Financial Stability Report for November 2022

Christian Hawkesby: Kia ora koutou katoa, mōrena koutou. Nau mae haere mai ki Te Pūtea Matua. Ko Christian toku ingoa. Tēnā koutou katoa.

Good morning, welcome and thank you for joining us here today. I'm Christian Hawkesby, the Deputy Governor and General Manager of Financial Stability and I'm delighted to be here today presenting our Financial Stability Report. I'm joined on the stage by colleagues — our Manager of Financial System Analysis Chris McDonald, Director of Prudential Policy Kate Le Quesne and the Governor Adrian Orr. I'd also like to extend a special welcome to our guests today here from James Hargest College — the winners of the 2022 Monetary Policy Challenge.

[Round of applause]

27 teams from across New Zealand participated in this year's challenge and thank you for joining us all the way from the mainland. I hope you really enjoy your time with us.

So today we're here to talk about the Financial Stability Report which is of course focused on the risks around our central view for the economic outlook, the resilience of the financial system and the face of those risks and our strategy and priorities in the face of that assessment.

So to the report itself, the rising global interest rates necessary to curb inflation will test New Zealand's financial resilience. While our financial system as a whole is resilient, some households and businesses will be challenged by the rising interest rate environment. It is important that financial institutions take a long-term view when supporting customers and allocating credit to the wider economy.

Global supply chain disruptions, ongoing food and energy, supply shocks, scarce labour resources and the lag defects of monetary and fiscal stimulus have all contributed to high global inflation. Central banks have been tightening monetary conditions at pace to ensure that inflation expectations remain anchored. The extent to which economic activity will slow in response remains highly uncertain. In short there are increasing downside risks to the global economic outlook.

In the face of this, we believe that New Zealand benefits from a strong starting point of high levels of employment and a sound fiscal position but we are not immune to these risks.

Rising household debt servicing costs and declining household wealth will put pressure on domestic spending in the near term. We are confident that the financial system is well placed to support the economy through this period.

Banks capital and liquidity positions are strong and our recent stress tests have demonstrated bank's resilience to severe but plausible downside scenarios.

That said, financial institutions will need to continue investing in their systems and their governance and in their risk management to ensure that long-term resilience that we have. In coordination with our regulatory partners we are committed to working with industry to support financial stability and to ensure that our priorities — our collective priorities are risk-based evidence-led and outcome focused.

Very happy to take questions about the report. I should remind you just briefly that we will be back here again in a couple of weeks’ time with the Monetary Policy Statement at the end of November and in the interim next Thursday, we will be sharing our findings of the review of the assessment and formulation of an implementation of monetary policy which is our 5-yearly legislative review.

So, in the meantime happy to take questions.  If you direct them in the first instance to me, I can share them across the panel as appropriate.

Media questions

Reporter: Hello Ainsley Thompson from Bloomberg News. The report identifies unemployment as one of the biggest risks to financial stability but today we saw unemployment stay near historic lows. When do you see that risk kicking in and what's the time frame on that?

Christian Hawkesby:  That's right. We benefit from a financial stability perspective, we benefit from the strong starting point that we have. We have very high levels of employment, we have high levels of income, job security. So all of those things benefit financial stability in the near term. We are conscious that in a rising interest rate environment that will slow the economy down, that will result in a weaker labour market. What our research and our stress tests are showing is that the financial system is resilient not only to our central view of a cooling labour market but for a scenario where unemployment was much higher than anticipated.

Reporter:  Kia ora, Imogen from NewsHub.  Are you telling Kiwis to expect more financial pain?

Christian Hawkesby: We're telling Kiwis to think and look ahead that we are currently in good times. We have a strong economy at the moment but there are clouds brewing, primarily from globally, internationally and this global rising interest rate environment will change things as we go forward and look into the medium term ahead.

Reporter: And how much of a concern is as house prices continue to fall that increase in stock being a negative equity. How much of a concern is that?

