The Reserve Bank of New Zealand released their financial stability report this evening, and zeroed into the housing sector as an area of potential risk. Graeme Wheeler, the central bank’s governor, said the imbalances in the housing sector is primarily dealing with the loan-to-value ratio (LVR). This ratio is a risk policy intended to avoid systemic risk by slowing credit and housing prices from inflating, but both are beginning to rise.
Wheeler said in the statement, ““The household sector has high and rising levels of debt relative to both historical and international norms. Both households and banks are highly exposed to the housing market. Further, we have a situation where house prices are rising from already-overvalued levels, particularly in Auckland and Christchurch. This is increasing the risk of a future house price correction that could result in significant financial system stress.”
The primarily factors in the increase of debt and home prices has a lot to do with constraints in supply, low interest rates and a lax credit system. The statement reported that the supply constraints is the primary mode of risk, and the housing market needs to avoid prolonged-periods of pent-up demand.
The RBNZ financial stability report also pointed out the dairy industry as a weakness – an industry that makes up a large portion of New Zealand’s gross-domestic product.
“While the dairy sector is currently enjoying record export prices, its high level of indebtedness makes it vulnerable to a fall in commodity prices or an increase in interest rates. A continuation of farmers’ cautious approach of recent years will help to mitigate this risk,” said Deputy Governor Grant Spencer.
The NZDUSD had traded down the entire day, and activity picked up after the RBNZ released the report. There was buying after the pair broke through the 50 percent high-to-low Fibonacci retracement and bounced of the 200 EMA. However, price action closed below a potential head and shoulders pattern on the daily chart.