Reserve Bank's housing market fears

Recent entrants to the housing market are vulnerable to rising interest rates, and 5% home loans could swallow up 50% of new buyers' household income, according to the Reserve Bank.

Following the central bank's latest Financial Stability Report, the bank has outlined why it is concerned about "vulnerabilities" in the market. 

The RBNZ warned that the long-term downward trend in interest rates could reverse, posing a risk to those who have acquired homes at "elevated" recent levels. 

The central bank estimates that an increase in mortgage rates to 5% could see a new homeowner's debt servicing ratio rise from 30% to 50%. 

It said that a large increase in debt serviceability could have a profound impact on the economy, "as highly-indebted households reduce their consumption spending, and particularly distressed borrowers default on their loans".

Red-hot house prices and a lack of affordability in the property market was laid bare by this week's FSR.

According to the report, new buyers need to stump up 223% of their median annual disposable household income for a 20% deposit on an NZ home. Ten years ago, buyers needed to save up about 140% of their annual income.

The Reserve Bank has been blamed by commentators for fuelling the skyrocketing housing market with its record low interest rates, quantitative easing, and the decision to scrap LVR rules.

Yet the central bank said it had taken steps to reduce the level of risk in the market by reinstating LVR limits, and said a "moderation of house prices" was unlikely to pose a significant risk to the banking system. 

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