The Dim-Post

July 21, 2016

Why are banks bearish on housing?

Filed under: Uncategorized — danylmc @ 12:56 pm

Via the Herald:

All four of the major banks have begun to apply new lending restrictions to home loans – six weeks ahead of the Reserve Bank’s official September deadline.

Earlier this week the central bank announced plans to introduce new bank conditions requiring most loans to residential property investors to have a minimum 40 per cent deposit.

Most lending to owner occupiers would also require a 20 per cent minimum deposit with both changes rolled out across New Zealand.

While the deadline for the changes is September 1 the Reserve Bank said it expected banks to follow the spirit of the new regulations immediately.



  1. And that makes them bearish, or that means they are good at following govt direction since their core competence is following govt direction and lobbying for regulations that protect their profits?

    Comment by PaulL — July 21, 2016 @ 12:59 pm

  2. I think it’s simply because they want to appear to be good corporate citizens in an effort to head off direct regulation.

    Comment by Gregor W — July 21, 2016 @ 1:10 pm

  3. But are all these banking restrictions just driving the housing prices down so foreign buyers get easier pickings?

    Presumably, someone coming to NZ with cash financed at 100% from an overseas bank doesn’t have to give a fig about NZ banking restrictions?

    And does it even matter to investors anyway. They just take money out of their mortgage on their first house from bank A and then buy a house with the money through bank B. As long as the investors put their sign to it being true, Bank B has no incentive to do any checks – anything that goes wrong lands on the investors not the bank.

    Comment by mjpledger — July 21, 2016 @ 1:53 pm

  4. They think there is likely to be a property market correction in the Australasian market and have already voluntarily placed similar restrictions on investment loans (30% minimum deposit) in the Australia.

    They might think this, because:

    Oversupply – Australia has been in a property boom at the same time and for the same reasons as we have. However they, unlike Auckland, have spent the time building dwellings, apartments and commercial properties. They will have built so many apartments in Melbourne and Brisbane they will have an oversupply of dwellings in 2018, in Sydney by 2022. You will have heard of Arthur Grimes theory that if we were to build a massive number of homes in six years we would crash the Auckland property bubble – that is basically what Brisbane and Melbourne have been doing since 2012.

    Global Conditions – there is a strong likelihood that America is going to elect a egomaniac to the Whitehouse, who will start a trade war (or just a war) with China. Europe is performing badly and Chinese growth is worrying.

    The Australian Government – the Liberal senate majority is currently held by Pauline Hanson(?) + one other.

    Comment by unaha-closp — July 21, 2016 @ 1:57 pm

  5. There’s also the issue of the last one of the banks to implement the limits is the one that’ll get the riskiest balance sheet. In a (now) more cautious industry better to lead on safety than follow.

    AKL house prices are also getting to the point where an affluent double income household can’t afford a 30yr mortgage on the average house. The practical limits of affordability have been hit and a rise in interest rates could immediately create bad loans.

    Comment by Richard — July 21, 2016 @ 2:10 pm

  6. “They just take money out of their mortgage on their first house from bank A and then buy a house with the money through bank B. As long as the investors put their sign to it being true, Bank B has no incentive to do any checks”

    Every time you even ask for credit even if you dont go through with it, its listed on your credit report- which are especially designed for banks. An investor who is ‘gearing up’ by taking on more debt isnt going to be that attractive to banks right now.
    The RB limits arent applied to individual investors just banks as a whole, so Mr Big can still get his /her loan at 25% LVR but mum and dad investors with not a lot of nett worth may face 45%. Those with stable jobs like teachers or doctors will be good but those in risky occupations like electricians could be turned down or even higher LVR.

