By Gareth Vaughan
There's little point in ANZ Bank New Zealand slapping higher minimum deposit rules on residential property investors than the Reserve Bank is proposing because borrowers could just go to other banks, CEO David Hisco says, and the problem wouldn't be solved.
Hisco hit the headlines this week with a thoughtful article on challenges being posed by high Auckland house prices, the strong New Zealand dollar, record immigration and New Zealand's creaking infrastructure.
Coming hot on the heels of the Reserve Bank proposal to force residential property investors borrowing from banks to have a deposit of at least 40%, one of Hisco's key points was that this restriction ought to be even tougher. He proposed a minimum 60% deposit. Asked in a Double shot interview whether ANZ would just go ahead and set the 60% limit itself, Hisco said this wasn't a solution.
"The issue if we did it alone is you would find you wouldn't actually solve the problem, the business would go elsewhere. I'm not so worried about not doing the business. But when it's going elsewhere it means you haven't actually really solved the problem other than doing less business yourself," Hisco said.
"Part of me saying 60% is saying if we've decided we should be doing things to limit Auckland investors, well then let's do it and obviously implementing at 60% would be quite a heavy move. No doubt the Reserve Bank's probably not into drastic moves like that. So they've moved it 10% [up from 30%], and I guess if they don't see much action they've still got the ability to move it more," said Hisco.
The point, he added, is if you've decided you don't want residential property investors in the market, recent Reserve Bank figures show them accounting for almost half monthly mortgage money lent in Auckland, then get rid of them, - at least for now.
"Bad news for them, but in the long run you might be doing them a favour if you save them an issue later on," said Hisco.
In addition to the tougher loan-to-value ratio (LVR) restrictions, the Reserve Bank's also looking at potentially introducing limits to high debt-to-income ratio lending, and/or making banks hold more capital against housing loans (a counter-cyclical capital buffer or capital overlay). Asked about whether the Reserve Bank should push ahead with either or both these tools, Hisco was less forthcoming.
"I wouldn't want to be putting out there what I think the Reserve Bank should do. They make their own calls, we work with them, they consult. What I've always said to the Reserve Bank is banks, provided they get time to adjust and make changes, they can generally get their head around whatever changes are implemented provided there's time," Hisco said.
'We've watched this building'
Asked about the timing of his article given the issues canvassed have been bubbling away for the past few years, Hisco said it was about trying to encourage a number of people to work together to improve things.
"We've watched this building and part of what we see is different parties looking to blame other parties, saying 'well it's your fault you should fix it.' Other people pointing a finger at another party. And we believe that the answer actually lies in a number of people working together," said Hisco.
These groups, he said, include the Reserve Bank and both central and local government, none of whom he is criticising.
"What I was hoping to do was explain to people that not one of those people can fix it on their own, and that people should understand that it is a complex issue, and that the answer lies in a number of things. And even then whatever you do may have another consequence."
It's not the first time Hisco has questioned banking industry lending practices. Back in March 2012 he hit out at rivals' high LVR lending telling interest.co.nz: "At the end of the day you’d have to ask yourself really whether if somebody has only got a 5% deposit that it’s a good thing to actually put them into a home loan."
Nonetheless ANZ, the country's biggest bank, has been the dominant player in the home loan market over the past few years. Since announcing the end for its National Bank brand in September 2012, the bank has grown its residential mortgage book by a net $14.4 billion, or 27%, to just under $68 billion. ANZ has about a third of the market.
'This thing's going to come to an end somewhere'
Asked whether ANZ had now decided to consolidate and wanted its competitors to do the same, Hisco said it was not for ANZ to prescribe what its competitors should do.
"What we believe is that clearly wages have not risen in pace with Auckland house prices. And so there comes a point when if we're not already close to it or there, where kiwis can't afford to get a loan and pay it off," Hisco said.
"This thing's going to come to an end somewhere, it has to because you can only borrow so much."
Low interest rates have enabled people to borrow more money, but Hisco said this doesn't compensate for the rise in prices.
"And of course the more you borrow, the debt doesn't go away, you have to pay it back," Hisco said.
"And that was the other point I made in the article which I think surprised some people, which is that now is a time to pay your loans off. There is never a better time with low interest rates than to clear debt. We need to remind people that getting your personal balance sheet in order is a good thing."
'Johnny-come-lately mum and dads'
Additionally Hisco said that although ANZ is obviously a money lender, its primary interest is to ensure there's a stable banking system.
