Global financial ratings agency Standard and Poor’s believes New Zealand house prices come down in the next two years.
We expect house prices to unwind in an orderly manner in the coming year despite prices and transactions soaring in recent months S&P said in its review of New Zealand banks.
But there was a risk that the unwinding was not orderly, and homeowners, and banks, would see the Governments measures to curb property price growth lead to house prices falling excessively.
Following a brief correction in property prices in mid-calendar 2020, New Zealand house prices have risen substantially since that time, S&P credit analyst Lisa Barrett said.
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These increases compound the risks associated with the buildup of property prices and private sector debt over several years, as well as New Zealand’s persistent current account deficit, rising external debt position, and commodity price fluctuations that pose risks to financial stability, she said.
House prices have risen sharply thanks to low interest rates.
House prices soared after the Reserve Bank cut interest rates to support the economy through the Covid-19 pandemic.
That left the banks exposed to a scenario of a greater and more prolonged fall in property prices, and its severe consequences, Barrett said.
The Government stepped in with measures designed to curb house price rises including extending the bright-line test (tax rules aimed at curbing speculation) to 10 years from five years, removing the ability of property investors to offset interest expense against rental income for tax purposes, and lifting the price and income caps on first home buyer grants and loans.
More curbs could be soon to follow.
In May, the Reserve Bank would report back to the Government on the possible introduction of debt-to-income and interest-only mortgage restrictions, Barrett said.
New Zealands economy was very resilient, and recovering strongly, she said, but despite households being heavily-indebted, S&P was not forecasting large increases in defaults on loans.
We consider that the New Zealand banking sector is adequately placed to absorb the increased credit losses, due to the economic impact of Covid-19, within its earnings, despite weaker interest margins compared with recent years, she said.
But, economic risks are also heightened by New Zealand’s external weaknesses, in particular its high level of external debt and persistent current account deficits.
Banks in New Zealand were less dependent on foreign funding than they were a decade ago, when the global financial crisis struck, and the substantial support from the Reserve Bank had alleviated that risk still further.
Overall, New Zealand banks remained well-capitalised, Barrett said.