    Comment by ghostwhowalksnz — July 21, 2016 @ 2:25 pm

  7. Because the market is so very obviously in a bubble and because housing crashes are particularly unpleasant for banks which make most of their money in mortgage lending.
    Maybe the incentives are actually in the right place, your typical banker gets a base salary plus an annual bonus based around how the bank is performing. It is in the interest of bankers for their to be nice steady positive growth which allows their base salary to grow and bonuses to be healthy. A property market trucking along at 6-8% annual cap-gain is just perfect, a string of years with 14-15% cap gains followed by a big correction and 2-3 years of plateau is bad. The 2008/2009 crash was miserable for the banks, salaries were frozen, bonuses were cancelled, contracts were terminated, overseas holidays postponed, investment properties sold off cheap, cars not upgraded – people were really suffering (I mean obviously not suffering like poor people suffered at that time, but still suffering).
    Also – the banks care about the health of the mortgage market, currently first home buyers are all but priced out – that is their future customer base.Banks don’t care that a lot of people have seen the equity in their home increase by 40% or more; they don’t make any profit of valuable houses only big mortgages (in fact increasing peoples equity means they are less likely to turn to profitable loans or credit cards for short term spending because they’ll have access to mortgage finance at historically low rates).
    ANZ, or any of the others, don’t want a property market dominated by fewer and fewer wealthy experienced property investors (who are notoriously hardball at negotiating down rates and shopping around) they want lots of ordinary families, up to their eyeballs in debt paying 30-40% of their take home pay for housing which they pay of slowly over 30 years. You can achieve that more effectively with an average house price of $650k than you can with $1m and if the price drop is brought about by a big supply side boost then the total lending pool doesn’t necessary drop that much it just gets spread out across more customers (which means more associated credit cards, bank accounts, kiwisaver and insurances than you’d ever be able to sell to a single investor owning 20 houses)

    Comment by DefinitelyNotABanker — July 21, 2016 @ 2:39 pm

  8. Its worth noting the timing. The Reserve Bank has just run a range of ‘stress test’ scenarios against the banks balance sheets. RBNZ came away happy that under all scenarios our banking sector doesn’t suffer a major collapse. The banks internal view of the results may not be so rosy. I suspect that under even moderate plateau or small drop scenarios the banks might need to implement salary freezes or cuts, sinking lids on employment, cancellation of all bonuses, layoffs etc. A scenario which passes the fiscal system risk stress test for RBNZ might nbe a long way from passing the personal risk stress test for senior bankers.

    Comment by Richard29 — July 21, 2016 @ 3:09 pm

  9. It’s possible they’re battening down the hatches in the event of a worst case scenario, which would be the Auckland housing bubble popping very loudly. Are the banks really as resilient as claimed? Because if not, depositors will take fright and stuff their cash under the mattress all at once.

    Comment by Kumara Republic (@kumararepublic) — July 21, 2016 @ 4:07 pm

  10. I’m not convinced that salaries/internal costs would be the difference between broke and not for a bank. They work on reasonably thin margins – their internal costs are probably 2-3% of their lending costs. If the market goes down 15%, that’d eat most of their capital. Sacking a few people won’t make that difference.

    Comment by PaulL — July 21, 2016 @ 5:44 pm

  11. If the market goes down 15%, that’d eat most of their capital.

    The bulk of loans were taken out before the market went batshit insane, even a biggish drop like 15% would still have people with more equity than they had when they took the loan out. As the banks don’t own the homes the problem isn’t the drop in prices it’s people’s ability to pay the loans back. Unlike the pre-GFC Irish and US markets (and the NZ Finance company sector) the people who’ve taken loans are going to unable to repay their debts. It’s only those folk who are leveraged to the point that they can’t absorb an interest rate hike that would be the problem and that’s unlikely to be enough to ‘eat most of their capital’, not to say that their profits could be pretty badly hit if new lending dives and bad loans jump on the back of a market plunge.

    Comment by Richard — July 21, 2016 @ 6:25 pm

  12. Banks are notoriously risk averse (just miss a mortgage payment and see what happens to you).
    Property Investors” are riskier than (hopeful) home owners.

    Banks are nervous about how many “investors” they have on their loan accounts.

    Too many risks might foil any attempts at another GFC.

    Comment by peterlepaysan — July 21, 2016 @ 7:22 pm

  13. They want to head off the loss of market share to second- and third-tier lenders who can only compete on credit quality. So long as credit quality of the borrowers stays high, the competition can only be on price and then the big banks maintain market share as they have the lowest funding costs. And without more competition net interest margins, currently high, stay high.

