Property prices to blame for S&P downgrade - MortgageRates.co.nz

Rampant Auckland property prices as opposed to the banking and finance system itself - are to blame for Standard & Poors downgrading of New Zealands risk assessment.Tuesday, August 18th 2015, 3:47PMby Miriam Bell

On Friday, S&P revised New Zealands Banking Industry Country Risk Assessment (BICRA) score from "3" to "4".

It also cut the standalone credit profiles of the countrys four biggest banks - ANZ, ASB, BNZ and Westpac - and downgraded the ratings of seven other financial institutions.

However, these changes were not due to any existing or emerging risks in any of the financial institutions themselves, S&P credit analyst Nico De Lange has emphasised.

In a follow-up presentation to Fridays announcements, De Lange said the ratings changes were intended to highlight that the risks facing New Zealands banking system have increased incrementally.

This is down to an increased imbalance in the New Zealand economy which largely stems from very strong residential property price growth, particularly in Auckland, over the last three years.

De Lange said S&P was of the view that there is a risk of a sharp correction in prices and, if that occurred, the impact would be felt by every financial institution in New Zealand.

It was for this reason the ratings agencies had revised its assessments.

However, De Lange said there are only 23 other countries with a higher BICRA score than New Zealand.

This means that, overall, the countrys banking system remains one of the lower risk banking systems globally.

De Lange pointed out that, while the ratings of seven financial institutions were downgraded, the ratings of the remaining 11 including the four major banks and Kiwibank - were affirmed.

This was because they benefited from group support. For example, the big four banks were all subsidiaries of Australian parent banking groups.

Despite the increased risk posed by property prices, S&P does not think Auckland has a property bubble that is about to burst.

De Lange said S&P believes the risk of a sharp correction to property prices remains low and the economic imbalances were likely to unwind in an orderly fashion.

The Reserve Banks imposition of macro-prudential tools was helpful although 2013s LVR rules only slowed down Aucklands housing market temporarily due to the citys supply and demand issues, he continued.

We see the RBNZ as pro-active, but in a difficult position because of the need to keep the inflation rate between one and three.

Interest rates are a tool they use for that. And that means on one side they have got the low interest rates, but on the other they are trying to cool down the property market with macro-prudential tools.

De Lange said the situation did beg the question of whether the RBNZ was doing enough in a macro-prudential sense.

I think we are on the same page, more or less, as the RBNZ. Property prices are of concern to them too, so they are likely to have sympathy for us.

Meanwhile, Prime Minister John Key told media he is confident New Zealands financial institutions are strong enough to survive a sharp correction in Aucklands property market.

Key said the countrys major lenders had assured him that their stress testing showed their respective loan books were strong enough to withstand such a situation.

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