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As MPs probe bank competition, Andrew Laming calls for an honest discussion on how capital allocation drivers are set

Rural News / opinion
As MPs probe bank competition, Andrew Laming calls for an honest discussion on how capital allocation drivers are set
Lending by sector

By Andrew Laming*

When we made our submission to the Rural Banking Inquiry, we went back into the Reserve Bank data to look at how each main banks' agri lending market share has changed over the last six years.

The changes in market share are really telling, but what’s more interesting is the actual dollars that have been lent (or as the case might be, haven’t been lent) when looking at other sectors such as home lending.

Let’s look at the graph of the market share first:

Picture3-Oct-01-2024-04-00-35-1574-AM

* The data includes all Agri lending done by each main bank including any parent company branch lending.

The biggest gainer, Rabobank, have moved from 16.27% to 21.68% market share over this period. In that time, they have moved past ASB, and as of June, have snuck ahead of BNZ to move into second place. *

Westpac has also made some gains over that period (0.81% ahead) although at one stage, they were 2% up but have since lost ground.

ASB have been largely flat during this period.

The biggest loser in market share, ANZ, have dropped 4.5% of market share - from 28.56% to 24.09%, with no interruption to their downward trendline. 

BNZ has also shed 1%, although they have regained from a lower point of 2% from two years ago.

When we start looking at the actual volume ($’s) of lending we can see the major issue with NZ capital flows.

The below table shows the change in lending volumes from each bank over the same period from 2018 to 2024 for both agri and home loan lending.

Picture1-Oct-29-2024-10-39-47-2250-PM

Put plainly, this means that over the last six years, whilst $111bn extra dollars have been advanced to housing, the main NZ banks have only allocated $2bn to agri.

Take out the dedicated agri lender Rabobank and it’s even worse - it means that over that period, the main banks have collectively reduced lending to the primary sector by $1.5bn – even though this is the powerhouse of our export revenue. This is made worse as this reduction was at a time when there was a significant expansion of credit both world-wide and in NZ, meaning agri unnecessarily suffered as an investment class.

NZ’s largest lender, ANZ, took over $2bn out of agri during this time, whilst pumping $32bn into housing. But the other banks were little different.

Even Heartland, an earlier upstart in agri lending, has clearly moved to focus their growth on home lending – their agri lending growth has been flat, but their home lending growth has leaped ahead a staggering 28% compounded growth per year.

Looking at the small bank players (“other”), they have collectively reduced (or chosen not to participate) in agri lending and have instead gone large on the home loan sector.

This, along with Kiwibank's similar home loan growth, speaks volumes as to how new and growing lenders view the currently regulatory frameworks and market settings when planning their growth.  

Given there is a current government focus on both banking and how we kick start NZ with further export growth, we need to have an honest discussion how our capital allocation drivers are set. This is at both bank and Reserve Bank level.  

While discussion on margins and bank profits dominate the headlines, bank structural issues that encourage lending to housing at the expense of the productive sectors are not being canvassed enough (see our recent submission for the issues and solutions as we see them).  

These structural issues also make lending to agri (& business) more expensive (the margins are almost double in agri on average and in some cases can be higher), even though agri lending losses are actually very low. This is a massive fiscal drag on the NZ productive sectors.

This is self-perpetuating as well - meaning that the majority of new savings, deposits or external wholesale capital that is raised by the main banks continues to feed into the housing sector reinforcing this as an investment class for new investors – and at the same time starving the sectors of capital that are more likely to grow NZ’s economy.  

These are the real questions that need to be asked at the Committee hearings.  

If we do nothing new, or simply seek to increase competitiveness in the home loan market, the majority of NZ’s future capital will continue to flow into the housing sector.    

Does NZ want a future that has even higher house prices, or do we want an advancing productive and business sectors that have the capital enabled confidence to continue to develop new product offerings, invest along the supply chain, incorporate new technology, develop away from marginal farm systems, bring in the next generation of talent and ultimately invigorate NZ?

There are 370,000 New Zealanders employed in the food and fibre sectors of NZ.

The sector makes up 82% of all our merchandise exports - almost $60bn in export receipts.

The sector has a greater share of our self-employed businesses than any other sector.

Time for a rethink.


*Andrew Laming is a founding director of NZ Agri Brokers Ltd (NZAB) and is based in Timaru. 

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27 Comments

"If we do nothing new, or simply seek to increase competitiveness in the home loan market, the majority of NZ’s future capital will continue to flow into the housing sector. "

Apart from the dairy conversion boom that started in the late 90s and has pretty much maxed out its capacity now, where is the latest land use change?....forestry for carbon credits is not exactly employment providing nor 'innovative' nor does it provide the opportunity for value add.