    Comment by BP — July 21, 2016 @ 8:42 pm

  14. Lovely thread, Danyl.

    Unaha-closp, you may have revealed the trump card, if I may pun so badly.

    MinDef White Paper showed a hockey-stick increase in projected budget 2015-2017, in the document they shared during their policy roadshow last year. So planning for a major regional conflict has been in situ for probably about 2-3 years.

    As someone with academic interests in both policy and history, the crossover is very interesting right now. We have the exact same conditions that existed in the run up to WW2 – the GFC has not been a static event, but dynamically changing the fiscal conditions around the globe.

    China was a tiger economy, sucking up coal supplies as they built infrastructure for a decade. Greedy countries sold coal like there was no tomorrow.
    Nobody looked at what was being built – China has largely upgraded its energy infrastructure over that decade, moving to renewables in a huge way.
    They stopped buying coal, and the bottom fell out of that market – to Gina Rheinhardt’s dismay, as her mining revenues were giving her some reasonable sway over the Aussie political environment.

    USA moved all their manufacturing to China (& the associated pollution) decades ago.
    China may get the last laugh on them, as they now control more global trade than any other nation state.

    Biden’s visit is pivotal. Watch out for sucking-up from JonKey.
    Expect an announcement of rapprochement, a ‘close friends’ statement.

    Lock up your daughters, and head your sons into the hills, unless of course you’re a military family, in which case they’re already in uniform.
    Oh, expect the unemployed to be conscripted into the forces first, at risk of being sanctioned by MSD; and conscientious objectors will be rounded up again for internment a là 1939.

    I would so love to be proven wrong about that scenario, but gate-crashing the 51st Foreign Policy School at Otago Uni a fortnight ago, to hear Nicky Hager speak, has made the future look somewhat bleak.
    It was just after BREXIT, and a whole bunch of MFAT, BritHighComm & US Consulate staff were sitting around looking queasy, and muttering to each other in corners while the academics gave presentations.

    Comment by anarkaytie — July 22, 2016 @ 5:30 am

  15. And there is the problem of RSA Clubs folding due to lack of numbers solved.

    Comment by Ray — July 22, 2016 @ 6:34 am

  16. Reef fish?

    Comment by MeToo — July 22, 2016 @ 7:37 am

  17. I’ve been training my kids up on the lightsabers – we’re ready to go bush at the drop of a hat

    Comment by rodaigh — July 22, 2016 @ 9:10 am

  18. unaha-closp: “there is a strong likelihood that America is going to elect a egomaniac to the Whitehouse, who will start a trade war (or just a war) with China.”

    Ah. So you think that Clinton will get the nod?

    Comment by D'Esterre — July 22, 2016 @ 11:19 am

  19. The reason they are making the changes now is because they come into force in 40-odd days, and with 90-day pre-approvals for mortgages, they have no time to waste. Last time round they got six months notice to prepare.

    Comment by Mike — July 22, 2016 @ 11:27 am

  20. I think they are now realizing that it is time to stop the bubble bursting.

    Comment by Michael — July 22, 2016 @ 11:51 am

  21. Government bonds aren’t doing well around the world and long term investment trends appear to predict global recession in a year or two. Time to minimise exposure.

    Comment by Fentex — July 23, 2016 @ 12:33 pm

  22. “12.Banks are notoriously risk averse … Property Investors” are riskier than (hopeful) home owners.”

    Not sure banks see it that way: investors’ houses make the investor money, with which to make mortgage payments. Investors with multiple properties can easily cover “voids” i.e. periods where an individual property earns no money while it is redecorated or is simply between tenants. Home owners, particularly those with only a single household income, can struggle to cover their mort repayments. Most decent investors have been accumulating property for many years, so paid “low” prices for those early properties, so the loan would have been small, and partially or substantially repaid… subject to the draw-downs which have allowed them to buy additional properties. My experience with these types of investors is that they deal with only one bank, and that bank will monitor the bank’s exposure to that investor.

    Ah, I remember fondly the days of 105 and 110% mortgages in the UK. Well: young first time buyers, coming from furnished or partially furnished rental accommodation, had to have money to buy furniture.

