NZ Banks Can Withstand A 47% Crash In Housing Prices: RBNZ

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With ASB economists predicting a 20% housing price fall in 2023 and a rise in the number of real estate inventory, up for sale in New Zealand, is the housing market up for a crash in the island nation which peaked during the pandemic?

However, Reserve Bank of New Zealand (RBNZ) says that stress testing shows that its major banks can withstand upto 47% crash in housing prices.

ASB economists have predicted a rise in the OCR rate by 0.75% next month and a further 1% increase in first quarter of next year.

As a result, the uptake in mortgage lending has cooled down and the housing sector lending is lowest since its 2018 levels, as per latest data from RBNZ.

Housing Sector Lending Drops to 2018 Levels. Source: RBNZ

“We now expect a 0.75% increase in OCR in November, a 0.5% hike in February and final lift in April (0.5% pencilled in) – implying a peak of 5.25%,” said ASB Economists Team headed by Chief Economist Nick Tuffley.

The RBNZ has lifted the OCR from a record low pandemic setting of 0.25% to 3.5% in October 2022, in order to control record levels of inflation in New Zealand. This has resulted in an increase in properties for sale by people whose mortgages have gone through the roof.

More Stock To Be Sold

Real Estate site RealEstate.co.nz has resulted a record listings for sale, as people plan to cash in before the market prices hit their bottom. However, housing sector lending has also hit its bottom since 2018, as RBNZ imposes tougher borrowing requirements for banks in New Zealand.

Mortgage rates could peak to 7.5% in 2023, expect ASB economists. “We expect most fixed-term mortgage interest rates will peak within a 7-7.5% range over the year ahead. Floating rates could peak around 9%. However, as is often the case, the outlook is far from certain,” ASB Economists said in their October review.

Even with a 47% Crash in House Prices, Banks Won’t Fail

In a scenario where the New Zealand economy experiences a house price fall of 47% from its 2021 peak, an equity price fall of 38%, unemployment rising to 9.3%, Gross Domestic Product contracting by 5%, and the 2-year fixed mortgage rate peaking at 8.4% respectively, the banks won’t face an insolvency crisis.

“Our annual stress testing programme enables us and banks to better understand the implications of current and emerging risks to bank balance sheets and overall financial stability by investigating severe, but plausible scenarios, RBNZ Deputy Governor Christian Hawkesby says.

RBNZ is trying hard to reign in inflation and is expected to raise OCR rates by 1-1.5% next year. With a strengthening USD against the NZD, there is no respite from inflation as a large number of sectors in the island nation depend upon imports for their survival.

NZD To USD. Year Till Date. October 2022.

 

“The week-to-week churn in risk sentiment means we may continue to get the odd week where NZD/USD gains back a bit of ground, but we eye resistance near the 0.5800 mark,” said the ASB Economists team.

However, Commonwealth Bank of Australia (CBA) sees NZD trending to a low of 0.5200 against the USD towards the middle of next year, which might give a rise to the alreardy record high inflation.