WELLINGTON, May 31 (Xinhua) -- New Zealand's financial system remains sound and the risks facing the system have reduced in the past six months, Reserve Bank Governor Graeme Wheeler said on Wednesday when releasing the Bank's May Financial Stability Report.
"The outlook for the global economy has been improving but global political and policy uncertainty remains elevated and debt burdens are high in a number of countries," Wheeler said in a release.
A sharp reversal in risk sentiment could lead to higher funding costs for New Zealand banks and an increase in domestic borrowing costs, he said, adding that New Zealand's banks are vulnerable to these risks because of their increasing reliance on offshore funding for credit growth.
"House price growth has slowed in the past eight months, in response to tighter loan-to-value ratio (LVR) restrictions, and a more general tightening in credit and affordability pressures in parts of the country," he said.
While residential building activity has continued to increase, the rate of house building remains insufficient to meet rapid population growth and the existing housing shortage, he said, adding that house prices remain elevated relative to incomes and rents, and any resurgence would be of concern.
Dairy prices have recovered significantly in the past 12 months, and the majority of dairy farms are likely to have returned to profitability in the 2016/17 season, Wheeler said.
However, parts of the dairy sector are carrying excessive debt burdens, and remain vulnerable to a fall in income or an increase in costs, he said, adding that banks should continue to closely monitor and maintain full provisioning against lending to high-risk farms.
Deputy Governor Grant Spencer said the banking system maintains strong capital and funding buffers, and profitability remains robust.
"Banks have generally tightened credit conditions in light of funding constraints and the increasing risks around housing," Spencer said, adding that banks are seeking to reduce their reliance on offshore funding and have raised deposit rates.
The Reserve Bank supports a cautious approach to managing foreign debt, in light of lessons learned in the global financial crisis, Spencer said.
While the LVR restrictions have increased the banks' resilience to any fall in house prices, a significant share of housing loans is being made at high debt-to-income (DTI) ratios, he said, adding that such borrowers tend to be more vulnerable to any increase in interest rates or declines in income.
