New Zealand house prices are up to 20 per cent above “sustainable” levels, says the Reserve Bank of NZ.
Speaking at the Finance and Expenditure select committee following Wednesday’s release of the bank’s latest Financial Stability Report, RBNZ governor Adrian Orr said “we are somewhere between 5 per cent and 20 per cent north of a sustainable level”.
Although the bank has long been warning that prices are unsustainable, this is the first time it has actually quantified “sustainability”.
In the FSR, the bank warned that a sharp correction in New Zealand house prices was a “plausible outcome”.
“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, but overall the threat to the financial system is limited. Banks kept test interest rates in their serviceability assessments around 6 percent during the pandemic, which remains above current mortgage rates. This provides some reassurance that buffers are in place to ensure debt serviceability continues,” the report said.
The RBNZ said New Zealand’s banks are facing considerable cost pressures and “near-term risks to the financial system have increased”, but the financial system remains “well placed to support the economy” in part due to the banks’ increased capital positions ahead of incoming higher capital requirements.