OREANDA-NEWS. A tightening of macro-prudential tools by the Reserve Bank of New Zealand (RBNZ) will have a positive effect on bank credit, says Fitch Ratings. The new measures focus mainly on higher loan-to-value ratio limits (LTV) for residential investment mortgages and target the heightened risks to banking system stability from rapid Auckland house-price appreciation. Auckland house price growth accelerated to 18.1% per year-on-year versus 8.4% nationwide as of end-June 2015.

Fitch expects the RBNZ measures to protect the viability of banks by limiting their exposures to higher-risk mortgages if house prices fall sharply. Auckland's property price growth may decelerate as credit growth slows in line with the new macro-prudential measures. Slower and more moderate house-price growth would limit the negative impacts on the wider economy. According to the RBNZ and CoreLogic data, investors accounted for 41% of all Auckland property sales at end-June 2015. At the same time, more than half of New Zealand's new investor lending had LTVs above 70%.

The new macro-prudential tools may also counter-balance the effects lower interest rates and a weaker currency may have on stimulating property demand. The RBNZ has cut its official cash rate by a cumulative 50bp since June to reflect weakening demand pressures on inflation and the New Zealand has depreciated by more than 15% year-to-date, which could increase foreign investor interest in Auckland property. If the new tools are unable to cool the Auckland property market against these other factors, it could constrain the RBNZ from further monetary policy loosening or add to pressure for additional macro-prudential measures.

If house prices continue to accelerate at current growth levels, risks to bank ratings would increase, especially as an increasing portion of this growth is debt-funded - as reflected in the rising household debt-to-disposable income ratio (162% at end-March 2015 from 151% in December 2011). The economy is also challenged by other risks arising from low dairy prices and the peaking of reconstruction activity in Canterbury, both - especially in combination with each other or a house-price fall - could also have an impact on banking system stability.

In isolation, these risks appear manageable, as reflected in the results of the RBNZ mortgage stress tests in 2014. Notably too, Fitch also stressed banks' NPL ratios with end-March 2015 data and loss-absorption buffers remained solid under the test. However, a combined scenario in which house prices fall sharply while dairy prices remain low would increase the pressure on banks' asset quality, especially given New Zealand's high household indebtedness. Under such a scenario, Fitch would expect banks to limit credit growth and preserve capital, potentially resulting in a wider slowdown of the economy. Nevertheless, New Zealand's banking system is significantly better capitalised than it was pre-2007. It also benefits from strong pre-impairment operating profitability, which supports loss-absorption buffers if needed.

From 1 November 2015, banks will be required to limit Auckland investor mortgages with an LTV of above 70% to a maximum of 5% of Auckland investor mortgages; 10% of mortgages secured on owner-occupied properties in Auckland will be able to be written at LTVs above 80%. At the same time, the speed limit outside of Auckland will be relaxed to allow 15% of mortgages to have an above-80% LTV. This allows the RBNZ to specifically address the risks related with investor mortgage lending in a specific market without impacting other regional markets within the same jurisdiction.