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The housing and dairy sector, combined, carry $218 billion in loans. Housing stands at $186 billion and dairying is $32 billion, of a total $50 billion in agriculture.
The introduction of the Reserve Bank's contentious loan to value ratio (LVR), to restrict bank lending to low-deposit buyers, is grabbing headlines.
But the LVR's impact is yet to meaningfully emerge in any economic data and the Reserve Bank said yesterday it could take up to six months to accurately gauge LVR's impact.
The debts involved in the housing and dairy sectors both pose risks to the country's financial stability, the Reserve Bank's Governor Graeme Wheeler and deputy Governor Grant Spencer said in the bank's financial stability report released yesterday.
Mr Wheeler said while the financial system was ''sound'', with well capitalised banks with strengthened funding bases,''the main threat to the financial system is the risk associated with imbalances in the housing market''.
Mr Wheeler's comments come a day after the Real Estate Institute revealed the country's median house price had hit a record $407,500. October's residential sales were valued at $3.44 billion.
For the month of October 2011, there were 601 sales of houses over $800,000, which more than doubled to 1249 last month, while sales of houses over $1 million were up 160%, from 167 two years ago to 435 sales last month.
''The household sector has high and rising levels of debt, relative to both historical and international norms. Both households and banks are highly exposed to the housing market,'' Mr Wheeler said.
Further compounding the issue was the situation where house prices were rising from already-overvalued levels, particularly in Auckland and Christchurch.
''This is increasing the risk of a future house price correction that could result in significant financial system stress,'' Mr Wheeler said.
ASB economist Daniel Smith said aside from the housing issue, the Reserve Bank noted parts of the rural sector, including dairying, ''are also highly indebted''.
''The Reserve Bank also noted the longstanding vulnerability New Zealand faces because of its high level of external debt, both issues echoing points raised in earlier reports,'' Mr Smith said.
Deputy bank governor Grant Spencer highlighted the dairy sector debt, which he said made the sector vulnerable to a decline in commodity prices or any increase in interest rates.
While the dairy sector was enjoying record export prices, farmers had to continue a ''cautious approach'' to mitigate its vulnerability to its high level of indebtednessFarm credit growth had slowed during the past six months and dairy farmers were set to get a boost from high milk prices, the report said.
While the payout boost gave some scope to repay debt, if the increased income instead prompted a return to pre-crisis borrowing and spending trends, the financial risk in the agricultural sector could rise, the report said.