Kia ora, I’m Chris, manager of the team that produces our Financial Stability Report. These are the top 5 things you should know about financial stability in NZ right now.
1 - Risks remain higher than over the past few years. 6 months ago, we reported that risks to the financial system had increased. International developments were a key reason for this, including the US announcing higher tariffs. Now we know that the worst-case scenario looks less likely, but risks remain elevated. For example, it’s still unclear what the impact of higher tariffs will be on global economic growth.
2 - The weak domestic economy is creating challenging conditions for many businesses. Businesses reliant on discretionary spending have seen profitability fall over the past 2 years, and business failures have increased - particularly in construction and hospitality. More businesses have defaulted on their bank loans, however, defaults remain lower than during the 2008 Global Financial Crisis. Lower interest rates and elevated export prices are benefitting some sectors. Conditions are expected to improve gradually over the next year as lower interest rates help to boost consumer spending.
3 – House prices remain flat in a soft market. Despite the fall in interest rates, the housing market remains subdued. Low net immigration and the weak economy have contributed to soft housing demand. Buyers have plenty of options with lots of homes on the market right now. We have reviewed our Loan-to-Value restrictions. From the start of December, banks will be allowed to lend more to borrowers with small deposits. We don’t expect these changes to have much impact on the housing market, but they will give banks more flexibility and over time this should help first home buyers access credit.
4 - Banks are well placed to support an economic recovery. International comparisons show our banks are well capitalised. This means they are well placed to cope with credit losses, should these happen. This is reinforced in our latest stress test. The results showed that banks in New Zealand could cope with an escalation in geopolitical conflicts, although a severe global crisis would take time and effort to recover from.
5 - Property insurance premiums continue to rise, albeit more gradually. Insurance helps households and businesses by sharing risks that they would otherwise have to face on their own. This is particularly important here given New Zealand’s exposure to natural hazards. Over the past decade the cost of property insurance has increased significantly, creating affordability challenges for households and businesses in higher risk areas. While this trend is ongoing, fewer significant claims events recently and improved conditions in global reinsurance markets have helped to ease costs for property insurers. Health insurers, however, are facing significant growth in claims costs. This is resulting in operating losses and driving up customer premiums, as insurers look to rebuild their capital.