Global strong class=’StrictlyAutoTagBold’ strong class=’StrictlyAutoTagBold’ prices for New Zealand’s biggest export commodity remained low due to strong global supply, sanctions on imports of dairy products by Russian Federation, and slower Chinese demand, said the strong class=’StrictlyAutoTagBold’ strong class=’StrictlyAutoTagBold’ report.
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The Reserve Bank’s initial modelling shows non-performing dairy loans will increase to 7.8 percent of sector debt under the base case scenario, which projects a quick recovery in the payout over the next four years.
Mr Wheeler says a sharp downturn could challenge financial stability given the large exposure of the banking system to the Auckland housing market.
Earlier this year the Reserve Bank imposed new 30 percent deposit requirements on property investors in Auckland to cool the market, while at the same time relaxing the amount of low deposit loans Bank can make available in regions like Hamilton and Tauranga.
Struggling farmers facing a second season of weak dairy prices and a regional spillover from the soaring Auckland property market are a growing risk to the New Zealand economy, the country’s central bank said on Wednesday.
Prices in Auckland alone dropped 3.0 percent in October from a month ago.
The Reserve Bank is warning the risk to our financial system has increased in the past six months.
At its last meeting in October, the RBNZ voiced concern about the rising New Zealand dollar.
“House price-to-income ratios in the region [are] now comparable to those seen in a few of the world’s most expensive cities”.
“LVR restrictions have been eased outside of Auckland where housing market activity has been more subdued”.
The central bank said in today’s report that the tighter lending rules for investors are expected to reduce Auckland house-price inflation by as much as 4 percentage points over the coming year.
A significant proportion of mortgage lending is being undertaken at elevated debt-to-income ratios and although low mortgage rates are relieving pressure on these indebted households, a few borrowers could quickly come under pressure if their labour incomes decline or mortgage rates increase, the report said.
The bank also wants the country’s five biggest lenders to the dairy sector – ASB Bank, ANZ Bank New Zealand, Bank of New Zealand, Westpac New Zealand and Rabobank New Zealand – to stress test their portfolios.
“The banks are working with dairy farmers experiencing difficulty, and it is important they continue to take a medium-term view when assessing farm viability”, says Deputy Governor Grant Spencer.
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“The banks’ losses on dairy exposures are expected to be manageable but banks need to ensure that they set aside realistic provisions for the likely increase in problem loans”, he said.
