Limits on risky mortgage lending are to stay unchanged, with the Reserve Bank saying debt levels in some sectors are still high and warning that insurance and finance companies need to increase their capital levels.
Reserve Bank of New Zealand governor Adrian Orr. Photo: NZ Super Fund
In its six-monthly Financial Stability Report, the Reserve Bank (RBNZ) said the loan-to-value ratios (LVRs) had helped to cool the housing market and debt growth but risks remained, and the restrictions were still needed.
"The current LVR settings remain appropriate for now, with any further easing subject to continuing subdued growth in credit and house prices and banks maintaining prudent lending standards," RBNZ governor Adrian Orr said.
LVRs restrict banks from lending any more than 20 percent of their lending to first home buyers with less than a 20 percent deposit, and no more than 5 percent for residential property investors with less than a 30 percent deposit.
The LVRs were imposed in 2013 to reduce the risk for banks as house prices surged by as much as 20 percent a year, and a large part of bank lending was going to borrowers with low finances.
Some real estate interests have said that with prices slowing around the country, and even falling in parts of Auckland, that the LVRs should be relaxed or even abolished.
Farm debt worries
In other parts of the report, the RBNZ said the risk from an indebted dairy sector remained high with a number of farms carrying too much debt, despite improved milk prices.
It's been estimated that about 20 percent of dairy farmers hold about a third of the farm debt and the report said they are the most vulnerable.
"But the most indebted farms have struggled to repay debt... farms may need to invest more, and may face higher costs, as they respond to biosecurity threats, such as the Mycoplasma bovis outbreak," it said.
It also said the costs of climate change, and the cost of countering greenhouse gas emissions would also add to the burden of the sector.
"However, options for addressing problems at financially stressed farms appear constrained at the moment, as demand for dairy farm land is low."
The bank said the over-all banking and financial system was "resilient", but repeated it wanted the financial strength of the sector to be reinforced to withstand any shocks.
The RBNZ is currently looking at submissions on its proposals to make retail banks significantly increase their capital levels, which the banks and some commentators have said will increase the cost of borrowing, lower deposit rates, weigh on the economy, and lead to credit rationing.
"It is imperative to improve New Zealand's financial system resilience while conditions are conducive," Mr Orr said.
"There is also a need for some insurers and non-bank deposit takers to improve their capital buffers. We will be reviewing insurer solvency standards in the months ahead."
He said insurers also needed to manage their exposure to climate change and natural disasters, which is changing affordability.
"These risks must be appropriately identified and priced, so as to best ensure a stable transition over coming years."
