Housing-market risks expected to be dominant issue in FSR

Nick Tuffley.
Nick Tuffley.
The Reserve Bank's Financial Stability Report is likely to include housing-market risks to financial stability, the area most subject to external market scrutiny.

The FSR, due out tomorrow, was likely to cover a range of issues but ASB chief economist Nick Tuffley said the housing issue was expected to be one of the most important parts of the report.

Acting governor Grant Spencer signalled the central bank would lay out in the FSR how it would unwind loan to value (LVR) lending restrictions.

In the November Monetary Policy Statement, the bank noted low house-price inflation was expected to continue, reinforced by new government policies on housing.

''This suggests, once the new Government's housing policies are firmly in place, the Reserve Bank will be likely to gradually relax the LVR lending restrictions.''

The Reserve Bank was likely to reiterate its desire to have debt-to-income restrictions included in its memorandum of understanding with Finance Minister Grant Robertson but comment it did not see the need to introduce those restrictions in the current environment, Mr Tuffley said.

The Reserve Bank would also provide an update on other key financial stability vulnerabilities, which included dairy sector indebtedness and recent developments in bank funding.

Dairy risks had subsided but the sector remained in the central bank's focus given the high level of indebtedness, he said.

Funding risks appeared to have stabilised and a recent paper suggested the Reserve Bank was ''fairly comfortable'' with recent developments in funding and the subsequent slight tightening in credit conditions that had occurred.

Residential consents had lifted in the past three months on the back of increased demand for apartment buildings in Auckland and Wellington, Mr Tuffley said.

Nonetheless, residential construction was still running short of what was needed to meet current population growth, let alone alleviate dwelling shortages in Auckland and Wellington.

Election uncertainty, capacity constraints, credit conditions and a slowing housing market could be constraining house-building demand, he said.

Craigs Investment Partners broker Chris Timms said the key event in what would be a relatively quiet week of economic releases would be the latest ANZ Business Outlook survey, due out at 1pm on Thursday.

''We will be watching with interest to see if the recent trend of sharply falling optimism continues, or whether it rebounds.''

Political uncertainty had dominated in the past two months. Headline confidence fell to zero in September - the month in which the election took place - before falling further in October, during the negotiation period where the outcome was unknown.

The -10.1 reading last month was the lowest in more than two years and well below the long-term average of 10.7.

However, the own activity index, traditionally a much better proxy for growth, fell to a much lesser degree and was not significantly below the long-term average.

It was possible there would be a bounce in November, simply as a result of the period of uncertainty lifting, Mr Timms said.

With many policy positions and impacts, still unclear, Craigs expected businesses to remain apprehensive into early next year.

On Friday, Statistics New Zealand will release the country's terms of trade.

Mr Tuffley expected a 0.5% lift but any lift would take the terms of trade to an all-time high.

Looking at the drivers, the remnants of the earlier dairy price surge would lead overall export prices higher in the three months ended September.

Meat, particularly lamb, export prices were likely to be similarly firmer over the quarter.

Import prices were expected to remain subdued, reflecting continued weak global inflation.

''Heading into 2018, we expect recent dairy price falls and rising oil prices to see the terms of trade drift lower.''



Here it comes