November 29, 2016 / 8:31 PM / a year ago

UPDATE 3-New Zealand central bank warns of new rules to rein in risky home loans

(Updates with comments from NZ Finance Minister)

By Swati Pandey and Charlotte Greenfield

WELLINGTON, Nov 30 (Reuters) - New Zealand’s central bank on Wednesday warned of significant risks from sky-rocketing house prices, saying yet more restrictions on mortgage lending might be needed if property prices continue to accelerate.

The Reserve Bank of New Zealand’s (RBNZ) fears of a debt-fuelled property bubble suggest it is likely done cutting interest rates, after easing to a record low of 1.75 percent earlier this month.

The RBNZ already requires investors to make a 40 percent downpayment on investment properties and is also seeking powers to impose lending restrictions based on borrowers’ debt-to-income (DTI) multiples.

However, politics could thwart its efforts. Finance Minister Bill English, who has the final say on whether the RBNZ can add DTI to its policy toolkit, had concerns it might have unintended consequences for first-home buyers.

“One of the risks of getting into more detailed regulations is that...we have to have another intervention to offset the first,” English told reporters on the sidelines in parliament on Wednesday.

Earlier, RBNZ Governor Graeme Wheeler said he would meet with English in “a couple of weeks” to further discuss the issue.

While the bank did not propose using such measures at present, DTIs could be warranted if housing market imbalances were to deteriorate further, Wheeler said.

House price to income ratios in Auckland, New Zealand’s biggest city, were among the highest in the world, the RBNZ said.

“On housing risks specifically, the RBNZ certainly isn’t claiming victory despite signs that the Auckland market is cooling and loan-to-value restrictions have improved bank resilience to price falls,” said Philip Borkin, senior economist at ANZ.

“The risks discussed reinforce that the cash rate is likely on hold for the foreseeable future.”

The bank also said high farm debt left the dairy sector vulnerable to future shocks, despite expecting the average farm to return to profit this season.

After rising steadily from 2008 to scale record highs in 2013, global dairy prices dropped sharply because of slowing economic growth in China, New Zealand’s top export market, and a global oversupply of milk product.

Dairy prices have rebounded about 50 percent since July, but remain well below their highs.

Overall, the banking system had strong capital levels to withstand shocks, the RBNZ said, but it sounded a cautious note over the banks’ dependence on offshore wholesale funding.

“Banks could become more susceptible to increased funding costs and reduced access to funding in the event of heightened financial market volatility.” (Reporting by Swati Pandey and Charlotte Greenfield; Editing by Wayne Cole and Eric Meijer)

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