No case to end LVRs – S&P

In a new update on New Zealand’s banking sector, the credit rating agency said risks stemming from rising house prices and household debt levels have stabilized in 2017.

But housing-related downside risks remain elevated and the unwind of both house prices and credit growth has some way to run before the risks subside.

S&P’s director of financial institutions ratings, Nico de Lange, said that house price growth has slowed down noticeably in the past year including, importantly, in Auckland.

That’s due to a number of factors including the Reserve Bank’s third round of LVRs, a tightening bias from the banks, affordability and serviceability issues and interest rate repricing.

De Lange pointed to the LVRs as the key contributor to the slowdown in housing – which is behind a wider slowdown in credit growth.

“But the strong build-up in imbalances in both credit growth (relative to GDP) and house prices (relative to income) have to unwind further before housing related risks stop posing a threat to the financial system.”

This means that the time is not right for the Reserve Bank to start removing the LVRs.

S&P’s associated director financial institutions ratings, Andrew Mayes said they believe the slowdown in both housing and credit growth will continue.

Macro-prudential tools, like the LVRs, are targeting the wider risk to the financial system – not just the housing market, he said.

“We feel that an unwind in the build-up of risks from housing, which remain elevated, hasn’t taken place yet.

“From where we see things at the moment we would expect the LVRs to remain in place.”

Additionally, DTIs could be a useful addition to the Reserve Bank’s macroprudential toolkit, as they add serviceability into the equation which the LVRs don’t, Mayes said.

“But we are not sure when we will see developments in this space as no political party seems keen to endorse them.”

In the longer term, S&P does not expect to see house prices falling too much - unless there is a dramatic change to existing supply and demand dynamics – although credit growth should continue to slow.

Mayes added that funding cost pressures for banks are expected to remain and that is coming through in mortgage repricing.

“Costs have probably stabilised which means the headwinds have come off and we could see a cut in some rates.

“But we think that we will see some pressure on loan repricing going on for a while.”

Read more:

LVRs still needed – RBNZ 

PM rules out DTI ratio idea