Rising house prices put NZ covered bonds at risk
Moody's Investors Service has warned that housing affordability for new mortgage borrowers deteriorated on average across New Zealand over the year to June 2018. The ratings agency said that rising house prices - up by an average of 5.9 per cent in the 12 months - outstripped household incomes, which increased by 5.3 per cent in the same time. This decline in affordability was one factor which Moody's said was credit negative for its rated mortgage-backed covered bonds."Deterioration in affordability increases the risk of mortgage delinquencies and defaults, but our rated covered bonds also show low loan to value ratios, thereby mitigating the potential credit-negative impact," said Robert Baldi, a Moody's vice president and senior analyst.Conversely, housing affordability improved in Auckland over the year to June 2018, although the proportion of income needed to meet mortgage repayments remained high at 43.5 per cent, considerably above other regions in New Zealand.These risks are offset by the low LTV of mortgages in New Zealand banks' cover pools. The weighted average LTV of the mortgages ranged between 44.7 per cent and 54.8 per cent as of 30 June 2018, depending on the covered bond program, Moody's said.In addition, the limits imposed since 2013 by the Reserve Bank of New Zealand on the proportion of mortgages with high LTVs that banks can write have contributed to a materially lower level of mortgage lending for LTVs over 80 per cent.