What falling house prices will mean
Reserve Bank remains confident about the resilience of financial system
The Reserve Bank estimates a 30 per cent fall in house prices could lead to about 10 per cent of all outstanding mortgage debt falling into negative equity.
The bank, in its latest financial stability report, noted house prices have begun to fall and said it had continued to monitor the extent of mortgage lending in negative equity.
“Relative to December 2021 prices, we estimate that a 30 per cent fall in house prices could lead to around 10 per cent of all outstanding mortgage debt to fall into negative equity,” the report said.
Negative equity is when the value of the borrower’s property is less than the outstanding mortgage amount.
The bank said its loan-to-value ratio settings have acted to limit the risks of future negative equity for recent borrowers, while earlier borrowers have seen large gains in equity as prices have risen in recent years.
“Given the large increase in prices over the past two years, it would take a substantial decline in prices to see widespread negative equity,” the bank said.
A “sharp correction” in house prices remained a “plausible outcome”, it said.
The report said New Zealand’s financial system was well-placed to handle different pressures.
Reserve Bank governor Adrian Orr said the global pandemic continued to pose complex economic and financial challenges, including ongoing disruption to production and supply chains.
“Russia’s invasion of Ukraine has heightened these challenges, including the significant human impact.”
Orr said the combination of a global pandemic and war presented a significant challenge.
“But we are confident that the New Zealand financial system is resilient to a range of potential outcomes.”
At a news conference, Chris McDonald, manager of the forecasting team in the RBNZ’s economics department, said a stress test of the financial system carried out last year involved a theoretical unemployment rate of 12 per cent and a 40 per cent decline in house prices.
“In that stress test we found that the banks were resilient to that scenario,” he said.
Deputy governor Christian Hawkesby noted that while house prices had fallen, they remained above a sustainable level.
“How that correction comes about — it could come through house prices falling or those fundamentals shifting up through time,” Hawkesby said.
“We are not putting a number on how far they are away from being sustainable.
“It will be something that we will continue to review through time.”
Orr was asked how concerned he was about people who had bought houses at elevated levels over the past 12 months.
“When you look across the full mortgage book, households are in a very strong equity position and as we know employment is at a very high level, and those are great conditions for stable balance sheets at the household level.
“But without doubt over the last 12 months people have entered that market — and there was no shortage of warning coming from ourselves — they have entered the market at very elevated price levels.”
Those property buyers would have been “stress-tested” by their banks.
“We know that they have passed these tests but as they roll on to those higher interest rates, without doubt there may be some belt-tightening that is needed.”
Orr and his predecessors have talked about monetary policy “needing mates” in the form of fiscal policy.