Standard & Poor’s (S&P) says a fall in house prices of up to 20% may not harm New Zealand banks’ credit ratings, but “robust” house-price growth, especially in Auckland, continues to elevate risks in the financial system.
The comments come in a report from the credit ratings agency that says Asia-Pacific’s residential property boom may be waning as the region’s economic growth rate slips. China yesterday reported September quarter Gross Domestic Product of 6.9%, the economy’s slowest quarterly expansion since 2009.
“A slowdown in Asia-Pacific’s real estate markets will test the credit quality of the region’s financial institutions, property companies, and other related sectors,” S&P credit analyst Terry Chan says. “Residential price appreciation in Malaysia, Australia, and New Zealand remains a key risk to bank ratings. That said, the banks there are reasonably placed to absorb price shocks.”
The latest Real Estate Institute of New Zealand (REINZ) figures show Auckland’s median price reached a record high of $771,000 in September, an annual increase of 25%. The REINZ data also showed strong increases in the Waikato and Bay of Plenty.
S&P tested the potential impact of three scenarios covering hypothetical falls in residential property prices and household disposable income.
The first scenario features a 10% decline in housing prices with no change in household disposable income. The second scenario involves a 20% decline in prices and 2.5% decline in household disposable income. And the third scenario includes a 30% decline in prices and 5% decline in household disposable income.
“Continuing short-term residential property price appreciation is an identified key risk to bank ratings in Malaysia, Australia, and New Zealand. Hence a retreat of property prices in these markets may, depending on the prevailing economic circumstances, have a solidifying effect on ratings at current rating levels, lessening the possibility of future bank downgrades associated with continuing rampant price appreciation,” says S&P.
“For Malaysia, Australia, and New Zealand, we believe that a 10% or even 20% property price shock potentially may not impact bank ratings. Property sensitivities as they affect banking sector credit strength are hardly a flash in the pan for these markets.”
“In New Zealand, we believe that robust house price growth – particularly in Auckland – is elevating risks in the financial system; hence, on August 14, 2015, we negatively revised our Bank Industry Country Risk Assessment (BICRA) on New Zealand and at the same time took various negative rating actions on financial institutions. This negative BICRA change followed an extended period whereby New Zealand’s previous economic trend was negative primarily because of property concerns,” says S&P.
“As for Australia, our expectation is that a 30% drop in property prices and a 5% decline in household disposable income could have a more severe impact on the New Zealand banking system. In our view this scenario would coincide with a significant rise in the unemployment rate and a drop in GDP growth, resulting in economic imbalances reversing and New Zealand moving into a correction phase; in this scenario credit losses across all asset classes would have a high impact on the banking system.”
Potential ratings downgrades could result from a revision of S&P’s capital and earnings assessments, and could also stem from a downward revision of S&P’s BICRA assessment on New Zealand.
Meanwhile, S&P describes Hong Kong, where house prices have risen 45% over the last three years, as having the most resilient banking system in the Asia-Pacific. Hong Kong banks are, according to S&P, likely to be the region’s most resilient to a house price shock.
“This is not completely surprising given Hong Kong households’ proven resilience to extreme price movements such as the circa 70% decline in house prices between the 1997 Asian Financial Crisis, prior to which house prices peaked, and the 2003 Severe Acute Respiratory Syndrome (SARS) pandemic. During this time, banks’ problem residential mortgage loans increased to only about 1.5% of total residential mortgage loans,” says S&P.
Based on REINZ figures, Auckland house prices are up even more than Hong Kong’s over the past three years at 50%. New Zealand prices are up 31%.
Elsewhere in the region India, China, and Japan may be more sensitive than other banking systems to a 10% to 20% fall in house prices, says S&P, with Chinese property developers “highly sensitive” under the scenarios evaluated.
“Between half and three-quarters of the ratings in this sector could be lowered,” S&P says.