WELLINGTON: A housing boom in New Zealand's largest cities threatens to destabilise the country's financial system, the central bank warned Wednesday.
The Reserve Bank of New Zealand said low interest rates and improving sentiment in global financial markets had resulted in a rise in household credit over the past six months, fuelling the property market.
It said the problem was worst in New Zealand's biggest city Auckland, where house prices are near record levels, and Christchurch, where a NZ$40 billion ($33.6 billion) rebuild after a 2011 earthquake has stoked demand for accommodation.
The bank said New Zealand had so far avoided the property crashes that had affected other countries but further price rises would increase the financial sector's vulnerability, with potential impact on the overall economy.
"If the correction in house prices was triggered by an external event such as a large financial and economic shock in a major trading partner, reduced export demand would add to the upward pressure on unemployment," it said.
The bank said that it was increasing the amount of capital banks have to hold to back low equity mortgages, creating a greater buffer against shocks to the financial system.
"This will strengthen the capacity of the banking system to weather a housing downturn, and should also lead the banks to review the riskiness of the loans they are currently writing," it said.
New Zealand's official interest rate has remained on hold at 2.5 percent since March 2011 and the Reserve Bank said last month it was unlikely to move this year.
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