Rising House Prices Risk for New Zealand Banks

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House prices rising annually at more than 30% could create a risk for New Zealand banks of a "disorderly correction", S&P Global Ratings has warned. Unprecedented house price growth of 30%-plus in the past 12 months here was exposing financial institutions to rising economic risks, the rating agency warned on Friday Efforts by the Reserve Bank and Government to create a less toppy market have not been effective so far. Because of surging house prices and bumper demand, New Zealand banks have already had regulatory restrictions placed on the sector this year. The size of deposits required for home loans and debt-to-income limits have been intended to curb rampant house price inflation but these haven't worked so far. S&P warned of what might happen if nothing changed. "We now view the economic risk trend as negative, reflecting a one-in-three possibility that in the next two years New Zealand financial institutions could face greater risk of a sharp fall in house prices, which could potentially result in higher credit losses, particularly if the growth continues unabated," S&P said. "If the current trend persists, we expect to assess our economic risk score for the New Zealand banking industry as having worsened. "Nevertheless, we expect to keep our issuer credit ratings on the six rated New Zealand banks and two rated non-bank financial institutions unchanged in that scenario, primarily reflecting the support of more highly rated parents," S&P said. S&P said while its base case suggested an "orderly slowdown" of NZ house price growth, downside risks were increasing and a lot would hinge on whether policy measures were successful in curtailing property price growth. S&P expects New Zealand banks' credit losses will return to pre-pandemic levels in one to two years. "This reflects the New Zealand economy's faster recovery from the effects of the Covid-19 pandemic than most advanced economies," it said. Treasury is expecting house price growth between 2021 and 2022 to be 0.9%. The Real Estate Institute's latest monthly data showed we have a long way to go to sink that low: new house price records have been set, with national prices up 19.1% in the year to April and Auckland outstripping that, rising 21.6%, REINZ announced on May 13. "This is a very sharp adjustment in house prices but a very necessary one," Finance Minister Grant Robertson said in today's Budget lockup.