"The banking market's very competitive. And again this is a situation where we may have a view that we want to tighten our lending conditions and pull back. But unless there's a generally shared view that now's a time where we need to navigate more carefully, well then that business will just go elsewhere and it doesn't then actually solve the issue," Hisco said.
"And the issue that I think needs to be looked at is the amount of investor lending in Auckland right now. And for a lot of these people they are Johnny-come-lately mums and dads who have seen everybody else get on board and so they think they'll do it too. The point is if things went bad they could quickly see their equity in their own home erode, which was used to secure the investment property, and of course the investment property would also go backwards. So it was a warning to say property doesn't always go up."
Hisco said there was no pressure coming from ANZ NZ's parent in Australia, where there's ongoing pressure for banks to hold more capital, to dial back in New Zealand. Shayne Elliott succeeded Mike Smith as ANZ's group CEO at the start of the year and has pulled back from his predecessor's Asian growth push, and is looking to squeeze better returns out of the group's capital.
"No, Shayne has come on board and with the new management team we've announced a change in our strategy somewhat. But people are generally happy with the direction we've taken New Zealand. Obviously we've merged the two brands, we've grown the business since then and we've got cost out of the business, which was part of the reason for doing that. That has made us more competitive. So we've got a pretty clear business model here with a good share of business across all the different parts of the market. And they're quite happy with us keeping our focus on just keeping the steady ship and growing the business slowly. So there's no pressure coming from them," said Hisco.
'We try and limit what we borrow from offshore'
As reported by interest.co.nz last December, a new rule implemented by the Australian Prudential Regulation Authority means ANZ NZ must repay its Australian parent NZ$8 billion over five years. In May Hisco told interest.co.nz that ANZ NZ had plenty of time to pay back the NZ$8 billion, various funding sources and thus a strategy for this requirement. However, he also said the repayment meant ANZ NZ would: "Review our [lending] book and if we've got loans that are really mis-priced or priced at a time that was historical and not appropriate for today, we would reprice those loans. And if they [borrower-customers] thought they could do better elsewhere, maybe they could go. [We're] making sure if we've got money out the door it's worth having out the door."
Interest.co.nz recently noted the growth of household debt is now outstripping the growth in household deposits by the most in more than six years. And Hisco acknowledged sourcing overseas funding to meet strong domestic lending demand is part of the problem.
"Yes it is. All of the big banks would go offshore and top up. I would be suggesting most of the banks would top up roughly the same amount every year. And if you go offshore and decide you want to top up for double that, you're going to pay a lot more for it," said Hisco.
"We get a sense for what we can borrow offshore at around competitive rates. And if we were to go offshore and ask for a lot more, obviously the spread goes up and then that has to be passed through as an input cost. So we try and limit what we borrow from offshore. And obviously New Zealand has a limited amount of savings so savings are important, which is why I said in the article I doubt that we could continue to go on lending at heightened levels for a period of time because we'd have to borrow more from offshore to top up."
'If our currency's out of step with the rest of the world people will look elsewhere to trade'
In terms of the New Zealand dollar, Hisco said there was a limited number of things the Reserve Bank could do to try and weaken it. (The Reserve Bank of Australia has had a look at some unconventional tools it could use to weaken the Australian dollar).
"I wouldn't be sure that quantitative easing would be something that they [the Reserve Bank] would be thinking about. The comment was just generally one which is New Zealand has benefited from export trade. It has helped us build our industries here and if our currency's sort of out of step with the rest of the world, well then people will look elsewhere to actually trade. And being a long way from other countries, if we're looking to sell things, particularly if it's export product, we've got to ship it further. So we need to be competitive. And historically the Kiwi [dollar] has been lower. So it's running at a heightened level and a return to more historic levels would, I think, be helpful in the long run," Hisco said.
'Immigration's good for New Zealand'
Of immigration, which with a net gain of 69,090 in the June year, is running at record highs, Hisco said New Zealand benefits from it and acknowledged ANZ does too. ANZ NZ last year told analysts and fund managers that immigrants make the bank revenue from day one and are 10% more profitable than the average New Zealand consumer.
"I think people need to understand that. Immigration's good for New Zealand," Hisco said.
If you look at the immigration statistics the thing that has probably been a bit of a surprise...is this is the longest period where we've seen kiwis not going to Australia and kiwis coming home. And that has really put some pressure on the system," said Hisco.
