House prices pose risk to banks, agency warns

Rising house prices pose a stability risk to New Zealand’s banks, a global ratings house says.

S&P Global has released its midyear banking outlook.

It said the sector was ‘‘clawing its way back to normalcy’’ but risks were growing in New Zealand.

Internationally, state intervention on behalf of corporates and households had worked and banks had benefited, the report said.

The net negative outlook for the global banking sector improved to 1 per cent in June 2021 from 31 per cent in October 2020.

As at June 25, 2021, about 13 per cent of bank outlooks around the world were negative. That was significantly lower than October 2020 when about one-third of rating outlooks on banks were negative.

But the report highlighted a reintensification of economic risks in New Zealand because of strong house price growth. The rate of house price inflation hit 30 per cent this year and yesterday Trade Me reported new record asking prices.

‘‘In New Zealand, economic trends recently reverted to negative from stable because of soaring house prices. Instructive is that this action reversed our previous move of economic trends to stable, from negative, only a few months prior,’’ S&P said.

‘‘While house price growth in New Zealand has been exceptionally strong, our action in New Zealand could point to the possibility of negative changes in other jurisdictions where it becomes challenging to reconcile house price increases with ongoing banking sector stability.’’

S&P said there was a ‘‘one in three’’ possibility that New Zealand banks could face a greater risk of a disorderly correction in house prices in the next two years, as opposed to an orderly unwinding, if sharp growth were to persist.

‘‘This could result in higher credit losses in the longer term.’’

S&P said government moves to mitigate risks to financial system stability from house prices had so far been less effective in restraining house price inflation than anticipated. Risks remained around the funding profiles of New Zealand banks.

‘‘The banks’ significant dependence on offshore short-term borrowing, the country’s persistent current account deficits, and its exposure to fluctuations in commodity prices, all make New Zealand vulnerable to external shocks.’’

The report said an important factor now would be how successful moves were to restrain house price growth.

‘‘Our base case anticipates successful regulatory and government actions to curb house price growth. Measures include the reinstatement and subsequent tightening of loan-tovalue restrictions, a tax-driven housing policy package, and potential introduction of debt-serviceability restrictions in the coming months. If this is not the case, downside risks to financial institutions will continue to rise with the rapidly increasing house prices in the country.’’

Sense Partners economist Rosie Collins said house prices were important to banks.

‘‘Sixty per cent of bank lending is residential in New Zealand, so any bursting of a bubble will impact bank profits. But because banks test lending against income, and we have a fundamental housing shortage, it’s unlikely banks will face widespread defaults if house prices fall.

‘‘Banks are highly regulated and they hold a lot of capital. This means we can be reasonably happy they can ride things out. More likely the wealth effect is what will hit the economy – homeowners will feel poorer if house prices go down and so they’ll spend less.

‘‘If banks pull back from new lending as house prices fall, then we’d see a larger problem, because new owners couldn’t borrow as easily to purchase the houses others can no longer afford.’’

S&P Global said the New Zealand economy was recovering more quickly than most and real GDP growth should reach 4.6 per cent in the year to December 31, driven by consumption and investment.

‘‘In New Zealand, economic trends recently reverted to negative from stable because of soaring house prices.’’

S&P Global