As the debate around the housing market and the potential need for a Debt to Income (DTI) multiple restriction burbles along in Wellington, the CEO of the bank with the biggest exposure to the housing market has weighed in with a few warnings to new rental property investors and the Reserve Bank.
ANZ Chief Executive David Hisco told me after the bank posted a 9% fall in annual cash profit to NZ$1.53 billion that ANZ was being more cautious about growing lending in a market where house prices were historically high, interest rates were historically low and wages had not risen as fast as house prices. ANZ has NZ$31.4 billion worth of mortgages in Auckland, including 3% with loan to value ratios of over 80%.
ANZ's results showed a slight drop in market share in mortgage lending (from 31.6% to 31.5%) in the six months to September 30 as it grew lending 4.5%, which was slower than the overall banking system growth of 5.0%.
ANZ tightened its lending criteria for rental property investors in the first week of June ( see our Hive News on June 7 ) and Hisco also issued an unusually strong warning about Auckland's "over-cooked" housing market in this July 20 Op-Ed in the NZ Herald.
“We’d like to see a bit caution around investors who are Johnny-come-latelies who jump in and think this is how it is and prices keep rising, because it’s not necessarily guaranteed going forward,” he said.
Hisco pointed in particular to rental property investors in smaller towns and cities who were not considering whether higher prices were justified by population or income growth.
“If wages haven’t grown and population hasn’t grown, then you need to be sure that you’re making a sensible investment,” he said.
NZ$10 billion funding gap to squeeze
Hisco also pointed to a rise in the domestic funding gap for the banking system to around NZ$10 billion in the last year as borrowing growth had rapidly overtaken growth in household deposits.
The Reserve Bank requires the banks to fund at least 75 per cent of their lending from term deposits and long term bonds, which restricts banks from simply diving into international wholesale 90 day commercial paper markets to bridge the funding gap. Such borrowing has also become more expensive in recent months because of regulatory changes making it more difficult for US money market funds to buy such paper.
“There’s a limit to what we can go offshore to borrow without being charged significantly more, and so if you follow that through it means that asset prices can’t continue to be funded ad infinitum,” he said.
“There needs to come a time when they need to have a pause. If you listen to some of the market anecdotal evidence, maybe we’re seeing the Auckland market having a pause, and it’s probably a good thing.”
Prefers LVRs to DTI complexity
Hisco was cautious about whether the Reserve Bank should adopt a debt to income (DTI) multiple limit, arguing that instead it should look at ramping up its LVR requirement for investors if necessary.
He said defining income consistently was a particularly tough task for any DTI limit.
“It would need to be very clear and prescriptive so that all players in the market actually behaved and treated the same things as income, and it would be quite complex for banks to implement and costly,” Hisco said.
“And given we’re seeing some evidence that things are slowing down then perhaps it may not be required.”
“The beauty of the LVR now is it’s well understood and systematically we’ve all adjusted to it. Introducing a new rule is like introducing a new rule in Rugby. It’s not exactly as easy as you think.”
Hisco called in July for the Reserve Bank to require rental property investors to have a 60% deposit, rather than the 40% limit formally adopted from October 1.
Better fiscal and monetary policy coordination?
Meanwhile, Treasury Secretary Gabriel Makhlouf gave a speech at Victoria University yesterday on sustainably improving economic capital, in which he said New Zealand didn't appear to be spending enough time thinking about how to invest in lifting inter-generational wellbeing on a sustained basis.
He focused in particular on the risks of relying too heavily on monetary policy and on the need for coordination with fiscal policy and prudential policy to improve wellbeing in the long run.
"International experience over the past 10 years and maybe more casts increasing doubts about the effectiveness and efficiency of monetary policy alone in managing the economy’s performance relative to its current growth potential when it is adjusting to a large structural shock," Makhlouf said.
"In fact, relying on monetary policy alone to do that job risks the longer term growth potential of the economy as well, by leading to the misallocation of resources towards investments such as residential investment that are comparatively less productive in terms of generating wealth and well-paid jobs," he said.
