The Reserve Bank of New Zealand says the country’s $NZ180 billion ($A174.52 billion) commercial property sector has become less risky since the global financial crisis (GFC) because a reduced amount of debt is being used to fund new developments and purchases.
In a recent bulletin, the bank said commercial property lending was the main reason for defaults worldwide during most financial crises. Most people link the implosion of sub-prime lending in the US residential property market to the GFC.
But the Reserve Bank said commercial property prices also fell significantly in many OECD countries, at rates almost universally higher than for residential property.
New Zealand's commercial property sector is again in expansion mode, following a 30 per cent drop in property values after the GFC. Over the past two years, prices have risen at more than six per cent annually, vacancy rates have dropped and sales have increased.
One reason the sector tends to be a catalyst for defaults in tougher economic times is that there are significant swings in commercial property values over time and more borrowers in the sector tend to suffer financial stress and default on their loans during downturns, the bank said.
Other factors include irrational exuberance - where investors over-pay for property due to misplaced optimism about returns. At least two-thirds of commercial property stock in New Zealand is held by investors, with the rest mainly by owner-occupiers.
The sector accounts for about $NZ30 billion of mainly bank debt and nine per cent of total bank lending.
Tighter lending standards were brought in by the banks after the GFC and with the near collapse of property finance companies, which also pushed commercial property prices down.