PHOTO: Releasing its half-yearly Financial Stability Report, The Reserve Bank said the level and trajectory of house prices is unsustainable and creating risks for recent buyers. Photo credit: Supplied/Getty Images.

The Reserve Bank is concerned the level of house price growth is not only unsustainble, but also puts recent buyers at risk.

Releasing its half-yearly Financial Stability Report on Wednesday, which considers the “soundness and efficiency of the New Zealand financial system”, the Reserve Bank said those who had to borrow more to buy a house are “increasingly vulnerable” to future shocks.

This included recent mortgage borrowers with low deposits (high loan-to-value ratio), who are more at risk if current prices drop. Rising interest rates could also mean some households were over-leveraged.

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“Also, while current debt servicing costs are quite low, higher mortgage rates could see debt servicing costs rise substantially for some borrowers as a share of their income, creating financial stress and reducing aggregate demand,” the Reserve Bank said in the report.

Loan-to-value (LVR) restrictions were the main tool used by the Reserve Bank to reduce housing market risks. From this week (November 1), the amount of lending banks can make to owner-occupiers with small deposits is chopped in half – just 10 percent of a bank’s total new lending can go to owner-occupiers with less than 20 percent deposit.

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The Reserve Bank said it would begin consulting on forms of debt servicing restrictions, which it said could also be used to “lean against those risks” of high debt relative to income.

Bank capital requirements (the financial buffer held by banks), would “progressively increase” from July 1, 2022.


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