Taking home loan debt into retirement

WELLINGTON: Ongoing containment of Covid19 and significant fiscal and monetary support has ensured the New Zealand economy has been resilient in the face of economic shocks from the pandemic but significant risks remain, according to the Reserve Bank.

New Zealand’s central bank released its sixmonthly Financial Stability Report yesterday and Reserve Bank governor Adrian Orr said the relatively resilient economy meant the financial system had not been tested as severely as it could have been.

‘‘The banking system has maintained strong buffers of capital and liquidity, and the insurance sector remains well capitalised.’’

But Mr Orr also signalled caution, saying Covid19 remained rampant internationally implying significant risks to New Zealanders’ health and economic prosperity remain.

‘‘Businesses domestically and internationally face ongoing challenges as fiscal support measures unwind, which will lead to an increase in loan impairments for banks,’’ he said.

Deputy governor Geoff Bascand acknowledged that actions to support employment and investment had also spurred activity in the housing market, resulting in an increase in higherrisk lending, particularly to property investors.

‘‘High leverage in the housing sector poses risks if house prices fall sharply or unemployment rises, reducing the ability to service loans.

‘‘This is why the Reserve Bank intends to reimpose LVR restrictions to guard against continued growth in highrisk lending and ensure that banks remain resilient to a future housing market downturn,’’ Mr Bascand said.

The Reserve Bank has signalled its intends to consult on reintroducing the bank restriction from March 1.

Mr Bascand said banks needed to continue to support their customers and maintain their appetite to lend.

The report notes home loan deferrals peaked at about 8% of mortgage lending but only 1.5% remained on deferral as of early November.

However, the Reserve Bank expected loan impairment rates to rise and banks had increased loan loss provisions in anticipation.

‘‘Higher provisions, along with reduced net interest income as a result of lower interest rates, have seen bank profits fall from previous high levels. However, profits still remain reasonable and, with banks currently restricted from paying dividends, they have strengthened their capital buffers.

‘‘A worsening in the economic outlook would likely result in banks having to raise additional provisions to cover expected credit losses, which could put further pressure on profitability.’’

Reserve Bank stress tests had shown banks had the capacity to withstand a significant weakening in the economy before their ability to continue to support the flow of credit would come under question.

The Reserve Bank said despite the decline in economic activity housing market activity and credit growth had rebounded strongly.

‘‘A growing share of this lending is going to borrowers with low deposits, making these borrowers’ balance sheets more vulnerable to a correction. If this trend were to continue, the stock of lowdeposit home loans on banks’ books would gradually rise to a level that would constitute a risk to financial stability.’’

Some banks had eased maximum loan to value ratio restrictions to property investors from 70% to 80% and lending at that high LVR had increased strongly.

‘‘While the share of highLVR loans on banks’ balance sheets remains relatively modest for now, a material easing in standards for new lending could see risks increase over time.’’

The report notes that while asset price growth supported household balance sheets, longterm risks remained from housing market imbalances.

‘‘House price growth continues to outpace growth in household incomes and rents.’’

In October, the house pricetoincome ratio rose to 7.7 up from 6.8 a year earlier, driven mainly by strong growth in Auckland, where the house pricetoincome ratio was now 10.3. — The New Zealand Herald