will observe how market conditions react to recent changes in government policy,” said Deputy Governor Geoff Bascand.
“If necessary, we are ready to further tighten the loan terms for housing using LVR requirements or additional tools that we are evaluating,” he added.
The last FSR had no political involvement or involvement in the housing market, said ASB Bank chief economist Nick Tuffley.
“We consider the housing market to cool rapidly for the remainder of the year, which should limit the need for further macro-prudential measures in the short term,” Tuffley said.
The RBNZ said the new capital rules for banks will begin to be implemented from October 1, with increases in minimum requirements from July 2022.
Reporting by Praveen Menon; Editing by Leslie Adler and Sam Holmes