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Clearly mis aligned capital allocation

”” Put plainly, this means that over the last six years, whilst $111bn extra dollars have been advanced to housing, the main NZ banks have only allocated $2bn to agri.

Take out the dedicated agri lender Rabobank and it’s even worse - it means that over that period, the main banks have collectively reduced lending to the primary sector by $1.5bn – even though this is the powerhouse of our export revenue. This is made worse as this reduction was at a time when there was a significant expansion of credit both world-wide and in NZ, meaning agri unnecessarily suffered as an investment class.””

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"Does NZ want a future that has even higher house prices" Of course it does! The proof of the pudding etc.

"Or do we want an advancing productive and business sectors" Obviously not.

"Even higher house prices" might look good. Until that breaks. And when it does, all that balance sheet 'wealth' evaporates into a cloud of.... I was going to say methane, but by the look of the above, there won't be much of that about.

Debt isn't Wealth. Food to eat is Wealth. A productive Job is wealth. A Family Home, that is affordable without being financially crippling, is Wealth. "Even higher house prices" supported by more manufactured Debt and not supported by Real Wealth, is a disaster waiting to happen.

 

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A productive Job is wealth. An affordable Family Home, that is affordable without being financially crippling, is Wealth.

Totally agree with you however this view has unfortunately become outdated and old fashioned. We have become obsessed with 'feeling' rich which supposedly equates to success and being the envy of your peers. Therefore cheap money, a speculative housing market and huge amounts of debt is often the path we chose. Will this end badly? Probably but that is for someone else to worry about.      

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What percentage of the burgeoning $billions being lent is though due to household using their mortgage as a current account. In other words as the value of their home increases they simply borrow more pro rata. The banks have been  rampant at this sort of thing.We kept getting unsolicited increases to our credit card limits with our then bank covering letter advising blithely, that because of our overall financial position they were comfortable “to support” us spending more. The obvious, basic and drastic point is that the more equity a household borrows the less they actually own. We had to intercede in extended family a few years back where a young family who had bought a property in 2000 for around $150k which had by then risen to about $375k and they were about to go out and buy a bloody Maserati! Their bank was quite happy to increase the mortgage, virtually on demand.

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@ bw - "Debt isn't wealth".

True, but effective debt helps to create wealth. Wealth has nothing to do with how much money you get paid, or how many materialistic things one manages to accumulate over their lifetime, wealth has everything to do with how long your money can last long after you stop working. Now for most people in NZ that's about 4 to 8 weeks, not very long at all.

Infact our entire global monetary system is built out of debt. We haven't had "real money" driving our monetary system since the 1970s when Nixon took gold away from backing money. Our money is now backed by nothing tangible, but it is now backed on a promise. That's what "real money" of today is, it's a promise. Our monetary system only has value because it is backed by a government promise that it holds some kind of value. There is nothing tangeable backing it except a promise. This is debt, which of course is another form of promise, a promise to pay back what one owes.

You are over 50 years too late if you are expecting to "get wealthy" using ones hard earnt after taxed dollars. But more power for you for trying I suppose. Can pass on poor with very little to leave ones family & children, no legacy, no passing on the batton to the next generation, but at least you'll have your ethics intact.

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State mortgages fixed at 4% forever for owner occupiers and social housing would:

  • Stabilise house prices
  • Get rid of the boom and bust
  • Help our construction sector build steadily
  • Reduce current account deficit by about $4bn (by reducing bank profits)
  • Lead to and increase in home ownership
  • Expand Govt balance sheet and smooth revenue
  • Focus banks on business lending
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Govt gave state mortgages by the thousands for many decades - you know that magical time in the mid-20th century when we built houses and they were affordable, and we became one of the richest countries in the world? Then we liberated the financial system and everything went to crap.

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Exactly. Up until then both Labour & National governments recognised the basic tenet of the nation’s citizens having at least a sporting chance of owning a roof over their head. State Advances, capitalising the family benefit and a good number of building societies and local  savings bank that lent specifically to home ownership. Then came rogernomics and the trading banks were allowed to muscle into an area from which they had been purposely precluded and away it went from there.

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Isn't the crux of those articles that 2% involves govt subsidies as it's average long term borrowing cost is around 4%? If you offered state mortgages at 4% it would pretty much eliminate that subsidy would it not?

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Yes, it would, but don't let the facts get in the way!

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Yes the problem with New Zealand's housing market is that there isn't enough debt and capital allocated to it.

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Pardon?

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Houses and Herpes, it's what we do.

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The Theory is simple. Debt goes up (it's just a number on a spreadsheet after all); Wages go up to make the Debt affordable, Prices rise, and so we're back into Equilibrium at a higher Denominated Price Level. Easy. Old Debt gets more easily paid off by New Money (Debt). But....

