By Michael Rehm*
New Zealand’s housing markets are in a quagmire. Kiwis suffer from the least affordable housing in the English speaking world.
The Labour-led Government is not proud of this and is aggressively crafting policies to re-instill affordability while simultaneously trying to promote home ownership. Successive governments, including the present one, have homed in on housing supply as the euphoric solution to the country’s housing woes. This supply-focused strategy is very popular worldwide and is politically convenient as it spurs job and economic growth.
Unfortunately, housing markets, in New Zealand and across the globe, are systemically broken in a way that expansion of new housing supply alone cannot fix. In New Zealand when supply-side solutions, namely the government’s flagship KiwiBuild, did not yield results, policymakers brainstormed for alternatives. The latest supply solution is the rushed Housing Supply Amendment Act, passed urgently under the long shadow of Covid.
The base assumption at the beginning of Covid was the pandemic would bring on intense downward pressure on house prices. To counter this, the existing demand-side policy measures such as strict loan-to-value restrictions were lifted and interest rates were slashed. Housing was deemed too big to fail. In effect, the Government and Reserve Bank (RBNZ) offered market participants a crystal clear signal that they would not allow house prices to decline, despite the chronic, severe disconnect between prices and fundamentals such as rents and incomes.
As this market signal sunk in, the collapse of interest rates pushed real returns on alternative investments such as bank term deposits into negative territory. The net result was a flood of direct investment into housing. Residential investors in particular went on a home buying binge. While all forecasts assumed a collapse in house prices, the opposite occurred and prices exploded.
During this same time, new housing supply was breaking records each month and the borders were largely closed. Economics 101 did not offer a valid explanation for the antithesis that was unfolding. The Government knew it had to act and in March it effectively declared war on residential landlords by barring investors from claiming mortgage interest costs. The Government has also indicated a preference that the Reserve Bank wield its monetary policy tools to subdue demand from investors while sparing first time home buyers. In July the Minister of Finance added debt-to-income (DTI) limits to the RBNZ’s toolkit.
DTIs are now undergoing a second round of public consultations. It seems likely that if a DTI restriction were to be invoked it would lie at a level of six times borrowers’ incomes. Of course under such a policy setting, exemptions aside, roughly half of investors and one-quarter of prospective first home buyers could not purchase. Therefore it is unsurprising that politicians and the RBNZ are coy to implement a debt-to-income tool. Although the mechanism can re-establish the link between homeowners’ incomes and house prices in the long run, in the short run a DTI restriction is a nuclear bomb capable of vapourising house prices.
The Government is hoping to perform delicate surgery on the market and cut out investors, which they see as a cancer killing first home buyers’ chances of getting onto the property ladder. However, if the Reserve Bank applies a DTI, the result would amount to a poisoned chalice for first-time buyers as they will surely assume massive mortgages and be the first to fall into negative equity when house prices inevitably revert to levels supported by fundamentals.
Although landlord greed seems to be the primary target of the new housing policies, there is an even larger, greedier actor behind the housing markets: banks. Without the eagerness of banks to lend increasing amounts of debt onto the shoulders of owner-occupiers and residential investors, the current obscene prices would not be possible. Arguably, loosely regulated bank lending is the central reason behind the gulf between house prices and household incomes in New Zealand and around the world.
It is critically important to appreciate that when banks expand their lending they create new money in the process. Banks are not simply an intermediary between depositors and borrowers. The creation of new money is an immensely profitable enterprise, polar opposite to running a rental property ‘business’ which is primarily a gamble on future capital gains.
According to the Deloitte Top 200 Index, ANZ bank generated $1.8 billion in after-tax profit in 2020. With 9000 employees, that is just over $200,000 in annual profit (after operating costs and tax) per head. Much of this profit leaves New Zealand to be paid out in Australian dollars as dividends to bank shareholders.
New Zealand banking is unique within the OECD. According to the IMF, Australian subsidiaries account for 86% of New Zealand banking sector’s assets. The next highest foreign ownership is Mexico with 41% controlled by Spanish banks. New Zealand is in a league of its own.
