Rising debt levels threat to New Zealand financial stability: central bank

Rising debt resulting from soaring home prices and low dairy prices is continuing to pose a risk to New Zealand's financial system, the central bank warned Wednesday.

While house price inflation in the largest city of Auckland, home to a third of the population, had softened recently, house price to income ratios remained among the highest in the world, said a Financial Stability Report from the Reserve Bank of New Zealand (RBNZ).

Vulnerabilities in the housing market had increased in the past six months and house price pressures were spreading beyond Auckland to the rest of the country, said the report.

"Credit to the household sector is growing rapidly, and the household debt-to-disposable income ratio now stands at 165 percent, a record high," said the report.

"Rising house prices continue to reflect low interest rates, steady income growth, and an imbalance between population growth and the rate of house building. There is a risk that a reversal of any of these factors could cause a significant market correction."

Meanwhile, low dairy prices have caused the average dairy farm to suffer operating losses for the past two seasons.

However, even with recent improvements in dairy payouts, some farms might struggle to achieve profitability, especially given that 20 percent of farms accounted for around 50 percent of overall dairy debt.

"As a result, problem loans are likely to continue to increase. Debt levels have been stretched further as dairy farms have borrowed working capital to absorb operating losses over the past two seasons. High debt levels leave the sector vulnerable to any future weakness in dairy prices," it said.

RBNZ governor Graeme Wheeler said in a statement that the RBNZ had asked Finance Minister Bill English to give it a debt-to-income (DTI) tool to regulate bank lending.

"While the (RBNZ) is not proposing use of such a tool at this time, financial stability risks can build up quickly and restrictions on high-DTI lending could be warranted if housing market imbalances were to deteriorate further," said Wheeler.

Deputy governor Grant Spencer said in the statement that the banking system had strong capital and funding buffers and profitability remained high.

"However the banking system's reliance on offshore wholesale funding is beginning to increase due to a widening gap between credit and deposit growth. Banks could become more susceptible to increased funding costs and reduced access to funding in the event of heightened financial market volatility," Spencer said. Endit