FSR: Financial System Sound, But Vulnerabilities Remain

"Successful public health measures along with substantial monetary and fiscal policy support, helped to prevent many business failures and a larger rise in unemployment. Key New Zealand export prices have also been resilient, with dairy prices at their highest level in several years. Yet, despite doing better than feared, border restrictions, supply chain disruptions, and social distancing have reduced activity in affected sectors, and some businesses remain vulnerable. We are also seeing the impact of low global interest rates resulting in increased risk taking and higher asset prices. This is an international phenomenon, with the New Zealand impact most visible in higher house prices."

• "A high proportion of new lending has had high debt-to-income and loan-to-value ratios (LVR). This makes recent borrowers more vulnerable to a rise in mortgage rates, and exposes households and the financial system to a decline in house prices. The recent tightening in LVR requirements, particularly for investor lending, will help to mitigate some of these housing risks and support more sustainable house prices. We will be watching how market conditions respond to the Government's recent policy changes. If required, we are prepared to further tighten lending conditions for housing using LVR requirements or additional tools that we are assessing."
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