Credit rating agency Standard & Poor's is again warning rising New Zealand house prices could heighten the risk of a sharp drop, especially if there's an external economic shock.
In its 2014 outlook for the New Zealand banking sector, S&P is projecting a relatively low level of credit losses over the next two-to-three years, underpinning the strong profitability of this country's major banks.
“Nevertheless, we note that a key downside risk to our base case scenario is that persistent house price inflation could further heighten the risk of a sharp property price correction sometime in the future, particularly if there is an external shock to the economy that increases the risk of the banks incurring higher credit losses,” said S&P credit analyst Nico De Lange.
“Consequently, we consider the stand-alone credit profiles of all banks and credit unions in New Zealand as remaining subject to negative pressures, as reflected in a negative rating outlook on a number of these banks and credit unions," De Lange added. See credit ratings explained here.
The latest data from government valuer Quotable Value shows an annual increase in residential property values in the year to January of 9.6%, with a rise of 14.5% in Auckland. Residential property loans account for about 60% of total lending by the New Zealand banking sector.
The S&P report comes after ASB yesterday posted record interim net profit after tax of $416 million, a rise of 14%, with loan impairments down $7 million, or 25%, to $21 million.
This time last year S&P caused a stir with a warning that New Zealand and its banks were vulnerable to a sharp correction in property prices.
LVR restrictions & higher bank capital requirements encouraging
The credit rating agency said a sharp correction in property prices could happen if New Zealand's economy weakens through, for example, a large fall in terms of trade that weaken the country's export earnings and business and consumer confidence, with this weighing on labour market and household debt-servicing ability.
"We are of the view that a hard landing in China could potentially have a material impact on the New Zealand banking system; that said we consider the probability of a hard landing to be low," S&P said. "In our view New Zealand's direct exposure is primarily through soft commodity prices which could fall sharply in a hard landing scenario."
S&P said the introduction by the Reserve Bank of "speed limits" on banks' high loan-to-value ratio (LVR) residential mortgages, and higher capital requirements for high LVR lending, may be enough to contribute to a tightening of bank lending criteria, thereby slowing down household credit growth and containing house price growth.
Reliance on offshore funding still a weakness
Nonetheless they raised the old chestnut of the major New Zealand banks' dependence on offshore funding.
"We hold that a high reliance on external funding is a key weakness of the New Zealand banking system, with net banking sector external debt funding about 32% of system-wide domestic loans. Banks' dependence on offshore borrowing has reduced since 2010, reflecting lower credit growth and a strong inflow of customer deposits. We expect that increasing credit growth would likely increase dependence on offshore borrowing," S&P said.
"In our view, any disruption in the offshore wholesale funding markets might be to the detriment of the cost and availability of funding for banks. A potential scenario includes a euro zone crisis that causes a dislocation in international funding markets."
"In particular, we consider the New Zealand banking system's sensitivity to a disruption in external funding as possibly being more pronounced during a period of rapidly depreciating currency, falling property prices, or increased credit losses. Nevertheless, we believe that the major banks are likely to benefit from their parents' support in normal as well as most stress scenarios," S&P added.
S&P said its base case forecasts banks' nonperforming loan levels and credit losses will remain flat after peaking at about 2.1% and 0.8%, respectively, in 2009-2010.
33 Comments
Largest economy in the world?
China’s $8.22 trillion economy is now the second largest in the world, compared with the $15.68 trillion U.S.
In 2012 China’s per capita GDP was $9,233, compared with $49,965 in the U.S.
http://www.forbes.com/sites/currentevents/2013/09/17/once-china-catches…
Also the USA has had a major reset, Chinas is still to come.
You will notice that SK gets in very quickly when there is some negative comments about NZ housing. You can smell the fear on his breath. In NZ we have many like him who have total tunnel vision towards property and are generally not diversifed in their investments. Anyone who has a balanced portfolio in property, commodities and equities has nothing to fear. Anyone who has their eggs in one basket has reason to fear a major financial crisis whether it be a terrorist attack or a major slowdown in China. One thing for sure the people at S&P will have far more qualifications than SK and they will be far wealthier and diversified in their investments than he will be.
