NZ economy gets tick

Posted by MarkL on November 16, 2014

The New Zealand economy received a thumbs up this week from the Reserve Bank, however concern was raised over debt in the household sector.

The Reserve Bank released its bi-annual Financial Stability Report that showed Auckland is firmly in the driving seat when it comes to New Zealand’s economy, which, given it is by far the biggest city, is not surprising.  However it means rural New Zealand is paying the price for Auckland’s spiraling economy.

“The New Zealand financial system remains sound, and well placed to support expansion in the economy. The banking system is well capitalised, funding and liquidity buffers are comfortably above required minimums, and non-performing loans continue to decline,” the report said.

“However, several risks to the financial system require continued focus. Debt in the household sector remains high relative to income, and house prices are overvalued on several measures. As a result, financial stability could deteriorate if there is a sharp correction in house prices, particularly if accompanied by a reduction in debt repayment capacity,” the report said.

The report also said debt among dairy farmers had risen, while global dairy prices had dropped.

The report quoted information from the IMF and the OECD that Auckland and Canterbury’s house prices were “dangerously overvalued” and a sharp downward correction was possible. If this happened with household debt high, the bank said the repercussions would be felt throughout the economy.

The Reserve Bank cited the loan-to-value ratio lending, where first time buyers could only borrow 80 percent of the value of the home, introduced by the bank in 2013 as a step it had introduced to minimise this risk. However LVR has been widely criticized in areas where property prices are struggling and first time buyers have been penalized.

While house price inflation around the country remains at a manageable five per cent, in Auckland it is at 8.5 percent, which is still to high according to the bank because it exceeds income inflation.

In his weekly column in the Herald on Sunday commentator Bernard Hickey summed up the report:

“If the Government needed any more motivation to solve Auckland's housing shortage, this week's Financial Stability Report should be required reading.

“A flick through it could also be a useful way to sober up Aucklanders still partying hard over their ratings valuations.”