Fitch: Tighter Macro-Prudential Rules in New Zealand Support Bank Ratings
Fitch believes the measures, which limit lending growth based on loan/value ratio (LVR) ranges and borrower types, could increase financial stability in New Zealand's banking system, especially in light of continuing and unsustainable house-price growth and historically high household-debt. The nation-wide rules are likely to reduce investor mortgage activity and high loan/value ratio (LVR) lending, two segments Fitch considers as higher-risk through the cycle. However, we deem that a more meaningful result could be achieved by combining the proposed rules with other measures, such as debt/income limits and additional capital overlays.
New Zealand's household debt/disposable income ratio rose to 163% at end-March 2016 and is now higher than pre-2008 global financial crisis levels. This follows historically low-interest-rates and soft wage increases, which contributed to mortgage credit growth of 8.1% yoy in March 2016.
Fitch says a sharp house-price correction - although not our base scenario - could hurt banks' balance sheets if it occurs in conjunction with increased unemployment or higher interest-rates. It may also have long-term implications for the country's economy. However, Fitch does not anticipate a significant house-price correction, absent an economic shock. Auckland's house-prices increased by 14.5% yoy at end-March 2016, with strong net immigration, lack of timely housing supply and greater investor activity as key drivers. House-prices also rose strongly outside Auckland, increasing by 11.2% yoy across the country.
In its consultation paper published today, the Reserve Bank of New Zealand (RBNZ) plans to restrict growth of investor mortgages with an LVR exceeding 60% to 5% and owner-occupied mortgages with an LVR exceeding 80% to 10%. The RBNZ is also exploring further measures that may include a counter-cyclical buffer, which is currently not set.
Macro-prudential tools implemented by the RBNZ since October 2013 have lowered the proportion of higher-LVR mortgages being underwritten, although effects on house-price growth were limited due to continued strong demand. New Zealand banks' exposure to residential mortgages accounted for 55% of total banking assets at end-March 2016. New residential mortgages with a LVR exceeding 80% declined to 7.9% at end-March 2016, from 25.4% at end-August 2013.
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