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Global credit rating agency Standard & Poor's has put eight local banks on notice over the rising risk of a housing bubble bursting in New Zealand.
Smaller lenders Cooperative Bank, Heartland Bank, TSB Bank, Credit Union Baywide, Credit Union South, First Credit Union, New Zealand Association of Credit Unions and Police and Families Credit Union have all had their outlooks dropped to negative from stable, giving them a one-in-two chance of being downgraded in the next two years if the country's economy deteriorates, S&P said in a statement.
The outlook for bigger lenders, including ANZ Bank New Zealand, ASB Bank, Bank of New Zealand, Westpac New Zealand, Bank of India (New Zealand), Rabobank New Zealand and Kiwibank, was left unchanged due to expected support from their parents.
The rating agency said persistent current account deficits and a heating property market were threats to the New Zealand economy. New Zealand's current account deficit is forecast to keep widening to 6.5 per cent of gross domestic product by 2017 as trade surplus from exported goods falls in the wake of the drought and the deficit from imported services remains elevated.
"We consider that there is an increasing risk that a sharp correction in property prices could occur if there is a weakening in the country's macroeconomic factors," S&P said.
If those threats materialise, "banks' credit losses could rise materially, given that there was a build-up in housing prices and domestic credit over the period preceding the global financial crisis," it said.
"We consider that such a scenario would have a high impact on the banking sector and the financial strength of the balance sheets of New Zealand banks."
Finance Minister Bill English said this morning "it was vital to act" on New Zealand's housing bubble in yesterday's Budget to avoid it bursting and causing widespread destruction, as happened in the United States, Spain and Ireland.
The Government aims to build 39,000 new houses in Auckland over the next three years which, on top of the gathering pace of the Christchurch rebuild, it hopes will provide momentum to the economy, increase its revenue and boost job numbers.
English made his comments on Radio New Zealand this morning.
"What we've learned from the global financial crisis is that in countries like Spain and the US, where they've had housing bubbles, is that there is widespread destruction when those bubbles burst, and Ireland has been the same.
"We must learn the lessons from those countries that 12-15 per cent compound house price increases are dangerous for an economy and that's why we need a collective will to help solve this problem.
"The measures that we're putting in place aren't going to solve the problem overnight but they are a very definite step in the direction of increasing supply."
An $18 billion residential rebuild in Canterbury is seen as the backbone for New Zealand's economic growth over the coming four years, and the Treasury ramped up its forecast housing inflation, which is seen peaking at a 7.1 per cent annual pace this year and the next.
New Zealand's bubbling property market is seen as a threat to the country's financial stability, with the International Monetary Fund yesterday saying local housing is about 25 per cent over-valued and the Reserve Bank last week threatening to introduce restrictions on low equity loans if they pose a "significant risk" to the system.
S&P said some of the Reserve Bank's planned initiatives to managing banking sector risks could mitigate the country's vulnerabilities.