Christian Hawkesby:   I might I might pass to Chris on some of the details, but what we're identifying is that we look at a range of measures for sustainable house prices and across all of those range of measures they are still south of where house prices are at the moment. So we see a weaker outlook for house prices but also that we need to ensure that the financial system is not only prepared for that central view, but the range of risks that revolve around that.

Chris McDonald: Just to add to that, when you look across the household sector — households are in a good position and that's because the house prices have increased over the past couple of years. Prior to that, the peak that we saw end of last year and so the equity that they have in those homes has increased and so that they have that buffer for potential price declines. In addition we had the LVR settings that were in place since 2013, and that again isn't created an increased buffer for households. Now while in aggregate households are in a strong position, there’s always going to be pockets of risk, and so we've put some numbers into the report. It shows that right now even with the 11% decline, only 2% of households are in negative equity and partly that's just because house prices have only really fallen back to the level that they were at in May last year. So they're still high relative to where they were pre-pandemic.

Reporter:  Kia ora, Jane Patterson Radio New Zealand. Mention about a significant increase and unemployment would be a risk but what's the balance at the moment with the commentary around maybe some loosening in that job market might actually help to curb inflation. How does that balance it? And also to the Governor, what do you say to New Zealanders who are really facing potentially some significant financial pressure and what's the balance between chasing down that inflation target?

Christian Hawkesby:  So, I'll take the first half of the question and then pass on to the Governor.

So we've been very clear with our and our Monetary Policy Statements that not only is inflation — consumer price inflation high at the moment but employment is through its maximum sustainable level. So we have a very strong, very hot labour market and to achieve our monetary policy objectives we need to ensure that demand cools such that it can keep pace with the supply that's available and that's going to involve a period of a cooler demand, cooler consumption all resulting in weaker employment growth going forward. Now we have the risks around that which involve how quickly that occurs, what else occurs in the global environment which may change interest rates further.

Reporter: What's the extent though so you know to actually have any significant impact on bringing inflation back, are you looking at job losses, are you looking at businesses just not taking on extra people. What is the softening of that market look like or does it look like opening borders and bringing more supply in.

Christian Hawkesby: So we'll get into this in a lot more detail in a couple of weeks’ time with our Monetary Policy Statement, but it is a a combination of the demand side of the economy cooling through higher interest rates and the supply side of the economy relaxing through immigration, increasing the labour size of the labour market. I'll just pass on to Adrian for the second half of your question.

Adrian Orr: Thank you for the question and you know my advice to people is to talk with their financial advisors and stay close to their bank. One, house prices falling don't create a financial crisis in themselves. It just means that you're living in you're still living in the home. The servicing of mortgages is where you need to stay very close to the banks. If they have lent wisely, then you are the wise person they have lent to and they should be able to work with you through good times and bad.

We’ve got specific graphs within this document that show the levels of interest rates that borrowers have been tested at through history and the interest rates that are looking out there you know are well within those types of interest rate stress tests. So stick close to your banks and banks stick close to your customers, would be my suggestion. We are in a strong position to weather this international challenge.

Reporter:  Sorry just a general one about flood risk. Do you have concerns about flood prone areas and do you have any advice for banks?

Christian Hawkesby:  I'll pass on to Chris to talk about the stress testing we've done in that space. It’s been a very important part of the work that we do — the stress testing, not only to ensure that the system's sort of resilient for the here and now, but the different scenarios that we have. We’ve traditionally looked at macroeconomic scenarios for stress testing. We’ve now moved to include climate change scenarios. Chris.

Chris McDonald:  So the exercise that we did this year looking at flood events is very much about building our understanding and banks understanding of those risks, and about kind of working through the challenges with data and modelling that the new risk kind of needs, so there's a fair bit of work that's gone on there. The scenarios that we've presented results for I would say are quite severe scenarios, and also there they're forward-looking — so that they're looking kind of 30 years ahead in many cases. So what we get out of it is the results are being informative. It highlights for us that banks do need to consider these risks and I think because even though the scenarios are forward-looking, I think because the banks are lending for 30 years it means that banks need to start to consider these risks sooner than that — very soon in fact.

