Borrowers hoping (and savers fearing) that this Thursday's OCR cut might push retail interest rates lower may be left hanging by banks who have taken their foot off the mortgage lending accelerator and are instead keener on term deposits.
Two of the biggest banks, ANZ and Westpac, have indicated in the last week that they have dialled down their mortgage lending growth and are instead hunting for more term deposits to fill funding gaps that can no longer be easily or cheaply filled by going into hot money markets offshore.
They are suggesting that this time next week the Reserve Bank may have cut the Official Cash Rate by 25 basis points to 1.75%, but shorter term fixed mortgage rates may not budge from around 4.5%, and longer term fixed rates may actually have risen. ASB hiked its three, four and five year rates late last week.
ANZ CEO David Hisco indicated as much last week and yesterday Westpac CEO David McLean told me yesterday rates may have bottomed out because banks need to find more local term deposits to better match their lending growth, which Westpac was deliberately slowing down.
He described how Westpac had tightened its lending criteria for rental property investors in recent months, on top of the Reserve Bank's LVR restrictions.
Westpac had made 20 changes to its lending criteria in recent months to improve the quality of its mortgage lending, particularly to rental property investors in Auckland, he said.
“We asked ourselves: where a market has been running really hot, as the housing market in particular in Auckland has been, are we as a bank writing business today that looks fine now, but we might regret in a downturn?” McLean said.
“There’s 20 things that I would say are tweaks or selective diallings down around the fringes of the market,” he said, pointing to a reduction in the interest-only period for investors to 5 years from 15 years and a cessation of new lending to offshore investors because of problems verifying income.
“It’s mainly Auckland, but we’ve seen house prices in the Auckland, Hamilton, Tauranga triangle have grown quite a lot, and now the contagion is spreading to Wellington and other geographies,” he said when asked where Westpac was tightening its lending.
McLean spoke after Westpac NZ reported its cash earnings fell 4 per cent to NZ$872 million for the year to September 30 after its net interest margin fell 12 basis points over the year to 2.13 per cent. It also increased its charges for bad loans by NZ$12 million after a review of its NZ$5.7 billion dairy loan portfolio.
Westpac slowed its mortgage lending growth to four per cent in the second half of the year from it annual growth rate of seven per cent and was below system-wide growth of over nine percent for the year.
'Lower rates are not working'
McLean said Monetary Policy had been ineffective at stimulating growth at low interest rates.
"We are at or close to the bottom of the cycle," he said.
He pointed to the increasing need for banks to fund their lending locally as regulators globally continue to require higher capital levels and more stable funding sources such as local term deposits and longer term bonds -- both of which are more expensive.
The Reserve Bank's Core Funding Ratio, which has been 75% since 2013, is a key factor driving the banks to look for local term deposits, while a regulatory requirement for US mutual funds to hold US Treasuries rather than bank commercial paper has also increased the cost of 'hot' money on overseas wholesale markets.
Deposit rates below 4% were not attractive for depositors, he pointed out.
"For us the challenge is how to we make deposits more attractive because you can’t necessarily rely on the wholesale markets or there might be these liquidity ratios that might constrain our ability to do that," McLean said.
"We’ve got to make deposits attractive. That’s why I think more OCR cuts become less and less relevant."
'DTIs may be needed, but difficult'
McLean said he had sympathies for the Reserve Bank as it considered a Debt to Income (DTI) multiple limit, given the effectiveness of the LVR restrictions became less potent the higher house prices went.
"The problem with the LVR restrictions is that if house prices keep going up the LVR restrictions just goes up with it. If they’re really worried about asset prices getting out of touch with incomes then they need a DTI test," he said.
However, he warned it would be difficult to manage avoidance and to assess income. The actual level could also be difficult, given the limits of 3.5 and 4.5 respectively in Ireland and Britain are well below the DTIs in place in New Zealand, where more than 60% of lending to investors is done with DTIs of over 5.
"If you look at the UK and Ireland debt to income ratios, they are much lower than would work in Auckland," he said.
Bennett's emergency housing plan
In another sign that Auckland's unaffordable housing market is weighing on the Government fiscally and politically, Paula Bennett and John Key launched a surprise NZ$303.6 million package of spending to address homelessness in Auckland.
Less than six months after announcing a NZ$42 million plan in the May Budget to provide emergency housing, the Government announced the spending to provide up to an extra 1,400 places at any one time, including 600 in Auckland.
