New Zealand's central bank may take steps to rein in risky mortgage lending

[WELLINGTON] New Zealand's central bank on Wednesday warned of significant risks from sky-rocketing house prices, noting new mortgage lending restrictions might be needed if property prices continue to accelerate.

The Reserve Bank of New Zealand's (RBNZ) fears of a debt-fuelled property bubble suggest it is likely done cutting interest rates, after easing to a record low of 1.75 per cent earlier this month.

The RBNZ has already raised 'loan-to-value' ratios (LVRs) to 40 per cent on investment properties and is seeking powers to impose lending restrictions based on borrowers' debt-to-income (DTI) ratios.

"On housing risks specifically, the RBNZ certainly isn't claiming victory despite signs that the Auckland market is cooling and LVR restrictions have improved bank resilience to price falls," said Philip Borkin, senior economist at ANZ.

"The risks discussed reinforce that the cash rate is likely on hold for the foreseeable future."

Speaking after the bank released its semi-annual report on the health of the banking sector, RBNZ governor Graeme Wheeler said he would meet with the Finance Minister Bill English in "a couple of weeks" to discuss whether lending restrictions based on debt-to-income ratios could be added to its policy toolkit.

While the bank did not propose using such measures at present, DTIs could be warranted if housing market imbalances were to deteriorate further, Wheeler said.

House price to income ratios in Auckland, New Zealand's biggest city, were among the highest in the world, the RBNZ said.

The bank also said high farm debt left the dairy sector vulnerable to future shocks, despite expecting the average farm to return to profit this season.

After rising steadily from 2008 to scale record highs in 2013, global dairy prices dropped sharply because of slowing economic growth in China, New Zealand's top export market, and a global oversupply of milk product.

Dairy prices have rebounded about 50 per cent since July, but remain well below their highs.

Overall, the banking system had strong capital levels to withstand shocks, the RBNZ said, but sounded a note of caution on the banks' high reliance on offshore wholesale funding.

"Banks could become more susceptible to increased funding costs and reduced access to funding in the event of heightened financial market volatility."

REUTERS