OREANDA-NEWS. Further proposed tightening of macro-prudential rules for residential mortgage lending in New Zealand from 1 September 2016 should strengthen the banking system's credit profile, says Fitch Ratings. However, these new rules are not expected to change the current bank ratings.

Fitch believes the measures, which limit lending growth based on loan/value ratio (LVR) ranges and borrower types, could increase financial stability in New Zealand's banking system, especially in light of continuing and unsustainable house-price growth and historically high household-debt. The nation-wide rules are likely to reduce investor mortgage activity and high loan/value ratio (LVR) lending, two segments Fitch considers as higher-risk through the cycle. However, we deem that a more meaningful result could be achieved by combining the proposed rules with other measures, such as debt/income limits and additional capital overlays.

New Zealand's household debt/disposable income ratio rose to 163% at end-March 2016 and is now higher than pre-2008 global financial crisis levels. This follows historically low-interest-rates and soft wage increases, which contributed to mortgage credit growth of 8.1% yoy in March 2016.

Fitch says a sharp house-price correction - although not our base scenario - could hurt banks' balance sheets if it occurs in conjunction with increased unemployment or higher interest-rates. It may also have long-term implications for the country's economy. However, Fitch does not anticipate a significant house-price correction, absent an economic shock. Auckland's house-prices increased by 14.5% yoy at end-March 2016, with strong net immigration, lack of timely housing supply and greater investor activity as key drivers. House-prices also rose strongly outside Auckland, increasing by 11.2% yoy across the country.

In its consultation paper published today, the Reserve Bank of New Zealand (RBNZ) plans to restrict growth of investor mortgages with an LVR exceeding 60% to 5% and owner-occupied mortgages with an LVR exceeding 80% to 10%. The RBNZ is also exploring further measures that may include a counter-cyclical buffer, which is currently not set.

Macro-prudential tools implemented by the RBNZ since October 2013 have lowered the proportion of higher-LVR mortgages being underwritten, although effects on house-price growth were limited due to continued strong demand. New Zealand banks' exposure to residential mortgages accounted for 55% of total banking assets at end-March 2016. New residential mortgages with a LVR exceeding 80% declined to 7.9% at end-March 2016, from 25.4% at end-August 2013.