Kate Le Quesne: I would just add to that, that actually climate change scenarios and discussion are now a regular feature of supervisory conversations that we have with our regulated entities. So covering topics like strategy, risk management, adaptation because we do want entities to start to think about how they adapt now and for the long term.

Reporter:  Hi it’s Eric Frick The Good Returns. 2% of households are in negative equity. That's probably around about 30,000 households — maybe 100,000 people, say 3 to a house. That’s quite a lot of people to have that level of worry. What advice do you have for them?

Christian Hawkesby: Well I think as the Governor mentioned earlier, the really important part of you know servicing mortgages is your income and your participation in the labour market. So that’s why having a strong economy and this strong starting point that we do we think puts us in a good position. So it really is that's a really key feature of your ability to service your mortgage regardless of whether the level of your house prices and it's why when we think about financial stability and the types of stresses that we worry about, it's ones where unemployment is high for a prolonged period — that is the challenging environment that we seek to manage and plan and prepare for.

Reporter: This points to a pretty gloomy outlook for the global economy. Is there an argument that you should be looking at the RBA and the fact that they're slowing their pace of tightening and maybe follow suit?

Christian Hawkesby:  So yeah just a reminder, this is our Financial Stability Report. So this is the one where we put the gloomy hat on deliberately. So in our Monetary Policy Statement, we'll look at that central outlook we’ll weigh up the pros and cons of tightening monetary conditions faster or slower. In this setting, we're really looking at those risks where if global monetary conditions tighten at a pace that becomes challenging for economies in the financial system. But take your point that there are risks either way. At the moment we see the balance of risks on the global outlook to the downside.

Reporter: House prices have obviously fallen quite a lot since their peak last year. Do you guys have a forecast or a new forecast on how much we might see house prices fall from sort of November last year when they peaked to the bottom of the trough.

Christian Hawkesby:  So in a couple of weeks’ time when we publish our Monetary Policy Statement that will have our full suite of projections for all macroeconomic and variables — unemployment, interest rates, inflation, house prices as well. What we would say in this context is that when we look at sustainable house prices which from financial stability point of view is what we care about— how far away house prices are from a sustainable level, all of our measures are south of where we are at the moment.

Reporter: Jenny Ruth from This Business Desk. Do you have a current — you mentioned that banks are in for 30 years, but do you have a current estimate of how long the average mortgage lasts? Last time I heard, which is a long time ago, it was about 4 years.

Christian Hawkesby:  I don't know if anyone has that number off the top of their head, but I mean if the mortgage when it's taken out is 20 to 30 years, then you'd expect the average term outstanding on the stock would be considerably shorter than 20 to 30 years that would be an assumption.

Reporter: But yeah it doesn't last 30 years. People don't tend to live in the same house for 30 years, do they?

Christian Hawkesby: That's right. We can come back to you on that number if that will be useful

Reporter: That will be good, thank you.

Reporter: Ainsley Thompson from Bloomberg again. On the climate change stress tests —  how much concern is there about insurance retreat and the impact that we have on people's ability to finance and refinance your mortgages?

Christian Hawkesby: Do you want to take that Chris or perhaps Adrian in terms of the collective New Zealand and government industry approach?

Adrian Orr:  Yes thank you. So you know, the view here is for both insurance and banking they are absolutely interlinked. You won't get a mortgage if you don't have the insurance, so they are joined at the hip and also many of the insurance providers are also banks so you know we get a little bit loose in our language talking across the two. The insurance challenge we've been given a very strong signal globally and here domestically that relative risk pricing will be coming in. Those in more prone regions whatever the particular danger —whether it's earthquakes, volcanoes or floods — we'll be paying premiums accordingly. It's still very at an early stage industry-wise. The industry itself — the financial industry is critically important for the relative pricing and providing the signal.

