RBNZ lauds country’s “strong” financial system
“New Zealand’s financial system remains strong as it continues to adjust to the higher interest rate environment,” the Reserve Bank of New Zealand (RBNZ) has reported in its latest Financial Stability Report.
One reason for the RBNZ's positive assessment is that while most mortgage borrowers have moved off very low fixed interest rates – which were locked in two to three years ago – onto much higher floating rates, they've generally been able to cope with significantly higher repayments.
“Households have reduced their discretionary spending and, in some instances, also reduced principal repayments. The proportion of mortgage borrowers who have not been able to cope with the increased debt servicing costs has picked up from low levels. Loan arrears and non-performing loans are around the levels experienced during the initial period of the COVID-19 pandemic and well below the levels following the Global Financial Crisis,” the report said.
“The outlook for non-performing loans depends significantly on the future path of economic activity and labour market conditions. Banks report they are proactively identifying and contacting borrowers who may require assistance and offering them options to restructure their debt to manage pressures. It is encouraging that the increase in borrower stress is not accelerating.”
DTI restrictions designed to make the system stronger
Another reason for the RBNZ's confidence is that planned restrictions on debt-to-income (DTI) ratios are expected to help manage housing-related risks to the financial system.
“DTI restrictions would complement the restrictions on loan-to-value ratios (LVRs) that are currently implemented. LVR restrictions are mainly aimed at improving the resilience of the financial system by reducing potential losses if borrowers default on their mortgages. On the other hand, the DTI tool aims to improve borrower resilience by reducing the probability of borrowers defaulting,” the report said.
“Given these tools have synergies in mitigating losses for the financial system, restricting DTI ratios would allow for more permissive LVR settings while achieving a similar level of overall resilience. By activating DTI restrictions when the market is relatively subdued, it is likely that they will not be binding initially for most borrowers. Instead, DTI restrictions are intended to protect against increases in risky lending, especially when interest rates decline.”