Yesterday saw the release of the latest financial stability report with the Royal Bank of New Zealand (RBNZ) noting that the financial system was sound. The RBNZ acknowledged that the banking system is well-capitalised, profitable and operating well above required liquidity and funding requirements. Additionally, there remains more capacity within the system to manage a range of negative shocks.
However the central bank did state its belief that there exists risks to the system and that these risks have increased since its May report. Tuesday’s release once again highlighted the obvious risks with regard to Auckland housing, dairy and the global scene. The situation arising in the Auckland housing market has seemingly gained more attention of late, as the focus has shifted away from dairy issues.
The RBNZ noted increased investor participation in the market of late, with international evidence suggesting that investor loans have a higher tendency to default in the event of a major downturn in the housing market. House price growth in Auckland has increased strongly and the house price-to-income ratios in the region are now comparable to those seen in some of the world’s most expensive cities.
The central bank stated that it has been watching farm prices very closely, as concerns surrounding the Dairy sector continue. Low international dairy commodity prices have resulted in weak cash flow, but prices have sown some recovery since August. If these low prices persist, or even worse fall significantly, then many indebted farms will come under increased pressure.