House prices

PHOTO: The sky-high prices increase the risk of a sharp correction. Source: 1 NEWS

The Reserve Bank (RBNZ) is warning about the threats posed by a sharp fall in house prices or a rise in unemployment.

In its six-monthly financial stability report the governor, Adrian Orr, said the big financial shocks from the pandemic have yet to be felt because of various official support measures.

“The relatively resilient economic out turn means that the New Zealand financial system has not been tested as severely as it could have been. The banking system has maintained strong buffers of capital and liquidity, and the insurance sector remains well capitalised.

“The government’s fiscal support, in particular the wage subsidy scheme, has stabilised the labour market and household incomes.”

But the central bank’s report noted low-deposit home loans had grown and deputy governor Geoff Bascand said if unchecked, could threaten financial stability.

“High leverage in the housing sector poses risks if house prices fall sharply or unemployment rises, reducing the ability to service loans. This is why the Reserve Bank intends to re-impose LVR [loan-to-value ratio] restrictions to guard against continued growth in high-risk lending and ensure that banks remain resilient to a future housing market downturn.”