INCREASING pressure in a housing market where supply is failing to meet demand is posing a growing risk to New Zealand's financial stability, the Reserve Bank warns.
In the bank's six-monthly financial stability report, released on Wednesday, governor Graeme Wheeler says the country's financial health is still sound, but growing private sector credit and rising house prices which are already high pose a concern.
The fears have emerged as Auckland and Christchurch stand out as struggling to meet demand for housing and as banks become more tolerant of lending on smaller deposits.
"Further price escalation will worsen the potential damage that could result from a housing downturn following an economic or financial shock," Mr Wheeler said in a statement.
The housing market has become a growing headache for the central bank, as Auckland sale prices hit new record highs in a rapidly heating market, while at the same time a strong currency has limited the bank's ability to stoke lending growth with lower rates.
"The greater willingness of banks to approve high loan-to-value (LVR) ratio mortgages has further increased the potential adverse impact of a fall in house prices," the bank's report said.
Because of that increase in high LVR lending, the central bank has been looking at lifting capital requirements for housing loans and to lift the amount of regulatory capital required for the riskier lending.
While new housing will take some time to come online, the increased prices pose a risk to the economy if it causes excessive construction, which would ultimately cause a fall in house prices and lead to stress on bank and household balance sheets.
The increase in low equity home lending has also led to households becoming more stretched as people take on higher debt.
The central bank has also completed its consultation on a new tool-kit off macro-prudential instruments to cool asset bubbles, which includes the ability to set limits on high low equity lending.
A memorandum of understanding is expected to be signed with Finance Minister Bill English shortly, the bank said.
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