Reserve bank chiefs step up warnings on New Zealand financial stability

New Zealand's soaring house prices and high levels of debt continue to pose risks for the country's financial system despite measures to rein in lending, heads of the Reserve Bank of New Zealand (RBNZ) said Wednesday. Banks were well capitalized and non-performing loans continued to decline, RBNZ governor Graeme Wheeler said when releasing the RBNZ's six-monthly Financial Stability Report. However, house prices particularly in the two biggest cities of Auckland and Christchurch were still rising from "already overvalued levels," exposing households and banks to a future correction that could result in significant financial system stress, Wheeler said in a statement. The RBNZ was still closely watching the impact of its loan-to- value ratio (LVR) policy, implemented last month with the aim of ensuring most homebuyers borrow no more than 80 percent of their home's value. "The early evidence shows that banks have significantly reduced high LVR lending approvals, while increasing the cost of high LVR loans. However, it is too early to assess the impact of the measures on house price inflation," said Wheeler. Deputy governor Grant Spencer said in the statement that other risks to financial stability were high levels of debt in the pillar dairy sector, and New Zealand's high level of external indebtedness overall. "New Zealand's high external debt levels reflect persistent balance of payments deficits over many years. While the post-GFC ( Global Financial Crisis) improvement in private savings has reduced the external deficit in recent years, this trend is likely to reverse as new investment expands," said Spencer. "It is therefore important that the private savings improvement be maintained, and that the public sector deficit continues to reduce."