While the Reserve Bank gave the bank sector in general a positive report yesterday, house prices and the possibility of a lower dairy payout this season were both posing risks; the latter being the potential for an increasing number of farm loan defaults.
Labour's finance spokesman David Parker seized on the Reserve Bank's mounting concern over falling dairy payouts and possibility of an increasing number of farm loan defaults.
''The risk of another housing market surge and our reliance on the Chinese market are other causes for concern ... these risks show an increasingly unbalanced economy based on milk powder and house sales,'' Mr Parker said.
In the Reserve Bank's November Financial Stability Report yesterday, bank governor Graeme Wheeler said the country's banking system was well capitalised, its cash liquidity buffers were above the required minimum, and non-performing loans continued to decline.
However, the financial system faced the same key risks as six months ago, the first risk relating to ''housing market imbalances'', Mr Wheeler said.
''Pressures have eased since the introduction of the LVR `speed limit' in October 2013 and subsequent increases in interest rates,'' he said.
The LVR restriction stops banks from having more than 10% of their lending portfolio with people who have less than a 20% deposit, to decrease the exposure to any housing crisis.
The Reserve Bank credited the LVR with assisting ''moderation'' in housing activity, mainly by first-home buyers but more recently people moving. However, house prices were rising, albeit at a slowing rate.
Nevertheless, ''there remains a risk of a resurgence in house price inflation, particularly in light of strong immigration flows'', Mr Wheeler said.
''Consequently, we do not consider it appropriate to ease the LVR speed limit at this time.''
ASB chief economist Nick Tuffley said, given the risk of the housing market reigniting, the LVR would remain and the Reserve Bank was not likely to relax it until about mid-2015.
The Reserve Bank noted the increased indebtedness among house buyers and the continued high prices relative to incomes and rents.
''The risk of a resurgence in prices is still very real,'' Mr Tuffley said.
Reiterating the Reserve Bank always considered LVR restrictions were a temporary measure, Mr Wheeler said it would continue to closely monitor the housing market.
Tackling the dairy sector payout issue, deputy governor Grant Spencer said, although housing risk had reduced, risks in the dairy sector had increased.
''The forecast dairy payout for the coming season has been reduced significantly, and could result in rising loan defaults should the lower payout level persist,'' he said.
The diminishing forecast payout has been estimated to remove at least $5 billion from the economy, unless it falls even further.
The stability report noted: ''Some heavily indebted farms could struggle to meet interest and working expense payments. Financial stress in the sector could increase markedly if the dairy payout does not recover in the 2015-16 season''.
Mr Spencer said: ''The banking system's reliance on offshore funding has reduced in recent years, but it remains susceptible to volatility in international funding markets.''
He said lower global dairy prices were ''in large part'' due to reduced Chinese demand, which highlighted New Zealand's ''vulnerability'' to a slowing Chinese economy.
''Risks arise both from New Zealand's large volume of trade with China, and also from any financial market disruption that could arise from a Chinese economic slowdown,'' Mr Spencer said.
