Stable house prices have provided more confidence for some to enter the market, the report said. Photo: RNZ / Nate McKinnon
- The housing market is subdued, with stable prices and weak activity
- Policy changes mean the risk of another house price boom is reduced
- Banks' test rates have fallen from an average of 9 percent to 8 percent
A host of factors are weighing on the housing market, but the prospects of another boom are seen as less likely, a Reserve Bank report says.
Ahead of next week's financial stability report, the Reserve Bank (RBNZ) has released an update on housing, highlighting stable prices with weak activity.
It said stable prices have provided more confidence for some to enter the market, while owners facing debt-servicing stress may be looking to downsize.
The key to weaker demand has been high mortgage rates and lower population growth, along with caution amongst buyers amid weaker economic conditions.
"Advertised mortgage rates have begun to decline over recent months, but they remain at relatively high levels. This is continuing to constrain the borrowing capacity of potential homebuyers," the report said.
The fall in net migration has also helped dampen demand.
Less risk of house price boom
While the RBNZ did not make predictions on where the market would go as interest rates fell, report author and RBNZ adviser Charles Lilly said policy changes would reduce the risk of another boom in prices.
"Even if interest rates do continue to fall and demand picks up, we should see a moderation of risks building up. So one that we talk about is the debt-to-income (DTI) limits that we brought in in July this year," Lilly said.
The DTI limits mean banks are limited to no more than 20 percent of new lending to owner-occupiers with a DTI ratio of more than six, and no more than 20 percent of new investor lending over a DTI of seven.
That means most owner-occupiers with an income of $100,000 would be able to borrow $600,000, and investors $700,000.
"So that will act as a bit of a guard rail in terms of limiting the amount of borrowing that people will be able to take on if interest rates get very low. So that's going to be sort of something that's there as a guard rail to prevent a build up of financial stability risks in the future," Lilly said.
Government rule changes around land supply could also help, he said.
Test rates falling, financial system coping
The RBNZ said retail banks' test rates, which assess borrowers' debt-servicing capacity, have fallen from an average of nine percent in mid-2024 to around eight percent in October.
Banks typically apply a buffer above the average of the one or two-year fixed mortgage rate.
"Banks generally review their test rates on a quarterly basis. However, given the rapidly changing interest rate environment, some banks reported that they will review their test rates more frequently," the report said.
The country's recent house price cycle from peak to trough has been rapid compared to other advanced economies, and it has come with comparatively less stress on the financial system, RBNZ said.
It estimated less than two percent of the current stock of lending is to borrowers in negative equity (when the size of the mortgage is bigger than what the house is worth).
Loan-to-value ratio requirements meant borrowers were able to absorb substantial price falls without falling into negative equity, it said.
Mortgage arrears have been climbing but with falling interest rates, debt-servicing burdens have passed their peak, RBNZ said.
