Financial Stability Report for May 2021

Financial Stability Report in pictures

New Zealand’s financial system is sound but vulnerabilities remain

New Zealand’s financial system has coped well with the COVID-19 pandemic, but risks associated with the housing market are accumulating.

New Zealand has done better than feared but some businesses remain vulnerable.

Low global interest rates are supporting economic recovery, while contributing to higher asset prices.

Tighter LVR requirements will help rein in high-risk mortgage lending.

Capital and liquidity buffers have protected the financial system, but further resilience is needed.

New Zealand has done better than feared but some businesses remain vulnerable.

Global economic and financial outcomes have so far turned out more favourable than anticipated in the early days of COVID-19. New Zealand’s key export prices have been resilient, with dairy prices at their highest level in several years. However, supply chain disruptions and border restrictions have significantly affected some businesses.

In parallel, substantial domestic fiscal and monetary policy support, along with successful public health measures, has helped to prevent many business failures and a larger rise in unemployment, which could have stressed the financial system. However, New Zealand’s economic prospects ultimately depend on the global containment of the pandemic and on the recovery of trading-partner economies.

Low global interest rates are supporting economic recovery, while contributing to higher asset prices.

In response to the pandemic, central banks around the world eased monetary policy to stimulate investment and employment. The low global interest rate environment has also contributed to higher asset prices.

In New Zealand, low interest rates along with easier borrowing requirements, ongoing supply constraints, and a resilient labour market contributed to a rise in house prices over the past year. The sustainability of this increase is in question as these factors could prove temporary. Also, the effects of recent housing policy changes are still to be seen.

Tighter LVR requirements will help rein in high-risk mortgage lending.

Mortgage lending has increased against the backdrop of rising house prices, both to investors and owner occupiers. Also, many borrowers are taking bigger loans with more risk. In response, the Reserve Bank has tightened loan-to-value ratio (LVR) requirements. Since 1 May, almost all new loans to investors need to be less than 60 percent of the property value. Additionally, most new loans to owner-occupiers need to be less than 80 percent of the property value. With these restrictions in place, the Reserve Bank expects new lending to investors to slow.

Additional lending restrictions could be implemented by the Reserve Bank if needed to lean against housing market risks.

Capital and liquidity buffers have protected the financial system, but further resilience is needed.

The pandemic has so far had only limited impacts on financial system soundness, partly because of government support and also because of strong capital and liquidity buffers. Non-performing loans are at low levels and remain well below the peak seen after the global financial crisis. Solid profitability and dividend restrictions have allowed banks to build their capital, providing a buffer to absorb any future losses.

Overall, banks are in a strong position to keep supporting their customers and the economy. More capital remains necessary to support resilience in the future.