By Frank Newman on 15th November 2014
Last week the Reserve Bank released its half yearly Financial Stability Report. It’s purpose is to report on the soundness and efficiency of New Zealand’s financial system and the measures undertaken by the Reserve Bank.
In the media conference that followed , Reserve Bank Governor Graeme Wheeler commented on the possibility of regulations to curb buying by larger property investors (those owning more than five rentals).
The Stability Report itself made no mention of the need for such controls but the media made much of the Governor’s comment and as expected politicians jostled their way into the limelight with one-liners about home affordability, but more on that later.
In amongst the 59 pages in the report is some interesting information. The Reserve Bank reported our banking system is, “well capitalised, funding and liquidity buffers are above required minima, and non-performing loans continue to decline… each bank has the capacity to manage a range of significant negative events.”
The report went on to describe four key economic risks:
- Imbalances in the housing market (between demand and supply);
- High levels of indebtedness in the dairy sector;
- The potential effects of a slowdown in the Chinese economy; and
- The banking system’s reliance on offshore funding.
He said the balance of these risks had shifted in the last six months: The housing risk had eased because of the loan-to-value ratio (LVR) measures, but risk within the dairy sector had increased.
The impact of the LVR limits has been obvious. In the year to September 2014:
- House prices inflation nationally declined from 9.4% to 5%.
- In Auckland house price inflation declined from 16.4% to 8.6%.
- New lending with a LVR ratio >80% went from 24.4% of lending down to just 7.3%, and now accounts for 16.5% of total lending against 20.5% last year.
That’s a dramatic turnaround and on that score the LVR policy has achieved its purpose.
On the future of the LVR policy, it reports; “The Reserve Bank intends to ease or remove the restriction when a sustained moderation in house price inflation is achieved, and when there is little risk of a resurgence in housing market activity.” While immigration remains strong, the LVR policy will remain in place.
With respect to the dairy sector the Reserve Banks says; “The forecast dairy payout announced by Fonterra for the 2014–15 season of $5.30 per kilogram of milksolids (excluding dividends) is well below the payout for the previous season of $8.40. If realised, it would be the lowest payout in six years…Based on the recent outcomes of international dairy auctions, the payout could be lower than currently forecast [Westpac is expecting $4.80]…some highly indebted farmers are expected to experience negative cash flow at the reduced milk payout.”
That is certainly a risk for regional economies.
With respect to the banking systems reliance on offshore funding, overseas lenders now provide 30.1% of bank funding, down from 38.3% in 2007. That is due to the slow down in the demand for credit and improved domestic savings, which is good news.
Not surprisingly a number of commentators and politicians are calling for the Reserve Bank to regulate property investors. They say these large investors are pushing up prices and elbowing out would be first home buyers. That, of course, is untrue and ignores the fact that investors are not buying more homes than they did previously, they are simply buying a greater percentage of homes sold because fewer are selling to first home buyers due to the LVR regulations.
Unfortunately the home affordability debate has focused on property investors as the villain, instead of looking deeper into the issues. Ironically, those who complain about high property prices are the same people who at each election call for GST to be removed from fruit and vegetables. They say nothing of the impact of GST on those building their first home (something the government is encouraging via KiwiSaver), even though avoiding GST on fruit and vegetables is easy (grow your own) but avoiding GST on a new home is impossible.
Let’s take the average new home of 200m2, that costs say $2,000m2. That’s $400k. Of that $52k is GST and goes to central government! Local government also has its hand out, and will take at least another $20k-$30k in fees. In fact, the house itself is not that unaffordable – the fees and taxes are! Where are the calls from Wellington for GST to be removed from houses built for first home buyers? Who are the real villains in the home affordability story?