New Zealand's central bank says risks to the country's "sound" financial system have reduced in the past six months, even if global political and policy uncertainty remains elevated.
In a financial stability report released Wednesday, the Reserve Bank of New Zealand said house price growth in the country, one of the biggest risks to the financial system, had slowed and that dairy prices had recovered.
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Still, Governor Graeme Wheeler said banks in New Zealand, which are increasingly reliant on offshore funding, remain vulnerable to an increase in domestic borrowing costs and that parts of the country's dairy sector were carrying too much debt.
"The outlook for the global economy has been improving but global political and policy uncertainty remains elevated and debt burdens are high in a number of countries," Gov. Wheeler said in a statement.
"A sharp reversal in risk sentiment could lead to higher funding costs for New Zealand banks and an increase in domestic borrowing costs.
"New Zealand's banks are vulnerable to these risks because of their increasing reliance on offshore funding for credit growth," he said.
Gov. Wheeler also noted that tighter loan-to-value ratio restrictions and general tightening in credit and affordability pressures in parts of the country had slowed house price growth over the past eight months, and that the majority of New Zealand's dairy farms are likely to have returned to profitability in the 2016/17 season.
"However, parts of the dairy sector are carrying excessive debt burdens, and remain vulnerable to a fall in income or an increase in costs," he said, advising banks to continue closely monitoring this risk, and to maintain full provisioning against lending to high-risk farms.
Strong inbound tourism, demand for exports such as dairy and wool, and a housing boom have made New Zealand one of the world's best-performing economies, though the central bank has been trying to manage a nascent recovery in inflation against the demands of the housing market, especially in the commercial capital, Auckland.
Gov. Wheeler said that while residential building activity has continued to increase, "the rate of house building remains insufficient to meet rapid population growth and the existing housing shortage.
"House prices remain elevated relative to incomes and rents, and any resurgence would be of concern."
New Zealand experienced its strongest migration ever in the year through March and this was matched in the most-recent figures for April, with a net gain of 71,900, official data show.
While credited by lawmakers for keeping the country from recession, the flow of new arrivals is putting a strain on infrastructure and schools, and fueling the frothy real-estate market.
"Banks have generally tightened credit conditions in light of funding constraints and the increasing risks around housing. Banks are seeking to reduce their reliance on offshore funding and have raised deposit rates. The Reserve Bank supports a cautious approach to managing foreign debt, in light of lessons learned in the GFC.
"While the LVR restrictions have increased the banks' resilience to any fall in house prices, a significant share of housing loans are being made at high debt-to-income ratios," said Deputy Governor Grant Spencer. "Such borrowers tend to be more vulnerable to any increase in interest rates or declines in income."
The Reserve Bank of New Zealand will soon release a consultation paper proposing the addition of debt to income restrictions to its macroprudential tool kit, he said.
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(END) Dow Jones Newswires
May 30, 2017 18:39 ET (22:39 GMT)