[sorry Bernard  the tall people to the back please]

The insurance industry and financial markets given their forward-looking nature are really important about sending relative price signals to consumers, investors, house, home buyers and so this is about saying you need to wake up to the relative risks. You need to be able to communicate those relative risks and people need to know what they're actually buying into when they when they take those places. So you know, you will see relative price changes, you see more risk-based changes and that's an important part of the adaptation process. The financial system will not do this on its own. It will also need a regulatory impost local authorities about where they will or won't build, whether they will or won't put in 50-year flood protections or whatever. Those decisions also are an important part of the total insurance pricing package and of course central government around where they sit on what support if and when around crisis management. So we're all in this and the financial markets are a critical part of it, and the mahi that's being done and talked about here today by The Reserve Bank team are about making sure the banks understand and insurance companies understand and can measure those types of risks when they are thinking about lending.

Reporter: And should insurance companies have to be more open about areas that they are withdrawing insurance cover from?

Adrian Orr:  See I believe transparency is the most wonderful form of you know sunlight as a disinfectant — open pricing, open conversations around how those risks are being measured and priced is critical to the confidence of and integrity of those institutions so yes please we're all for transparency.

Reporter: Richard Hermann from Politic. What sort of unemployment range can the system tolerate in terms of the ability of mortgage holders to repay their mortgages? What sort of range can you tolerate in terms of unemployment before you panic?

Christian Hawkesby: So there's no magic number is the answer. What we've looked at is severe but plausible scenarios in our stress test. The specific number that we've used in in the most recent stress test is 9% in conjunction with a contraction of the economic activity, an official cash rate at 5.5% and mortgage rates up around 8.5%. So that is a pretty severe type scenario. It’s one that the financial system is resilient through. Those stress tests though — we're conscious that they don't capture everything. So they are sort of one input that we take in into our overall assessment of the resilience of the system.

Adrian Orr:  So the resilience to the financial sector is strong and open to an enormous amount of buffering. Is it infallible? No? So there’s always that balance between levels of capital and efficiency versus security and precaution and New Zealand sits at the more conservative end of that because of the capital work we've been doing.

Reporter: Brent Edwards from MVR. Is it fair to say that there's a real tension between your role around financial stability and your conduct of monetary policy in the sense that obviously if you're pushing up rates that can put on the very pressure you're talking about.

Christian Hawkesby: It's a great question and it's one that we think about a lot right through this COVID period in terms of thinking about our monetary policy tools and our prudential and financial policy tools and what we've found over the last 3 years is that actually the actions that we're taking on monetary policy and financial stability have been well aligned in terms of trying to achieve the same thing. When COVID struck, it was about supporting the economy, it was about supporting the financial system. And all of those things were telling us to have looser monetary conditions, to relax our prudential and macroprudential tools. In the stage of the cycle that we're in now, we feel like we're in the same position and that our monetary policy is telling us that employment is beyond maximum sustainable. We need to be taking away monetary stimulus and that is what we need to do both from a monetary policy perspective to keep employment on a good keel, but also to keep inflation expectations well anchored and we think that's probably the best thing we can do from a financial stability perspective as well so that we don't have to tighten even more later. The challenges strike and this is what all central banks and regulators are dealing with around the world is, it's how do you engineer that path such that we can get back to maximum sustainable employment without putting the brakes on so heavily that we have a very sharp spike higher in unemployment and that becomes a financial stability challenge at that point.

Adrian Orr:  Can I just you know — at a global level or an economic level, you can't have high and variable inflation and unanchored inflation expectations and financial stability. Hence we need to be having low and stable inflation and financial stability so they are mutually reinforcing. What is the challenge, it's not our goals and our purpose — the challenge has been the severe economic shocks that planet earth has received over the last 3 years — COVID and then the geopolitical tensions that had led to this chaos. So our goals are mutually aligned, reinforcing the shocks significant.

Reporter: The bank of mum and dad is like the fifth largest bank in New Zealand or lender in New Zealand. How do you factor that in when you do the financial stability reports?

