RBNZ Says Sharp Housing Correction ‘Plausible’ as Rates Rise
RBNZ Says Sharp House-Price Correction ‘Plausible’ as Rates Rise
(Bloomberg) --
New Zealand’s central bank said a “sharp” decline in house prices is possible as it raises borrowing costs aggressively to tackle inflation.
“While a gradual decline in house prices to more sustainable levels is desirable from a financial stability perspective, a sharp correction remains a plausible outcome that would have broad economic implications,” the Reserve Bank said in its semi-annual Financial Stability Report Wednesday in Wellington. “A large fall in house prices would significantly reduce housing wealth and could lead to a contraction in consumer spending, especially when combined with borrowers cutting back discretionary spending due to rising interest rates and higher living costs.”
New Zealand’s housing market has been in retreat since the RBNZ kicked off its tightening cycle in October. While price declines so far have been gradual, there’s a risk of a bigger drop as the central bank ramps up its inflation fight. It raised its official cash rate by a half percentage point rate hike last month to 1.5% and signaled it wants to lift it quickly to a neutral level of around 2%.
“The rise in New Zealand interest rates has been large relative to movements in other countries and one of the steepest rises in the past two decades, albeit from a low level,” the RBNZ said. “Debt-servicing costs will increase significantly as current fixed-rate mortgages reprice over the coming year. Some recent mortgage borrowers are vulnerable and could face difficulty servicing their debts.”
Still, the overall the threat to the financial system from the housing market is “limited,” it said.
“Banks kept test interest rates in their serviceability assessments around 6% during the pandemic, which remains above current mortgage rates,” the RBNZ said. “This provides some reassurance that buffers are in place to ensure debt serviceability continues.”
While the near-term risks to New Zealand’s financial system have increased amid Russia’s invasion of Ukraine and the ongoing pandemic, it remains “resilient to a range of potential outcomes,” the RBNZ said.
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