The New Zealand Government has supported policies to dampen residential investors’ speculative demand but it seems reluctant to tackle the housing market head on in fear of hindering first home buyers or bursting the house price bubble. Given the Covid antithesis, which saw house prices unexpectedly skyrocket, the role of banks in inflating the bubble warrants investigation. If banks’ lending behaviour is found to have contributed to New Zealand’s housing quagmire then banks must be held to account and share the pain when the bubble inevitably bursts.
*This article first appeared on Newsroom here, and is used with permission. Michael Rehm is a senior lecturer in property at the University of Auckland Business School.
65 Comments
Banks will never be held accountable. To paraphrase some old guy from ages ago: they have neither a soul to condemn, nor a body to burn.
How many executives went to jail as a result of the 2008 sub-prime mortgage crisis?
How many banks received tens of billions of dollars worth of tax payer money instead?
Yes. The end of the 'Big Short' movie covered it well. Hardly anyone went to jail and they all got bonuses from the Govt bailout. Kiwibank should start a deposit guarantee. This will attract deposits, thus putting pressure on the Aussie/American owned banks to match it. Perhaps the ANZ could complain again about pulling out of NZ.
The Banks are a symptom of poor Government policy and backbone at the end of the day, blaming the bank is like going after a child instead of the parents for poor parenting.
The Bank is a giant bureaucracy that blindly chases profit whilst skirting policy as hard as it can, the Government a populism machine which will skirt public ignorance as hard as it can, and so it goes.
If you want change it starts with the public being informed and then voting/protesting/holding the Government accountable.
Being informed starts with sound media, and is why I read Interest.co.nz over most outlets.
Yes, exactly, in jurisdictions that have good Govt. land-use policies, house prices are approx 3x median income, have high immigration, low-interest rates, and the banks lending according to that risk, ie since prices are stable and do not increase as they do in NZ, they require decent deposits to ensure their lending is secure.
The banks are only doing indirectly what the Govt. allows them to do via our poor housing policies.
NZ has repeatedly bailed banks out of their irresponsible practices. NZ has also bailed out large investor companies from cases of actual financial fraud with the perpetrators seeing no jail time. NZ has a tradition you can say of protecting the vested interests of banks and protecting the banks billion dollar profits. You can even see during covid the RBNZ practically rained cheap credit down on banks while pulling the basic social supports of the most vulnerable in the country.
You could probably argue that Government policy allows for the Banking system to create to much new money, inflating prices in certain sectors, and therefore taxing Kiwi's in all but name.
The Reserve Bank is only one avenue for which new money is created remember, and inflation the most insidious tax.
But yes, people seem to be thinking QE started in 2007/8.
When, what generation, will finally wake up and realise that companys, operate within the parameters of the law. Its like blaming commercial fishermen for the condition of our inshore fishing stocks..They operate within the laws and regulations made by the law makers..So called corporate responsibilty is a myth, always has been and unless somehow legislated for (and hasnt been done so in 100s of yrs) because far too complex. Our enviroment to fiscal policies, road speed limits etc, end of the day fall back to what the treasury bench /law makers and regulators say..
Often we get "industry guide lines, or industry self regulation.. A pie in the sky, voluntary action that always markets well, often suggested by the industry's central organisation.. usually the lobby group. No legal binding or able to make a level playing feild for competors. Just an interm delay period till voters pressure put enough influence (occasionally) to introduce legistation.
And when laws regulations are passed they must be well thought thru and well written to reflect the intention and uphold that in practice. Once again falls back to the government...not banks not business.
Regime head Ardern [before the last election] PUBLICLY stated she 'DID NOT want house price falls'.
Robertson PUBLICY said and continues to say he can make housing more affordable without house price falls. He PUBLICLY has asked kiwis to wait a few decades.
This is what NZ voted for.
