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NZ's housing-related imbalances set to peak in 2018, S&P Global says

Tuesday 20th February 2018

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Housing-related imbalances in New Zealand look set to peak and even begin to unwind in 2018 as headwinds abate and new government policies take shape, according to S&P Global Ratings. 

"The risks that the banking sector in New Zealand faces from five years of strong growth in both house price inflation, and more recently, household credit growth, have likely peaked, in our view, and we believe the basis for a partial unwinding is building," said Andrew Mayes, a credit analyst at S&P Global Ratings.

New Zealand's central bank has long signalled the housing market is a key risk to financial stability, but late last year announced it would ease restrictions on low-equity mortgage lending from Jan. 1 as housing market pressures abate after several years of policy efforts to cool rapid house price gains and their accompanying credit expansion.

"In 2018, we see the recent slowdown in credit growth steadying and house price inflation consolidating around current levels from recent cyclical lows in late 2017, as some headwinds of the last 18 months abate. Thereafter, we expect relatively measured house price and credit growth," he added.

Mayes noted that while the Real Estate Institute's house price index - which adjusts for market composition changes - ended 2017 higher at just under 4 percent, volumes were down for much of the year while housing stock on the market was higher. He also said that growth in investor and interest loans remain down by around 25 percent and 20 percent year on year.

"We see 2018 as continuing a theme of modest house price growth on similarly modest volumes," he said. 

Looking ahead, Mayes is expecting relatively measured house price and credit growth on the back of new government policy announcements, falling migration, higher fixed rates and changes to capital rules. 

"A change in government in late 2017 came with a number of policy announcements that should have the effect of both slowing demand and increasing supply, in our view, particularly on the back of an expected increase in supply of stock on market," said Mayes. 

Regarding current macroprudential tools in place, he expects that any further easing of those restrictions will come "only after a protracted period of measured growth in both credit and house prices." As a result, he doesn't expect their relaxation to add fuel to housing-related imbalances, although "such a scenario remains a downside risk to our base case," he said. 

He expects higher overseas rates to pose a headwind to stronger credit growth and a sustained buildup of house price inflation. While the short end of the yield curve appears anchored for at least this year, longer term rates should follow overseas leads higher, he said.

Mayes noted that New Zealand's major banks are material users of offshore term debt markets, with external debt at more than 25 percent of total domestic loans. Offsetting these pressures to some extent is the recent slowdown in credit growth as well as the stronger term debt issuance more recently. "On balance, however, we see the trend toward longer-tenured and more stable funding remaining a constant, and against the backdrop of higher rates overseas, we expect the bias toward higher funding rates to persevere," he said. 

Capital requirements will also likely pose an additional headwind to credit growth, he said. He noted the central bank is currently consulting on both the quality and quantum of capital and "a tightening bias is clear." 

S&P said it sees "little change in the attitude of the RBNZ toward macroprudential policy, despite recent personnel changes" with a new central bank governor and head of financial stability. 

Mayes also said S&P Global expects 2018 to be another good year for major bank performance against a continuing theme of low-interest rates and solid economic growth and it forecasts credit growth to remain healthy and toward the lower end of a range between 5 percent and 7 percent through 2018 "albeit continuing to drift lower from recent cyclical highs." 


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