By Gareth Vaughan
ANZ New Zealand CEO David Hisco says the volume of Auckland apartment developments falling over is not a big issue yet, the Reserve Bank's new LVR restrictions are working well, but the regulator's plan for debt-to-income ratio restrictions will be complex to execute.
Hisco was speaking to interest.co.nz after ANZ posted its annual financial results on Thursday.
New Zealand's Australian owned banks, including ANZ, clamped down on lending to rental property investors buying apartments and house-and-land packages off the plan mid-year, and the NZ Herald recently reported that 35 apartment and townhouse developments in Auckland have fallen over in the past year because of funding and cost problems.
However, Hisco said ANZ hadn't really changed its lending policies in apartment and townhouse development areas.
"Our policy has always been fairly clear requiring a number of pre-sales," said Hisco. "What we have seen happening is that [between] the time it takes for people to get the pre-sales and when they come in and say they're ready to go and we go through the numbers again, quite often there has been a rise in their cost of inputs from their suppliers. So then they stand back and go 'hang on a minute I 'm not going to make the same sort of money I thought I would so maybe I'd rather not do it anyway'."
He said cost increases included rises in areas such as building materials and consents.
"The time from when they start they have to offer a fixed price to unit buyers. Obviously at a competitive rate that's enough for them to make a profit. Obviously [if] they turn around before they start and find their input costs have increased, they either have to do it at lower margin, of which obviously we'd have to be comfortable with as well, or sometimes there's a collective decision that maybe we just defer and think twice about it. So it's not that we've changed our policies too much," Hisco said.
"There's still many, many, many developments going on. So for the news you hear of the one or two not going ahead, there's still plenty that are. So I'm not sure it's a big issue yet. The amount of housing stock that's coming on the market now is increasing so there's a lot of building work going on across New Zealand. There's a lot going on across Auckland right now, which will be aiding supply every day," said Hisco.
The latest Statistics NZ figures showed a significant drop in the number of new dwellings consented in Auckland, where high migration-fuelled population growth is causing a worsening housing shortage. There were 752 new dwellings consented in Auckland in September, compared to 970 in August, 1087 in July and 921 in June. Although the 752 dwellings consented in Auckland in September was up from 643 consents issued in September last year, the fact that consent numbers in Auckland have declined significantly for two straight months is concerning because it corresponds with a new surge in migration to a fresh record high.
'Making this simple is going to be complex'
Meanwhile, the Reserve Bank has formally asked the Government for a tool restricting debt-to-income ratios on residential mortgages to be added to its macro-prudential toolkit. Finance Minister Bill English has, however, expressed caution, raising concerns about unintended consequences. Hisco, whose bank is the country's biggest mortgage lender, is also cautious.
"I think the most complex part of the tool is the definitions because if you're not careful you'd have each bank come out with their own interpretation of the definitions. So making this simple is going to be complex and that's probably our concern on it. How do you get similar treatment on what people call income and how do all players interpret those rules? And what do you set the number at anyway because we're already way above what other parts of the world would be," Hisco said.
He wouldn't be drawn on what an appropriate setting might be.
In 2014 the Bank of England introduced rules through which mortgage lenders must constrain their proportion of new lending at loan-to-income (LTI) ratios at or above 4.5 (four-and-a-half times a borrower's income) to no more than 15% of the total number of new mortgage loans. And in 2015 the Central Bank of Ireland also introduced LTI ratio limits. Loans on primary dwelling homes in Ireland are now generally subject to a limit of 3.5 times loan to gross income. For banks this limit should not be exceeded by more than 20% of the euro value of all housing loans for primary dwelling home purposes during an annual period.
Credit rationing 'a process'
ANZ's economists earlier this week issued a note saying banks are now "actively rationing credit" and "leaning against activity at the top of the cycle".
"In an environment where credit growth is still far outpacing deposits, the former needs to slow and the latter rise," ANZ's economists said. "Lending criteria have been tightened beyond explicit prudential requirements. That’s a) responding to higher economic risks at the top of the cycle; b) trying to bring some balance back to the economy (i.e. stop the current account deficit blowing out); c) responding to shifting regulatory requirements (i.e. deposit and liquidity requirements); and d) common sense; excessive credit can be a key driver of booms and busts. The danger is that curtailed credit restrains housing supply though, so there is no free lunch."
Asked to what extend ANZ was rationing credit, Hisco said rationing was a process.
"I think what happens in practice is that people look at the deals coming in and become a little bit more selective about the quality of the deals coming in, and perhaps might turn away a couple that once upon a time we might've put through," said Hisco.
"I think at the moment one of the things that's helping manage flow is the LVR [loan-to-value ratio] rules around investor housing. Obviously there has been a slowdown in that area, so Reserve Bank has sort of done the work for us in that sense."
When the Reserve Bank moved earlier this year to force residential property investors borrowing from banks to have a deposit of at least 40%, Hisco suggested this restriction ought to be even tougher. He proposed a minimum 60% deposit to "get them [residential property investors/speculators] out." However, now he says the 40% limit is doing the job.
"My view was that if you decided you didn't want investors in the market just get them out. To do that a blunt instrument might have been useful. But the LVR changes actually seem to be having some impact and so there's no need to change where they are at the moment," said Hisco.
Barfoot & Thompson, Auckland's biggest real estate agents, yesterday reported its lowest sales volumes for an October in five years.
*This article was first published in our email for paying subscribers early on Friday morning. See here for more details and how to subscribe.
6 Comments
Clear evidence that bank lending in NZ has been above "prudent norms"!
Ireland has a DTI limit of 3.5. Ireland set its macroprudential limits of DTI and LVR saying they were simply "prudent norms" that "counteract financial bubbles without significant side effects in normal times".
We see here that Hisco has said: "And what do you set the (DTI) number at anyway because we're already way above what other parts of the world would be".
It is clear that lending by NZ banks has been clearly above "prudent norms", and hence the RBNZ urgently needs to tighten its macroprudential measures further, either by: reducing the LVR limit to "investors to below 40%, or by introducing a DTI applying to investors.
The banks clearly cannot be trusted to confine themselves to "prudent norms" of lending.
The legislators inherently come to the party late and can never be relied on as a fix for that very reason. One only has to look at the mortgage securitisation crisis in USA to see that. With inflation rising globally, interest rates must follow. A change in the 'cheap money' story could well see a fall in not only stocks and bonds but also housing. I would suggest that falling assett prices will not be good for our banks. Banking shares are taking a hit globally and are a good indicator of trouble ahead.
Rising inflation means interest rates must follow? Quite the opposite is the case. Money supplies (inflation) are increasing throughout the world and interest rates are in a 30 inverse trend to this. You had better change your name as you know nothing about money.
My understanding Gareth is that the banks have been given the hard word by Aussie to not increase their property development exposures. This means that they will only write a new loan after repayment of the last one. I see this as an endoresement for well organized, and highly capitalized developers. There may very well be a fallout in the developer space once the next round of developments complete. As we will have a number all competing for the same pool of funds. This will lead to price undercutting, risk taking, and undoubtedly a number of failures.
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.