    Comment by Clunking Fist — July 26, 2016 @ 4:17 pm

  23. This is not a solution. We already have housing concentrated into mainly two groups in New Zealand: 1. The rich and 2. The middle class families. Retirees, although still quite a wealthy class of individuals, are being neglected, as are single people on low incomes (who aren’t sick and who do not qualify for state housing). These two neglected groups are large groups of people, as retirees are growing in number and more people a choosing a single, childless lifestyle because of financial constraints. By introducing a minimum deposit of 40% for property investors and a minimum 20% deposit for owner-occupiers, ie the family home, the property market will get even more concentrated and out of the price range of those who are most in need of housing. We have an estimated 41,000 homeless people in New Zealand. The solution, therefore, is to increase the funding for Budget Advisory services as many of our homeless are desperate, have addiction problems, but could become independent citizens with a bit more help. Education is becoming out of reach for the middle class. So instead of going to Uni, people are opting for low paying dead end jobs because the Student Allowance is comparable to the Unemployment Benefit and because the student loans have to be repaid at an artificially low income threshold. These dead end jobs are under threat, because of technological advances and because of our high dollar which the Government continually fails to curtail. People who have tried for tertiary qualifications therefore end up in dead end jobs if they come from the wrong side of the tracks, they are made redundant because of our high dollar and because of technological advances; they then go on a benefit where they are made to feel stupid about themselves and are put onto meaningless courses which they are overqualified for.

    By introducing rent controls, the Government can scrap the Accommodation Supplement which costs billions of dollar each year and use the savings to build more hospital and schools, more council flats for the elderly, free tertiary education, and more jobs in new SOE’s. Think about the large number of retirees who own retirement villas and the effect it will have on their families when the property market crashes! This doesn’t have to happen if the property market is made LESS concentrated instead of more concentrated. Rent controls needn’t be a burden on property investors, either. We would start with reintroducing depreciation rates on investment properties, which then encourages landlords to provide heated homes that are free of mildew and mould, leaky roofs, busted windows, rubbish left out by the old tenants for the new tenants to deal with, etc. Then we would introduce rent controls which would reduce the amount of rent paid. It would be compulsory and not just a guideline. A rental costing $450 per week in Christchurch would be reduced to $400 per week, depending on a host of variable factors (area/size of property/the amount of money the landlord was charging before the earthquakes). A rental costing $320 per week in Dunedin would be reduced to $295 per week (depending on variable factors). The GV of the properties would be reduced in accordance with the rental reduction (or hypothetical rental reduction is the house is occupied by its owners). This might seem like a bad idea, meaning that a person who owns a $400,000 house loses $60,000 when the GV is reduced to $340,000, but the return on their investment would actually increase. So if they own a $400,000 house in Christchurch and charge $450 per week, the gross ROI (return on investment) is around 6%, and if you deduct the cost of maintenance and taxes, you may be looking at an annual ROI of around 4% (even though the rental price has been hiked up significantly since the earthquakes). If the house is worth $60,000 lower, say $340,000, and the rent is now $400 per week, it represents an annual gross ROI of around 7.5% and a net annual ROI of around 4.5 – 5.5% which is actually a significant increase in the investors’ return on their investment. The beauty is that it also saves the tenant $2,500 per year which they can save to buy their own family home someday. It also saves the Government maybe $1,500 per annum on an Accommodation Supplement they would otherwise be paying out.

    Yes there are drawbacks here for those with large mortgages and for those who own the home they live in, but there’s more positive than negative in this equation. It also helps to safeguard Government funded Superannuation for future generations of retirees.

    Comment by Daniel Lang — July 27, 2016 @ 11:38 am

  24. I’ve given up trying to understand property prices in Auckland. They haven’t been anchored to any sane underlying economy for a very long time. They seemed out of control to me 11 years ago, when I first bought. Even then, saving up the $60,000 for a deposit (I was self employed so subject to high LVR) was a really big ask for anyone young. Now it’s just a fantasy. Students I ask about it (I’m studying) don’t even have it as part of their life plan any more. They will either be gifted property, or it won’t happen. Hard times.

    Comment by Ben Wilson — July 28, 2016 @ 2:41 pm

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