House price slowdown eases economic risk

A slowdown in house price growth has put banks in a stronger position and reduced the chances of a major market correction, according to the ratings agency S&P Global.

It has reaffirmed the ratings for 10 big New Zealand banks and finance companies, and said the economic risks have eased for the individual institutions as well as for the broader economy.

The agency said annual house price inflation has fallen to about 3 percent, which compared with about 15 percent four years ago and an average of 9.9 percent between 2012-16.

"The slower house price growth has moderately reduced the likelihood of a severe house price correction and with it, the potential losses that banks in New Zealand may face in such a scenario," it said in a statement.

"We do not expect house price inflation to return to the lofty levels seen in 2015 and 2016."

However, S&P said there were still risks for the banks and overall it viewed the balance of risks as stable.

"A lower cash rate combined with higher regulatory and compliance costs and the Reserve Bank of New Zealand's substantially higher proposed capital requirements, all pose headwinds for future profitability. Nevertheless, higher capital requirements support a stronger banking system overall."

It said the broader economy faced continued risks.

"New Zealand's economic imbalances remain somewhat elevated because of its persistent current account deficits, high external debt, and an economy that is exposed to fluctuations in commodity prices."

S&P rates the country's major banks at AA-, while the country has a sovereign rating of AA with a positive outlook.

This article was originally published on RNZ and re-published with permission.

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