Christian Hawkesby:  So I don't know if Chris or Kate want to have a crack at this, but from a you know from a financial stability point of view what do we care about? It's that the lending that is undertaken has you know healthy deposit sitting behind it, in terms of there's sufficient equity from the borrower themselves that will provide that resilience and that there's been sufficient stress testing, service requirement testing such that if interest rates rise higher that there will be that resilient to different types of environments. So it's really about having a sufficient equity in the loans and sufficient resilience to higher interest rates, that's what we care about in terms of the stability of the financial system. Is there anything to add in terms of the particular you know sources of those deposits that make us think differently than that. I don't possibly know?

Reporter:  Okay no, it's sort of thinking that if you know anecdotally you hear a lot of people have said it's a gift but really they're paying their parents back and if that increases the sort of stress or risks associated with some of these mortgages possibly ones that have been taken on more recently.

Adrian Orr:  Yeah so our relationship is between the banks and the lender. If the lender has more complex relationships behind, I hope those are strong and they're well understood by the bank.

Reporter: We’ve just had the jobs data come out and we saw a strong rise in employment and a huge jump in participation. How do you read that? What does it mean for the employment sector at the moment?

Christian Hawkesby: Yeah so those numbers are pretty hot off the press — sort of 15 minutes before we walked into the room. The big picture really was that both the unemployment number, the wages numbers, they all came in broadly consistently with our most recent projections. Our colleagues will be pouring over that in in more detail you know as we speak and we'll come back to you in a couple of weeks for the monetary policy statement to update you on our thinking there.

Reporter: Question for the Deputy Governor on house prices. I see — excellent FSR by the way. Page 14 — there's a comment that your assessment of the sustainable level of house prices has declined. Could you give us a sense of how much it has declined and how different that might have been to what you forecast in your last round of forecasts, which from memory had peaked at a full trough of 20%.

Christian Hawkesby:  Thanks Bernard. So as moderator I can field the questions, but I can then you know have the right to pass them on — one of the great privileges. What I'll do is get Chris to talk about you know when we think about sustainable house prices there are a whole range of different measures that we look at and it's less about the specific measure and the specific number and more the sort of factors that sit in behind those including house supply, long-term interest rates those sort of things. So do you want to give a bit of context there?

Chris McDonald:  So we look at house sustainability from different perspectives. So we've often talked about households — for example— for a new buyer, what's the mortgage payment cost going to be compared to their income and compare that over time.

We look at investors and we compare how returns on housing compared to other assets, and then as Christian mentioned looking at the physical supply from new builds and compare that to population growth. I guess another part of that has been considering the changes in zoning regulations and how that might impact on house prices as well. So we look across a range of metrics. So you do get variation across them about how much they suggest house prices are different from their sustainable level. I guess because we've seen a significant increase in long-term interest rates, a number of those metrics have declined and I guess we're in a position where the numbers we mentioned last time they haven't improved much from there.

Reporter: So you saw the sustainable level at around 20% below the peak and you're saying you still see it around about there.

Christian Hawkesby:  It hasn't risen since our last update and this is a key thing for us is that what we care about is the difference between house prices and their sustainable level through time that can change either because house prices change or the fundamentals change and so the sustainable level may you know rise or fall to meet where house prices are. So we need to continue monitoring and reflecting and coming back on each of those to assess that risk which we care about.

Reporter: So we've seen in about a 10, 11% fall in house prices overall from the peak to where they are now and you're saying there's still a little bit more to go to get to that 20% down.

Christian Hawkesby: There’s still a gap and then we'll come back with our central projection as part of our overall economic predictions pretty shortly.

Reporter: You mentioned also in the FSR, the potential wealth effect of a more substantial possible fall. You refer to the 2019 paper which talked about in not very specific terms how much a wealth effect there had been from a rise, and what it might be for a fall. How much of an impact is the wealth effect and what we've seen so far going to have on consumer spending and the economy?