So much for S & P's views on housing from a respectable source:
"Standard and Poor's Lack Of Integrity Will Be Exposed"
After an unconscionably lengthy period of time, the dogged sleuths at our Justice Department finally are seeking some accountability from Standard and Poor’s (S&P) over their role in the housing meltdown. In a civil lawsuit against S&P announced by Attorney General Eric holder, our government is seeking the nice round number of $5 billion. S & P, a division of publisher McGraw Hill (MHP), as a credit rating agency is the final stop before a mortgage backed security (MBS), or collateralized mortgage obligation (CMO) can be issued. These MBS’s and CMO’s were nothing more than bonds backed by subprime mortgages rated “AAA” by S&P that went into default by the hundreds and hundreds of billions during the 2008 and 2009 mortgage “bubble” bursting and subsequent economic meltdown. Large institutions like pension funds, banks, endowments, and insurance companies suffered punishing and sometimes fatal losses. Is S&P culpable as claimed in government filings in that they had “significant conflicts of interests” or “Considerations regarding fees, market share, and relationships with issuers improperly influenced S&P’s rating criteria and models?” Let’s have a look and then make our own conclusions.
Link
And here's another spin on the same story:
"NZ banks expected to maintain sound asset quality as interest rates rise, S and P says"
Link:
As long as we keep an open door for anyone, any foreigner, any nonresident to buy our property then sharp falls in property prices are impossible.
If we ever did see house price falls then we would see great interest rate cuts in reaction as banks tried to protect their asset books. So for the owner occupier its a win win!
Oops misjudged that, inflations now 6%, damn it's now 7%, damn what do you mean Mr Exporter your costs are now run at higher than your global competitors and you can't sell anything and you're laying off staff, the trade surplus is now a deficit, damn now 8%, screw it, 10% OCR damn you, 12% mortgage rates.... take that.... Sorry you over leveraged home owners but you asked for it...monetary policy, an imprecise science not understood by some, fortunately better understood by the people who have to implement it.
Take a look at Countries like Argentina, Turkey, Indonesia....etc.
They tried to play the "toilet paper money" game that u talk about....
BUT ..it is only a game that the strong can play... ( China and USA ).
making too much toilet paper has given their currencies the "runs".
Foreign Capital has had enuf of being shat on.... so it leaves..
So they try to defend their currencies by selling their foreign reserves...and when they run out of those , then put up their interest rates.... hugely ( 10 % in Turkey I think )
Those are the unintended consequences of stepping in the ring and playing ur "toilet paper money game".
I agree with u about NZ swapping land for trinkets.... but I don't agree with ur answer to it.
I think Wheeler and his team has done the right thing by not intervening...
It is easy to print and sell $NZ for $US in order to weaken the $NZ.... but when time comes to do the opposite... it aint so straightforward...
in my view...
Indeed, they were foolish in taking the easy money, gambling it would work out....looks like it wont.
Bear in mind though the possibility of great unrest and in-stability that lurks in the shadows.
Agree on weakeing V strengthening.....its an asymetrical play....we cant be seen to print, we have to be seen as safe and reliable to investors abroad all of the time....
regards
"Better to have partied and then suffer the hangover"
I think Tommy Tiernan's "When Irish People had money" is kind of required watching at this point.
http://www.youtube.com/watch?v=EUo93Hw7LSw
So long as building and development costs exceed the cost of used housing, falls in prices is a remote possibility.
Of course a major financial shock may cause problems, but so will being struck by a meteor, the return of the Black Plague or the Labour/Greens winning the next election.
Smell the fear, change your underwear time. A Green's/Labour win I think is quite likely, more than 50/50. And by the way the rabid right are mud slinging they must be fearful as a "species".
Several ppl I know who rent are now finding their home is being sold from under them. Now that may not be a real trend but still, one to watch in the next few months.
regards
Liquidity, liquidity, liquidity.
The 3 most important words during a financial crises.
Spruikers and the over leveraged investors are the hardest hit when a liquidity crises hits.
They often lose the lot, as their house of cards (pun intended) comes tumbling down.
No bank wants the political fallout of repossessing a home, especially en-mass. So when it comes to recovering money its going to be the over-leveraged property spruikers who are the first and easy targets, nobody loves them and no one will care as they get decimated.
