Reserve Bank: Less risk of another house price boom

• The housing market is stagnant, prices are stable, and activity is weak.
• Policy changes mean risk of another house price boom is reduced
• Bank test rates fell from an average of 9 percent to 8 percent.

The housing market is under pressure from a variety of factors, but prospects for another boom are considered less likely, the Reserve Bank said in a report.

Ahead of next week’s financial stability report, the Reserve Bank (RBNZ) issued an update on housing, highlighting stable prices amid weak activity.

It said stable prices had given some more confidence to enter the market, while owners stressed over debt servicing may be looking to downsize.

Key to lower demand were high mortgage rates and slowing population growth, as well as buyer caution amid worsening economic conditions.

“Advertised mortgage rates have started to fall in recent months, but they remain at relatively high levels. This continues to limit the credit options of potential homebuyers,” the report said.

Fall in net migration also contributed to the decline in demand.

Less risk of a housing price boom

While the RBNZ made no predictions on where the market would go if interest rates fell, report author and RBNZ adviser Charles Lilly said the policy changes would reduce the risk of another price boom.

“Even if interest rates continue to fall and demand increases, we should see a reduction in the build-up of risks. debt-to-income (DTI) limits which we introduced in July of this year,” Lilly said.

DTI restrictions mean banks are limited to no more than 20 percent of new loans to owner-occupiers with a DTI ratio of more than six and no more than 20 percent of new loans to investors with a DTI ratio of seven.

This means that most owner-occupiers with an income of $100,000 would be able to borrow $600,000, and investors would be able to borrow $700,000.

“So this will be a bit of a guardrail in terms of limiting the amount of borrowing that people can take out if interest rates get very low. prevent future financial stability risks from building up,” Lilly said.

Changes to government rules on land supply could also help, he said.

Test rates are falling, the financial system is coping

The RBNZ said retail bank benchmark rates, which assess borrowers’ ability to service debt, fell from an average of nine percent in mid-2024 to around eight percent in October.

Banks typically apply a premium above the average fixed rate for a one- or two-year mortgage.

“Banks usually review their test rates quarterly. However, given the rapidly changing interest rate environment, some banks indicated they would be revising their test rates more frequently,” the report said.

The country’s recent peak-to-trough house price cycle has been rapid compared to other advanced economies and has caused comparatively less strain on the financial system, the RBNZ said.

It is estimated that less than two percent of current lending volume is to borrowers with negative equity (when the size of the mortgage exceeds the value of the home).

Loan-to-value ratio requirements meant borrowers could absorb significant price falls without going into negative equity, it said.

Mortgage debt is rising, but with falling interest rates the debt service burden has passed its peak, the RBNZ said.