Banks have migrated away from lending to productive business enterprises because the risk weights can be as high as 150%. Thus around 60% of NZ bank lending is dedicated to residential property mortgages owed by one third of already wealthy households
And separately, China is pushing ahead with a "5 year trial" of a new property tax on homeowners. Their goal is to "guide rational property buying".
That’s just what is needed in order to deter land becoming a speculative vehicle. I and others have urged a policy of land taxation in order to collect the land’s rising site value, so that it will not be pledged to banks for mortgage credit to further inflate china’s housing prices. - Link
There is no bank deposit insurance in NZ (in contrast to most other advanced economies). If a bank goes bust - because of a housing market downturn - it takes the savings of New Zealander's with it. It's a gun held to the head of the govt. The government will have to bail any struggling bank with the money from taxpayers (including those currently renting).
A good reason not to do away with the CCCFA's personal responsibility clause for bank directors, but to increase it.
We saw in Ireland, Greece and Cyprus how the banks are ready to strong-arm governments when the ship hits the flan, so a little personal responsibility doesn't go amiss.
"Does the role of banks in inflating the housing bubble warrant investigation?"
Two points :
1 : Does one need investigation.
2 : If investigation is unbiased, it is bound to confirm, than what happens to Central Bank - Father of all Banks.
Why this question, only because answere is obvious and why now ? Why not when crime was been commited or is it because now writing is on the wall so start blame game to confuse.
The appetite for risk in commercial banking is insatiable but the system is being backstopped by RBNZ and Government. Commercial banks know that neither institution would really allow a deposit taking bank to fail.
Also regarding house building much more could have been done much sooner. Everyone knows the RMA and councils impede development but no one has really had the willingness to do anything but fiddle around the edges of policy.
Yes banks are responsible for house price inflation. No doubt there. You don't need an investigation. Any blind person can see it too.
But our government doesn't want or can't do anything as major banks do not care about them. They are so offshore based and don't give a damn about it.
The banks are losely handled by this government. So in the end its the government and their policies which brought us to this position in the country.
Is a big rot.
Banks have complicit in this bubble since much of house prices rises are created by banks competing to provide the biggest loan. That said, if the government hadn't made it so difficult to develop property, the free market would have solved the supply shortage meaning banks would have less leverage. It seems banks and government have been shafting tax payers in everyway possible with new taxes and irresponsible loans, but what they have failed to realise is, when people go bust, there is no money to keep taking and they themselves go bust.
This is going to get ugly and I have no sympathy for the banks and government. I have sympathy for everyday kiwi just trying make a good life for their families. We've been shafted!
They have made this country unliveable for those without rich parents.
Thumbs Up for a good article. Banks are the accelerant in fuelling the fire in house price hikes. In cahoots with real estate ticket clippers. Obviously rich pickings for those with their snout into the trough. No wonder the yells, squeals and screams against the CCCFA. All in the name of charity for FHB's
Great article. "It is critically important to appreciate that when banks expand their lending they create new money in the process." The question is, do politicians know this? What percent of economists agree? The Bank of England explained this years ago but my impression is most people are unaware of it. We need a fundamental rethink of how money is managed in our economy but so far I see little appetite and mainstream economists not exactly leading the way.
Hence why Bitcoin was invented. One can attempt to store value in some other scarce thing like property or gold but good luck buying property now days, gold is known to be manipulated. Interest rates aside,every new currency unit that BANKS create devalues the units that you hold. The wealthiest/connected people obtain access to the best rates and newly minted digits before anyone else, or are creditors. There is virtually no way for the average person to get ahead. More detail here https://sahilbloom.substack.com/p/how-the-rich-get-richer
I'm all for bashing banks who basically have a licence to print money and make a profit. However, banks operate within the regulatory, policy, and authorising framework set by Government and their central banks.
Governments could, for example, limit banks to a defined set of simple banking functions: savings, loans, checking accounts - with no selling on of mortgage securities.
Banks also now control our business groups and influence our society outside of regulation. Look at Business NZ... CEOs PhilOIreilly and Kirk Hope... both ex Westpac.....what a f’in con incidence!