"Equally important are the consequences of such a policy on wellbeing across society and generations. We know that, as interest rates rise towards more ‘normal’ levels, a lot of low-income people who have over-borrowed get severely hurt. Would better coordination of fiscal, monetary, and financial/prudential policy – especially the physical, social and environmental infrastructure investment component of fiscal policy – help the economy’s performance over the cycle as well as help lift the economy’s sustainable growth rate? How could we achieve that better coordination?"
NZ$3 billion cost of Auckland congestion
Phil Goff has upped the ante in the debate with Wellington over Auckland's growing pains and its need for new revenue to pay for transport infrastructure.
Speaking to a business audience in Auckland this morning, Goff said traffic congestion in the city was costing the country NZ$3 billion a year and rising.
Goff told a PWC Breakfast Briefing road pricing would have to be part of the solution, along with a regional petrol tax.
"We need a petrol tax immediately," Goff told the 80 or so business leaders present.
Goff noted that a petrol tax was not a Government policy "at the moment", but that John Key had left the door open to change and the two would talk.
He said a congestion charge seemed inevitable.
"We need the revenue, plus we need to change the behaviour," he said.
The new Mayor has ditched his chauffeur-driven V6 Holden and is driving himself to work in a hybrid.
Goff eyes Airport link
New Zealand's boom industry -- tourism -- was a big headache for Goff, he said, pointing to the 3.5 million tourists a year that pour into Auckland airport, with most wanting to go downtown.
A mass transit link between the airport and the CBD was not in the plans until 2028, by which point projected arrivals would be nearly 6 million tourists a year, he said.
Moving Auckland's port would help, he said, pointing to the current 2,500 truck moments a day in and out of the port.
"Most major cities in the world have moved their ports out of the CBD. We should too, but central government will need to help us with a regional Ports strategy. Auckland can't do this on its own," he said.
In other economic and financial news...
In another sign of robust spending by households and tradies with plenty of home equity, the Motor Industry Association reported new vehicle sales hit an all-time record high of 14,709 in October, up 16% from a year ago. October's sales smashed the previous all-time record for any one month set in July 1984 (13,983) after import restrictions were lifted. The Toyota Corolla, a favourite with rental car fleets ahead of another boom summer for tourism, was the top seller with 1,210 sales. Next was the Ford Ranger double cab ute and then the Toyota Hilux ute.
Auckland's biggest real estate agency chain, Barfoot and Thompson, yesterday published the first hard sales data for October. It showed a big drop in sales as the LVR restrictions kicked in, but it's not affecting the actual prices transacted. Sales numbers fell 17% on a seasonally adjusted basis to a five year low. Both the average and median prices rose around 2% in the month. The percentage of property sales under NZ$500,000 was just 5.1% or 40 homes. More than 40% of sales were for more than NZ$1 million.
Speaking in the wake of the confirmation of the withdrawal of a Government guarantee for Kiwibank deposits from February 28, James Shaw called on the Government to introduce a sector-wide deposit insurance scheme for deposits up to NZ$100,000. "New Zealand is the only country left in the developed world that doesn’t offer savers’ deposit insurance to protect them against possible loss if their bank ever got into difficulty," he said.
National MP for Palmerston North (and former mayor of that city) Jono Naylor surprised a few people by announcing he would not stand again at the next election.
Quotes of the day:
John Key on why New Zealanders worried about privacy should be less concerned with its spy agencies than others:
"The truth in reality is that Facebook and Google and a whole bunch of other multinational websites and companies understand a lot more about your activities, quite frankly, than the spy agencies do."
Ron Mark after MPI asked for police help to visit a farm in the Wairarapa while looking for the banned pea weevil.
"Perhaps when police heard ‘P’ they probably didn’t realise MPI meant Peas. Given how stretched rural police are, a Wairarapa raid for illicit peas wasn’t their best use."
Tweets of the day:
This election is really stressing me out. I'm gonna take a break from it and watch some fun baseball oh dear god
Radicalised baristas switch nation to decaf, the nation is crippled by blinding headaches until their demands are met #KiwiTerrorPlots
Hope you enjoy your weekend. There's a great crop of long reads below.