Hive News Tuesday: ANZ suggests extended housing slowdown; Kiwibank's capital injection; Household borrowing up 9.2%

Copyright Lynn Grieveson / Hive News

Parliament resumes later today for a three-week session ahead of the December 3 by-election for the Mt Roskill electorate, with housing, transport and migration set to dominate the debate.

Building consent and mortgage lending figures published yesterday showed the twin pressures of weak supply and strong demand continue to underpin that debate, along with a fresh Treasury assessment suggesting migration will remain stronger for longer than many expected.

Statistics NZ reported consents rose 0.2% nationwide in the month of September to a 12-year high of 2,550, but consents in Auckland fell to 752 for the month from 970 the previous month. Auckland's consents for the year to September stood at 9,960, still well short of the 13,000 to 15,000 needed just to keep up with population growth, and not enough to eat into a shortage now estimated at over 40,000.

ANZ's Phil Borkin pointed to the tougher lending criteria adopted by many of the banks towards Auckland developers and investors in recent months as a factor frustrating the arrival of new housing supply, along with problems getting building materials and staff.

"We are mindful of capacity pressures (and also an altered funding backdrop for developers) capping the upside, and believe this could be particularly pertinent in Auckland," Borkin said, pointing to a softening in the trend for growth in consents in Auckland to 0.7% per month from 2.5% a few months ago.

ANZ's Cameron Bagrie was also subdued in a separate assessment of the housing market, saying the latest third round of LVR restrictions were cooling the market and the slowdown could last longer than the previous two rounds because banks were being more cautious.

"This time looks different as banks are actively attempting to lean against excesses, the interest rate cycle (both domestically and offshore) is maturing, valuations are even more stretched, additional macro-prudential measures are being worked on, and market forces (i.e. more intra-regional migration) will assist," he said.

However, an outright correction in Auckland was not likely, he said.

"Valuations are certainly stretched and risks have increased, but outright weakness is hard to envisage when net migration flows sit at records, supply is responding only slowly, interest rates remain historically low and the underlying economy is still performing well."

Household borrowing still growing 9.2%

Last week's figures (C31) showing a slow-down in new lending to rental property investors since July indicated the Reserve Bank's restrictions are affecting housing demand from this part of the market, but yesterday's overall household credit growth figures (C6) showed there's still plenty of net lending growth going to owner-occupiers and the amount of debt repayment is slow.

Total mortgage lending rose by NZ$1.578 billion in September from August and was up 9.2% from a year ago, which was an unchanged annual growth rate from August. The seasonally adjusted monthly growth rate of 0.8% was also unchanged from August and down only slightly from 0.9% in July just before the third round of LVR restrictions were announced.

This strong borrowing appetite and decreased saving appetite by home owners (who are now sitting on assets worth NZ$1 trillion) was evident in the household deposit figures (C17) for September that were also released yesterday. Total household deposits rose by NZ$988 million in the month to NZ$157.965 billion, which means there was a gap of NZ$590 million between extra household borrowing and saving that the banks will have to find by either borrowing in hot money markets offshore or through longer-term bond issues.

That's because since 2013 the Reserve Bank has required banks to have at least 75% of their funding in the form of term deposits or longer term bond issues, which effectively prevents them from simply diving into the hot markets in London and New York for 90 day wholesale money whenever there's a deficit between local borrowing and saving. The banks' combined core funding ratio (L 2) was solidly over the threshold at 85.6% at the end of August, but down from 87.5% the previous month and down from 86.5% a year ago.

This imperative is one of the factors driving banks to retain OCR cuts from both borrowers and savers to discourage more borrowing and encourage more saving, although there's also a desire to lift net interest margins to stock up on profits and capital ahead of higher capital requirements on both sides of the Tasman.

The desire of banks to brace for heavier weather ahead was emphasised by Standard and Poor's decision yesterday to revise the outlook for the big four Australian banks' credit ratings from stable to negative because of a higher risk of a correction in Australia's housing market and a reduction in its estimate of how supportive the Australian Government would be to the banks in any stress situation.

S&P said there was a one in three chance of a one notch downgrade to the ratings for the Australian parents, which would cascade down to New Zealand and effectively increase interest rates here.

In other economic and financial news...

ANZ reported business confidence fell slightly in October from September and inflation expectations were flat at 1.4%, which ANZ said pointed to a current GDP growth rate of 3.5% and room for one more OCR cut on November 10. It cited the tightening of credit conditions by banks as a factor in the slight ebbing of confidence.

ACC and the NZ Super Fund yesterday finally agreed to pay NZ$494 million for a combined 47% stake in Kiwibank after negotiations dragged on for five months longer than expected. The price was a touch below the NZ$495 million announced in April and the stake was slightly higher than the 45% initially announced, which they said was partly due to Kiwibank's second half performance being weaker than expected.

The other surprise was New Zealand Post's decision to sacrifice some of its proceeds to inject NZ$90 million of capital to push Kiwibank's capital levels up to the same levels as its Australian-owned peers. The Government will still get its NZ$200 million dividend and will still have to provide a NZ$300 million uncalled facility to back Kiwibank and effectively replace the deposit guarantee that New Zealand Post will remove for new deposits from February 28 next year.

Treasury published its monthly economic indicators assessment of the economy, including that GDP was growing at a stronger rate in the second half than it forecast in the May Budget. It also gave an extended assessment of its judgement on the economic outlook ahead of the December 8 Half Yearly Economic and Financial Update. It hinted it would have to lift its net migration forecast (a fall to 12,000 by 2019).

"The prospect of continued sub-trend trading partner growth, combined with recent signs that domestic growth will continue to outperform the Budget forecasts, suggests that New Zealand has become a relatively more attractive place to live and work," it wrote.

Have a great day

cheers

Bernard