When per Net Job creation doesn't keep up (technology and population increase); and so wages don't rise (in fact they fall in Real terms) yet Debt keep being created to fill the purchasing power gap of Higher Prices/Wages, we hit a problem. And even more, cheaper Debt just makes that problem both worse and the untidy resolution of it all the worse and sooner.

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The bad investments are chasing out the good, or at least swamping them, enabled by overly cheap capital the price of which has been artificially distorted (down) by the state. It's happened before and it'll happen again. Ergo productivity suffers.

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Add in "business lending" which is actually backed by houses, the proportion of non productive allocation of capital is even greater. 

What politicians don't seem to realize is that  Germany-style property ownership regulations is the only way that capital can be diverted toward productive opportunities. Can't have it both ways.

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Would probably help in the short term. But the primary cause of the too-cheap capital that's been spent in housing is the market distortion by the rbnz (by setting too-low interest rates). So, such regulations would just be another distortion introduced to solve second-order problems caused by that first distortion. (And of course there is a risk of unforeseen second-order effects from such regulations.)

So unless there is reason to believe the rbnz has somehow developed the ability to distort the market in a beneficial way - which is simply unrealistic - it's better to remove the first distortion and let the market price all capital. In other words, let the people who own capital decide what it's worth to lend rather than have the government tell them what it's worth.

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In other words, let the people who own capital decide what it's worth to lend rather than have the government tell them what it's worth

What makes you think that the relative price of debt between sectors would change significantly?

A residential property as security vs half a warehouse load of last year's Playstations or Crocs.  Seems pretty obvious which is a better security.

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Your argument is wrong headed if you accept the qty theory of credit: credit creation for non-productive purposes ultimately leads to persistent inflation and boom-bust cycles, which seem to be increasing in magnitude and destruction. 

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It's not the interest rates that incentivise mortgage lending, it's the risk weightings! 

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Yes Jfoe. Let's not forget that the Ponzi is also somewhat of a foundation for lending to much of the productive sectors. Your suggestion of credit creation at lower cost makes sense. But ultimately if that kind of lending indirectly feeds the Ponzi as it has from private credit creation, then it's a waste of effort. Whatever the solution, people need to protect themselves from monetary debasement. That realisation is becoming more clear by the day. It will become a central topic at the water coolers and BBQs eventually. 

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Turkeys voting for an early Christmas?   Most MPs have at least one house, some like our present Dear Leader, a few more.   He is “sorted “.  Working for the long term benefit of the many?  Not so much.  Examples JK and Auntie Helen, no shortage of IQ, skills, and the results?  Hindsight, a sick joke. We keep voting for them, blue or red, all the same.  Some of the problem is the “gotcha” creed.  Most of it is short term thinking.  And FOMO.  Safety in numbers, can’t stand out from the crowd?  As an experienced farm accountant, I saw innovation needs deep experience and focus. We still have this capacity, most obviously in our foiling yacht racing. Seemingly hated by the many, can’t see the grit, the determination. What makes the boat go faster?  Bankers, I never met a Banker with any ideas.  But we give them this allocation power.  Who is the turkey?

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Part of the issue may also be our new house numbers have increased markedly over the past 8 years as population has rapidly increased. Most of these need funding. On the other hand farm numbers aren’t growing, there’s no new land to break in. As such farms are trading in a set size pool with only land use change or new development within to fund. It’s a bit like no new houses just Reno’s or rebuilds.

Beside that it’s been very poor income on sheep and beef land and they simply can’t afford to borrow more - they might want to but the financials don’t work. Even dairy has been deleveraging over the past decade.

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A stronghold of the NZ economy historically has been the export of produce. Firstly  the commonwealth, specifically the home country the UK. The UK entering the EEC forced diversification and at the time dairy, meat & wool took up the challenge very effectively. However nowadays there is more than a sense that the farming of that shape and time,  is no longer sustainable. That is simplistically, a farm as a business is struggling to remain profitable. At the crossroads then you might well think especially that  out of the above three, dairy is now dwarfing the other two.

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Ask this question - are you making more margin on your fixed mortgage rates now than what you were making at the same time in 2023. The answer is yes (all the factual data backs this up circa 1% MORE margin across all the terms 1 - 5 years) - remember that is MORE than they were last year. Then ask them why they held up the 1 year fixed mortgage rates while dropping the longer terms. The answer there is everyone believed interest rates were going lower so they rolled their mortgages over at the shortest terms generally 1 year so the banks maximised their margins by keeping that rate relatively higher. So members of the Committee please ask the right questions.

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