IMF raises red flag over NZ’s property-linked debt levels

WELLINGTON: The International Monetary Fund (IMF) warned yesterday that high levels of household debt tied up in property are a risk to New Zealand’s financial stability and backed the central bank’s lobby for new tools to deal with the red-hot housing market.

New Zealand house prices, among the fastest growing in the developed world, rose 13.5% in the year to February.

Officials and economists are concerned that a sudden correction would wipe out household wealth and plunge the economy into recession.

New Zealand household debt was over NZ$260 billion (RM806 billion) in 2016, at a record high of 168% of household income, according to central bank statistics. Almost 90% of that is caught up in property loans.

“With high household debt, you worry about the amplification of large external shocks,” Thomas Helbling, the IMF mission chief for New Zealand, told reporters in Wellington.

He pointed out that the Pacific Nation’s small, open economy was especially vulnerable to global risks and that the chance of a “hard landing” in major trading partner China remained possible in the next five years or so.

The Reserve Bank of New Zealand (RBNZ) has been lobbying the government for months to get permission to add debt-to-income limits to its macroprudential arsenal to combat the country’s “excessive” house price growth. The IMF called on the government to sign off on the request.

Official interest rates are at a record low of 1.75%, and the RBNZ has indicated it could hold rates steady for two years or more as it grapples with stubbornly low inflation while trying not to stoke the housing market. – Reuters