We'll see a CGT and a WOF for rentals, either in 2015 or 2018, of no matter. These events will be a big enough % to put the fear well and truely in. As Roger W said earlier it will be a negative self-reinforcing sprial down....30~40% loses maybe even 70%. Even the high cash % owners like ZZ are going to feel the poorer, if not pain. On top of that I think there is a % of farmers out there with tax dodging rentals, so these events will shake them as well....
On top of that I dont think the LVR impact has really filtered through yet, 10% down is a huge impact, hence the RB is back peddling, it over-played its hand....
It will be interesting to see if your soul mate Oily decides to announce his "retirement" this year...if he does, well everyone else will be too late.
regards
The problems with not bailing are of course manifold.
a) Foreign investors expect us to, hence lend to us thinking their money is safe.
b) Property gamblers expect us to.
c) Depositors expect us to.
d) first time buyers expect us to.
Huge moral hazard.
The OBR in theory gives us the option of not, or to limit how much support is provided. Im not sure if its going to be that effective, but its better than nothing.
SCF, etc yes one huge mess...and the rets of it, and honestly I odnt think its been cleaned up enough. And the jail time for finance directors has been a joke.
20%, given the leverage this seems to big a %. I think we'll see melt down at 10% or less. I also dont think they can stop it...as Roger W says once it goes it will keep going down a long way.
National party, well frankly Labour porked the market while in power, ignored the RB. Natioanl gave tax cuts to win and that just porked the market....so no real difference.
This time around though it has to be fixed, simple...Natioanl wont touch it so it has to be the left.....god help us is all I can say.
regards
Hey Kumbel, ears on?
I found the answer to the factory build/self-certify notion that we were kicking around on the other thread. From, of all places, a guy who was a private building certifier back in the day, and who had a hand in drafting that early legislation.
It's nigh impossible to buy insurance cover for the ten year warranty that would be needed. Just too risky/unknown/expensive. So volume, self-certifying companies are hard to get off the ground.
Which is a sad joke, because the current situation - TLA's and Central Gubmints standing behind the whole deal, and most likely well under-insured at that if Christchurch is anything to go by, is little better and has fed the beast that is the TLA strangulation of land supply, builds, certification/compliance and other related rackets.
Yep being a private certifier is out of the question as a standalone business. If you were to build on a large scale and provide a 10-year warranty anyway I am not sure that you would need much more cover to also certify the building. You would only certify single-story residential anyway, the bulk stuff, which is way less risky.
The median house price in Melbourne is A$643,000, or, in Kiwi terms, $696,000. The median house price, it advises me, in Auckland is 16 percent less, at $600,000.
The Hon Dr NICK SMITH does not appear to have a good grasp of high school level maths:
$696,000 times 0.84 (less 16%) equals $584,640 - not $600,000.
Prices are stagnating??!!, even falling.??!!
http://www.bloomberg.com/news/2014-02-13/manhattan-trophy-home-sellers-…
If that is what you have to pay for a crap apartment in a crap city in a crap country, where they treat the poor citizens like crap, have crap leaders, that owe all the crap to other countries, then I will stick to my crap house ...in my crap town, in my crap country, with my crap income, with our crap .....leaders, who offer cheap crap deals to other countries to import their crap and crack millionaires, to lower the tone of our fair country to improve the crap that they dish out, so they can afford a crap apartment, themselves, when they all get kicked out of their vote buying jobs, I hope and pray, soon.
AT least I don't have to take crap from them, like other people. Though I do like to have a crack back, almost daily.
I suppose crap is all relative, these days.
Here's some advice to everyone
PRINT THIS HEADLINE , STICK OT TO THE FRIDGE DOOR , AND DONT SAY YOU WERE NOT WARNED WHEN IT HAPPENS .
The trusting simplicity and naivete of many New Zealanders is quite an endearing quality , but its often our folly .
Once again, we here in New Zealand are marching to the beat of our own drum , totally oblivious to these risks .
Social discourse and media hype in NZ suggests we are in an economic boom . Everyone is positive, and while thats a good thing , we need to have some circumspect about the realities we face .
The rest of the world's economic fundamentals that led to the GFC have not changed , and they have certainly not been sorted out .
QE in all its forms , money printing , Fed Bond issues , stimulus packages , negative real rates of return , Chinses , Japanese and EU monetary policy have simply papered over the cracks , like giving the crack - head more crack
We welcome your comments below. If you are not already registered, please register to comment.
Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.