Christian Hawkesby: Yeah well we know empirically that there is a very strong relationship between asset prices and consumption in New Zealand and that's you know tried and tested through time both on the upside and the downside in this environment where house prices are beyond their sustainable level and look to be weakening through time. That is one of the things that underpins our soft consumption projections. So even our central projection for consumption and spending is for a soft period ahead. What we need to think about in this environment is the risks around that and whether house prices fall more quickly or not and what that means for financial stability more generally.

Reporter: Jane Patterson again. I'm just coming back to you know talking about moving away from maximum sustainable employment — what is the tolerance for job losses to ease that pressure, you know taking into account the kick on economic and social impacts of people being able to pay mortgages? Just the actual cost you know to families and businesses?

Christian Hawkesby: So I think the key message here is that our tools are very blunt. In terms of our you know monetary policy — we have the official cash rate, we have a few other tools. On the prudential side, we have our micro and macro prudential settings. They are about the economy as a whole — they are sort of tools that affect the economy in aggregate. What we know is that from our perspective to achieve our mandate we need to have demand cooling relative to supply. We don't have the ability to sort of reach in very specifically into specific regions or areas or sectors.

Adrian Orr: First up, employment is beyond maximum sustainable employment at the moment so it's above. So we're not starting from at maximum sustainable employment and we know that's above by a vast array of indicators and the enormous amount of information being sent to us about the global lack of labour. So this is not a sustainable position where we are at the moment. Hence employment growth may slow relative to the labour force and over time unemployment arises, and over time the ability to attract, retain and get the labour you need improves and so that's one of the natural ways of going.

The second bit is we do not target a specific level of the maximum sustainable employment because we can't influence that. We can talk to you, where our job is to contribute to supporting maximum sustainable employment and the number one way we do that is by maintaining low and stable inflation and a well-functioning financial system. So we'll report on how employment is relative to the maximum sustainable employment but you know we cannot target a specific level because we don't influence that level. That level is influenced by the job market, not by us. The best we can do is provide the environment for that to happen. So, you know we do not try to target a particular level of employment or a particular level of unemployment. We just need to be cognizant of where it is and that we are contributing to the best maximum sustainable employment.

That is totally consistent with our policy targets agreement. People miss that contributing to sentence part of the sentence.

Reporter: Thank you. I wanted to ask about the risks for commercial office property and commercial residential development property. There’s been a few failures and a drop in orders. How much risk is there for the financial system from both failing residential developments and also any pressure on the office property sector from working from home?

Christian Hawkesby:  So historically, the commercial property sector has been a source of instability and financial instability not only domestically but globally as well. So it is one that we watch very closely. We have noted the increase in failures of developers and people in their businesses in that industry. It’s not out of line with what we've seen historically. So it has risen, but it's not out of line.

The thing I'd add is that the commercial property sector is a complex one —  in terms of there are different parts that are experiencing you know different levels of performance at the moment so — for example — the industrial property part of the sector has been particularly strong relative to other weaker parts. From a financial stability perspective, one of the key aspects is that the banking systems exposure to commercial property is relatively small and well-managed which gives us some comfort.

Reporter:  why is the loss ratios for these developers so much lower than it was in 2019 when we had the last bust?

Adrian Orr: I think it's the nature of the bust would be the difference. Each boom and bust will be different.

Chris McDonald: Maybe just to build on that one. One of the things is that banks’ lending standards are much tighter I guess than where they were 10 years ago.

Christian Hawkesby:   And just while I got the mic, I just wondered if there aren't any other questions or maybe only 1 or 2 left. I just wanted to use this opportunity for a free advertisement for chapter 4 of the Financial Stability Report. So we've been very focused in this discussion on the sort of here and now — the very immediate issues. Chapter 4 sets out our regulatory policy initiatives which really translate that sort of here and now, where do we see the risks into well what are we actually doing about it to ensure the resilience of the system going forward. There is a huge number of initiatives there and we've been doing a lot of work prioritizing those and working with industry to make sure that we're focused in the right area.

