The Reserve Bank's six-monthly financial stability report yesterday was headlined by rising house prices and continuing dairy sector risks, but Reserve Bank governor Graeme Wheeler was at pains to reiterate commentary on the potential use of a new household ''debt to income'' (DTI) tool.
Last October, a second set of loan to value ratio (LVR) restrictions was imposed on house investors, requiring minimum 40% deposits on property investments, which is separate to the ''debt to income'' assessment.
''While the bank is not proposing use of such a tool at this time, financial stability risks can build up quickly and restrictions on high-DTI lending could be warranted if housing market imbalances were to deteriorate further,'' Mr Wheeler said in a statement.
''There is a significant risk of further upward pressure on house prices so long as the imbalance between housing demand and supply remains,'' he said.
Deputy governor Grant Spencer said the updated LVR restrictions were increasing the resilience of bank balance sheets to a downturn in the housing market.
''However, the share of bank mortgage lending to customers with high DTI ratios has been increasing and this could increase the rate of loan defaults during a housing downturn,'' Mr Spencer said in the statement.
ASB chief economist Nick Tuffley said even assuming a formal go-ahead was given to introduce the DTI tool, it was unlikely to be brought in until the second half of 2017.
''Whether or not the Reserve Bank uses it from that point will depend on the Reserve Bank's assessment of housing market risks,'' Mr Tuffley said yesterday.
Westpac senior economist Anne Boniface said while the Reserve Bank was clearly yet to convince Mr English that additional tools were required, it had gone ahead with implementing new data collection systems and discussions with banks and other stakeholders.
''We are left in no doubt the Reserve bank is very keen to add DTI restrictions in some form to its macro-prudential armoury, providing it with additional options should financial stability risks heat up again further down the track,'' she said.
Mr Spencer said the banking system had strong capital and funding buffers and profitability remained high.
Despite being relatively concentrated, New Zealand's banking system also appeared to be operating efficiently based on metrics such as the cost-to-income ratio and the spread between lending and deposit rates.
''However the banking system's reliance on offshore wholesale funding is beginning to increase due to a widening gap between credit and [lack of New Zealand] deposit growth,'' he said.
Banks could become more susceptible to increased funding costs and reduced access to funding in the event of heightened financial market volatility.
Mr Wheeler said some dairy farms remained under pressure and problem loans were likely to continue to increase for a time.
While dairy prices had recovered in recent months and the average farm was expected to return to profitability this season, sector indebtedness had risen, which left the sector vulnerable to future shocks.