"As much as people would like to turn that debate into other topics, the main numbers in terms of immigration is trans-Tasman flow. And that has been a bit of a surprise, which is why it's taking a while for the various people that need to adjust to actually pick that up and deal with it."
"The point is we need to adjust for that, and so again that means building more houses which the government is ramping up in consultation with the Auckland Council. That takes time," he added.
There probably aren't many options in terms of actually "tweaking" immigration policy, Hisco suggested.
"We still need trades here. And again what I was saying [in the article] is that everybody needs to look at everything. And if you can make a contribution, any type of contribution, that may help us let the air out of the balloon slowly rather than burst the balloon...."
With this population growth comes pressure on infrastructure, including schools, hospitals and roads.
"It takes time and needs thought around where's the right place to put it, and what should the design be and then get that approved and consult with the right people," said Hisco. "And that's why we need a number of parties right now to fly in formation together to navigate our way through a time where New Zealand's under pressure on a number of fronts. It's partly we're a victim of our own success," Hisco said.
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39 Comments
As strange as Hisco's comments seem, good on him for showing self directed responsibility. It's obvious that the blunt tool of monetary is currently out of action so it's now a combination of macro prudential measures more voluntary responsibility from the banks. It will be of interest to see how far Hisco is prepared to go in terms of sacrificing earnings growth in favour of a more robust balance sheet. How much will the shareholders tolerate?
And obviously New Zealand has a limited amount of savings so savings are important, which is why I said in the article I doubt that we could continue to go on lending at heightened levels for a period of time because we'd have to borrow more from offshore to top up."
Does he mean ANZ's Australian parent bank does not wish to commit more equity capital since we all know it's domestic bank loans that create deposits, or does he still erroneoulsy believe deposits are endowments that precede loan formation and he is ANZ's chief intermediation officer? I hope not.
It certainly seems obvious that APRA knows it's time to find other sources of capital to underpin New Zealand's Australian bank funded residential property ponzi scheme. Namely our own, from government agencies to superannuation savings, no less.
The banks are getting concerned that any fall in the Auckland property market will catch them between a rock and a hard place.
The fall will likely see an increase in risk premium for raising capital and, at the same time, a flight of capital as risk averse depositors flee the NZ banking system. This will feed through to higher interest rates forcing more investor property sales and a subsequent reinforcing spiral.
The banks are raising the flag now so they can say "I told you so" when they ask the government for a bail-out. In spite of the nonsense that is OBR I cannot see any government pulling that lever but personally am not prepared to take the risk.
Unless we do something purposeful about foreign buyers, the only thing that will change is that pretty much everything will sell to them. There are billions of dollars heading our way via Chinese banks, ask Ms Shipley, Don Brash, and they will not be so held to restrictions that other banks are.
The tragedy that is NZ house is still unfolding.
"Immigration's good for New Zealand," Hisco said
Based on what? Is there any evidence for this other than the addition to ANZ's bottom line? Am I better off because I spend half my life stuck in Auckland traffic jams? Am I better off because I can no longer afford to buy a house? Am I better off because wages have been suppressed?
yeah for sure he's defensive on immigration. If immigration stopped, the housing inflation ponzie scheme would grind to a halt, the market would stabilize, the overseas investors would bail and the market would correct to what working class NZers can afford. That would be a massive correction with the banks foreclosing on customers and the banks losing billions. You bet he thinks immigration is good, if he said the opposite he'd lose his job.
Hisco's comments do not call out foreign buyers as a big part of the problem - there is no way NZ citizens should be savaged by huge L/V restrictions while foreign buyers financed off-shore can keep hoovering up our property unrestricted. New Zealand is for its citizens benefit first and foremost, every day of the week.
He also does not make a distinction between genuine property investors and pure speculators. There is a very big difference worth knowing. The former supplies long-term accommodation to the huge numbers of households who cannot afford to purchase housing, the latter have no commitment or interest in housing anyone, only making a quick capital gain. Yet both have been tarred with the same brush.
Loan To Income is just blatantly dumb!
Multiplying income by a number to say how much you can borrow makes no sense whatsoever.
There would be very few first home buyers in Auckland especially.
If this is what the non property owners want then their desire to rent will continue for the rest of their lives.
Blatently dumb? On what planet does that logic true?
Here on planet earth it is a smart move that the amount anybody can borrow should be tied their ability to service the loan.
If credit availability is regulated the prices will adjust to meet the conditions.