Bennett and John Key announced the package in the Beehive Theatrette in Key's weekly post-cabinet news conference. Their announcement follows an Opposition-led Inquiry into homelessness and a call by Labour in July for extra funding for 1,400 new places.
"There are certainly challenges out there and our most vulnerable feel them," Bennett said when asked if this announcement was an admission of a housing crisis in Auckland.
Bennett said the Government had set up a cross-agency team to find or build new properties, including buying or leasing motels, and building pre-fabricated homes on Government land.
The NZ$303.6 million package of spending over the next four and a half years included:
NZ$120 million in capital funding to build, buy or lease properties suitable for emergency housing, including NZ$100 million in a loan to Housing NZ.
NZ$71 million in rental subsidies.
NZ$102 million for Community Housing Providers to support, stabilise and help tenants into longer-term housing.
NZ$10.4 million for more dedicated frontline Ministry of Social Development staff to work with people who need emergency housing or are on the social housing register.
Bennett said some of the housing would be provided on vacant Crown land, including more than 40 homes to be built by Housing NZ in Otahuhu Auckland on land leased from the Ministry of Education and ready by early 2017.
“We’ll also use vacant Crown-owned properties where they are available, purchase accommodation facilities and lease properties as needed in areas of high demand," Bennett said.
“These new places will be in addition to the more than 3,000 places per year and special needs grants for accommodation we have already funded to the tune of NZ$41.6 million in Budget 2016. In total, we’re aiming for more than 8,600 places per year, as well as continuing to provide access to alternative accommodation when contracted emergency places are not available,” she said.
Bennett said the Government was working on building modular housing on three sites across Auckland, while Housing New Zealand had bought a motel in Takanini.
'Auckland a big issue'
“Especially in Auckland, the strong market has made it hard to find new places, but with this funding we have made sure it’s not money that’s holding us back," Bennett said.
Bennett later said the NZ$100 million loan to Housing New Zealand would be fiscally neutral.
Bennett and Key said the NZ$303.6 million would come from the Budget 2017 allowance for new spending of over NZ$1 billion. The news follows Treasury's report on Friday that the Budget surplus was running over NZ$700 million higher than forecast in May because of stronger than expected economic growth increasing corporate income taxes and GST receipts.
The NZ$102 million of funding for Community Housing Providers would allow them to manage the tenancies of those in emergency housing, develop plans for more sustainable housing and then support people in their first three months of their new tenancy, Bennett said. This would fund services to help up to 1,400 individuals and families at any one time, or 5,600 individuals and families per year.
The funds for extra staff would cover 41 additional staff to handle case management for those in emergency housing situations, including support to Marae and other community organisations.
Phil Twyford said the Government had been shamed into action and he noted how the 1,400 places was the same as Labour's call for 1,400 places in July.
"Today’s announcements won’t solve National’s housing crisis. Every week, there’s a new announcement from National and all they show is how bad they’ve let things get.This announcement is an ambulance at the bottom of the cliff, but the real solution is to stop pushing people off the cliff in the first place," Twyford said.
“The heart of the housing crisis is a lack of affordable housing and state houses. There’s no substitute for building houses. That’s why Labour will build 100,000 affordable homes for first homebuyers to purchase as well as thousands more state houses, and lock speculators out of the market," he said.
“The Cross Party Inquiry on Homelessness found an extra 15-25,000 state houses are needed so 41,000 homeless Kiwis can all have proper housing. The massive increase in homelessness is a direct result of National’s negligent mismanagement of the housing crisis, including its sell-off of state houses.
Winston Peters said Bennett had panicked because of pressure from political opinion polls.
"National has got the drift that middle New Zealand is feeling uncomfortable that thousands of innocent Kiwis are in hardship. And no wonder, this Minister is making an absolute mess of the social housing portfolio," Peters said.
"She’s flogging off state houses, and then wonders why the headlines are about people living in garages, on the streets, in cars and caravan parks," he said.
In other economic news...
It was an embarrassing day for Statistics New Zealand, who had to revise up their September quarter inflation figure from 0.2% to 0.3% because of a human error in counting the cost of vehicle relicencing fees. The correction lifted the annual rate in the September quarter to 0.4% from 0.2%.
In another sign the high currency is having an impact on the economy, the New Zealand Manufacturers and Exporters Association reported its Survey of Business Conditions completed during October 2016 showed total sales in September 2016 decreased 6.72% (year on year export sales decreased by 11.72% with domestic sales increasing by 17.12%) on September 2015.
Have a great day