Kate, I wondered if you know as a bit of context you wanted to talk about the Deposit Takers Bill which is a really large part of that landscape.

Kate Le Quesne:  Yeah sure. Thank you Christian.

So as Christian described, Chapter 4 takes us through what we've got in terms of our regulatory prioritization on the agenda at The Reserve Bank at the moment. So as a result of the prioritization process, we've elected to focus mainly on our 3 legislative priorities —  so that's the Financial Markets Infrastructure Act, IPSA —  the insurance legislation and the Deposit Takers Bill that that Christian described. So the Deposit Takers Bill is designed to promote financial stability by creating a single unified regime with a range of objectives within it. So yeah designed to promote financial stability by promoting depositor confidence, resilience of entities and mitigating risks in the financial system. So within the Deposit Takers Bill which is going through a parliamentary process at the moment — which we are supporting — you'll see a range of changes in there. So firstly it's a legislative framework so there's a range of you know I guess a scope set out within the framework and the design is that a lot of the detail of the different rules sit within secondary legislation that the Reserve Bank will pursue once the primary legislation is settled. It contains enhanced enforcement powers and will graduate a response that's designed to underpin our more intensive style of supervision that we've been talking about for a number of years now.

It contains a new and enhanced resolution function for the bank and of course contains the Deposit Compensation Scheme so that's the $100,00 per account per institution coverage of deposits. so that's just a little bit of detail on the work that we're undertaking. So in our view enhancing the legislative framework is really a key priority for us when we think about our financial stability objective.

Reporter: (inaudible)

Kate Le Quesne: That was introduced during September and it's going through the process now calling for submissions.

Reporter: Just on chapter 4 — which I also enjoyed thank you. The look at the debt to income multiple restrictions you seem to be saying in chapter 4 page 47 that you don't consider the financial stability risks there enough to do anything at the moment. What is the story with the DTIs — have you parked them?

Christian Hawkesby: I’ll let Kate update you on where we're at with that one.

Kate Le Quesne:  Sure.  So since 2021, when the Minister gave us a directive to consider the government's objective around housing in particular  — sustainable house prices paying regard to first home buyers and curtailing investor demand, we've been working on what's the best way to do that and during 2021 you would have heard us talk a lot about debt serviceability restrictions. We consulted at the end of 2021 on what those debt serviceability restrictions look like. So the DTI tool you talked about versus other options like test rate flaws and so earlier this year, we announced that our preferred tool was the DTI tool and we were proceeding with the operationalization of that tool. So you can expect to see from us soon a consultation on what are I guess the design elements of that DTI framework with the idea or make final decisions on the framework so the design early 2023 and then allow banks roughly a 12-month period for them to get their systems and themselves ready should we wish to activate that tool in future.

Adrian Orr: We try to separate the implementation from the utilization. In between time of course banks note around the level of interest rate floor testing they need to do. As highlighted in the document, I think they're up around 8% at the moment aren't they? If you are currently aiming to get a mortgage, you have to show that you're good to go up with interest rates around 8%.

Reporter: Of those people who borrowed in 2021 who with a 7% percent mortgage rate would be paying more than 50% of their disposable income in servicing costs, how big a cohort is that? Are we talking 1000s, 100s or a few dozen?

Christian Hawkesby: Did you want to put that metric into context Chris?

Chris McDonald: The lending in 2021 is about 25% of banks overall mortgage block.

Christian Hawkesby: We don't we don't have that number in terms of number of people. I think the big point here is that it really is that 2021 cohort that that are going to potentially experience a more challenging situation. When you look in aggregate across the whole lending book, debt servicing as a percentage of income has risen from 9% up to 19% now and it's still well south of sort of 25% is where it got back in 2017 as a sort of a comparator for you.

Oliver how are we doing?

Bang on. Well thank you very much. Thank you for joining us and we will see you again very shortly. Thank you.

Adrian Orr:  Well done. Thank you.