Just need a government willing to do something about the overseas launderers.
the bank doesn't care if the average punter pays off the loan in full - In fact that's the worst scenario for them. they end up with no income once the debt is cleared.
The best customer is the one that borrows from them time and time again, and never misses a payment.
Provided the value of the security exceeds the loan balance, and some, then from the banks perspective they are happy.
This is a perfectly good loan.
Its only during times of instability, or where valuations are inaccurate that the bank manager gets nervous.
The California's property boon of the 80's was underwritten by Japanese investors. They purchased as much farmland as was for sale at the time, pushing prices to the stratosphere. Local farmers happily pocketed the money. Then the bust came and the hapless Japanese investors had to sell on a downward spiral. Guess who released them of their burden? The local farmers bought it all up for half the price they had sold and pocketed the profits. And the poor Japanese investors tucked their tails in and headed home.
History may not repeat itself, but it certainly does rhyme. Lighten up on foreign investors!
" Lighten up on foreign investors!"
It's not the same. Japan is a pleasant place to live and Japanese aren't trying to escape a polluted barren wasteland with no future prospects. Chinese are different, they are getting their money out, they are looking to escape. Nothing is the same this time.
Ban foreign buyers, VOTE NZ FIRST.
I just don't understand why Hisco thinks that the RBNZ should raise the LVR higher but won't do this at ANZ independently. If I read this correctly, he says he won't do it unless the other banks do, because ANZ will lose market share to those who keep more aggressive standards. But surely you don't chase market share if its going to end up as bad debts? If he's genuinely concerned about residential investors losing their shirts (and ANZ's loan quality) then he should be acting now in the interests of ANZ shareholders, period. Unless he's actually fearful of losing his job if he's wrong. Is that how oligopolies work, won't make any sensible decision unless there is some sort of collusion or the regulator makes it for them?
ABC, I am amazed that he is taken seriously here. Methinks after years of filling their boots with easy money, they , bankers, can see the game is nearly up and want to go on the record as having "warned" the RBNZ. They all want the regulator to set their rules so their cosy little club can lock-step together to profit. Sadly, there is no orderly way out of this debt mess now. And when the Big Bang comes, the ANZ will be worst off, due to having swallowed National Bank, which had swallowed the Rural Bank.
Let's call it the, 'Greenspan Flaw'. Rand-ist Alan Greenspan supported deregulation on the basis that banks and associated finance companies would act out of self-interest in managing risk and maintain appropriate prudential integrity and reputation for continued profitable trade. Hence self-regulation.
What went wrong with that line of thinking?
For the same kind of reasoning Hisco is probably reluctant to raise the LVR higher independently - profit motive. Rock and hard place stuff, leading to a kind of Mexican Stand-off.
Perhaps Sheriff Bollard should ride on in and help the gunmen holster their pistols before the stray bullets burst any bubbles.
Its a bit of a ...I told you so! Joined by a chorus of NZ economist and others who've been giving the National government a "Hint" of what will happen if they don't change their policy to intervene in the Housing Market to avert a major event in NZ's economic history. PM Key will be remembered solely for this. The National Party won't change their ideology for there to be any kind of Market Intervention .... a new government in 2017 is looking more likely.
Hisco says there is no point in setting their own LVR rules. So ANZ blandly follows the sheep, cannot make decisions for itself which proves it DOES NOT give a crap about the stability of the banking system. If it did it would have some balls and set its own lending rules and perhaps other major banks would follow suit.
You just have to look at the airline industry where one airline decided to screw their clients with myriad immature fees and everyone followed suit. This of course was not good for passengers but the airlines are making record profits on the misery of those passengers. The same could happen here in real estate with regard to making it harder to borrow for investors.
Sometimes a business decides its own policy, not just what the government tells them to do.
It just proves that THE ONLY reason ANZ is not instigating tighter lending policy in order to stabilize NZ banking is because it might hurt their PROFITS in the short term. If they really believed tighter LVR would help then have the balls to do it, not whine about it.
Where do these idiots get educated, Australia?? (I refer to them being Aussie owned). Because they sure do not have NZ financial stability at heart and have no intention of trying to unless told to do so by the nanny minions in Government.
If the Reserve Bank wants to have some inflation its really very simply , all you do is run a bigger deficit ..................simply get the Minister of Finance to spend a huge amount of borrowed money on :-
1) The "so called " creaking infrastructure
2) Social Housing
3) Investing in new schools
4) Sorting out Aucklands roads
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