14500 members all paying their dues for a lobbying group promoting an economy their kids can’t buy a house in!
they have corrupted our institutions!
The only time I enjoyed playing monopoly was when I got to be the banker. The rest was a race to the bottom. Banks have a critical role to play in a capitalist democracy & some banks will do better than others. I think it was almost a billion dollars to bail out the BNZ many years ago, an extraordinary figure at the time. It was a shame govts can't run anything properly, as it would have good to keep it local. NZ is just another Australasian state in this reality, with most of our banking profits heading offshore. When will we learn?
Which brings me to the pitiful state of our education system once again, however, that's another story.
Yes, I remember that BNZ fire sale. Didn't cronies Fay and Richwhite clip the ticket big time? And what about the ASB too? Goes to show that NZers can't run banks. To me Kiwibank doesn't look quite as secure as and has a lower rating than the big four Aussie banks.
Yes the banks culpable...as are the regulator (RBNZ) and various governments, but i fear that the desire to enjoy the benefits of belonging to the club will continue to hamstring any meaningful reform here until such time as the major players are forced by events to do so....and of course it is all too late now anyway.
'Economics 101 did not offer a valid explanation for the antithesis that was unfolding.'
Yes, it does.
If an increase in supply causes the supply components to be supplied at a slower rate than the demand they are needed at, then this causes the price of those components to increase.
The supply restraints are the non-stability of all the following to meet demand in real-time; land use and supply, excess time to consent, cost of consenting, labour, and then the extra supply constraints that Covid introduced of logistics and material supply costs.
And since all savings are captured by the most restrictive parts of the system, anything they do that increases demand either for the purchase of houses (like lower interest rates, homeownership grants etc) or the supply of those houses (ie the materials, labour needed, etc.) will cause prices to increase.
If you want to lower prices, you have to remove the restrictions, the most important being land use, followed by consenting costs. The rest are secondary and will mainly solve themselves if the first two restrictions are sorted.
Everyone benefits when house price rises and including banks and those who don't own their own houses.
Profitable banks uplift Kiwisavers, keeps the economy going and even uplift the unemployed or full-time state beneficiaries; hence, I see no reason to be envious of banks making money for all stakeholders.
As the revolving economy grows so does taxation and that we had seen enabled the government to increase the benefits for the unemployed and full-time WINZers.
So why are we eager to bite the hand that has been feeding us?
That I say, would be rabid mentality.
Man this article reads like it was written by a labour candidate.
For a lecturer at Auckland University and someone who quotes "economics 101" I really wish he had gone on to economics 300 or 400. Land is the scarce resource. Plenty of trees making new wood, no one making new land.
Then we get the usual banks being foreign owned etc. Lets go back to the root cause. If you create an artificial limitation on the supply curve (yes economics 101) price will rise as you move along the curve. Address the supply constraint and curve will shift to the right and the price will fall.
But no, we must build up, concentrate, consolidate etc.
Yes… the banks have stoked the housing bubble for the last 2 years due to the fact that capital requirement for residential mortgages is substantially lower than for SMEs meaning a higher return on capital for the banks
SMEs employ the owners of these houses but a left to sink or swim in the current difficult trading market
the capital requirements need to be reviewed to have a level playing field for everyone !
The author needs to step back a bit and look at the RBNZ. Doesn't anyone remember them saying the banks should "lend courageously"?
In March 2020, the government and RBNZ were sh*t-scared the housing market was going to implode. So they did everything they could to prop it up. They went hard and early. Too hard and too early it seems. They inflated the housing market by 30%.
Great article. The same issues apply to numerous other countries around the world. At its core lies the great neo-Keynesian experiment conducted by central banks of providing dirt cheap credit to foster the illusion of economic growth, most of which has ended up cratering asset price bubbles, residential real estate being one of them.
Seems to me the banks are simply operating within the framework provided by Central Bank policy. When they detect trouble ahead, as will inevitably happen, the credit valve will be slammed shut regardless of DTIs or anything else.
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