By Bernard Hickey
The Reserve Bank of New Zealand has given its half yearly tick of soundness to the financial system, but has again warned about the risks from an over-valued housing market and high household and dairy debt.
It also dwelled in its Financial Stability Report (FSR) on the risks to New Zealand from a potential slump in China's property prices and shadow financing system. The bank also announced it would develop a new comprehensive stress testing system for banking system.
Governor Graeme Wheeler said a disruption in China's economic growth was one source of risk for New Zealand farm incomes and international wholesale bank funding markets.
"Such a disruption could also affect international capital markets, and impair funding conditions for New Zealand banks," Wheeler said in the statement. He later told a news conference there was "quite a high liklihood that there will be some sort of correction."
“More broadly, New Zealand remains exposed to the international financial markets as a result of its high external debt and ongoing current account deficit. However, strong deposit growth in recent years has helped to reduce the reliance of the banking system on offshore funding," he said.
The bank said New Zealand’s financial system remained sound and well placed to support the expansion in the economy.
However, Wheeler warned several risks to the financial system required continued focus.
“Debt in the household sector remains high relative to income, and house prices are overvalued on several measures. As a result, financial stability could deteriorate if there is a sharp correction in house prices, particularly if accompanied by a reduction in debt repayment capacity,” he said.
Wheeler later pointed to OECD research showing house price to disposable income multiples were 26% above the long term average in New Zealand, while house price to rent multiples were 66% over the long-term average.
“Debt is also elevated in the dairy sector, although incomes are currently strong. A reduction in dairy export prices, and any associated fall in land prices, could place pressure on the more highly leveraged borrowers in this sector."
High LVR speed limit
Deputy Governor Grant Spencer said current prudential policy settings remained appropriate given the risks facing the financial system.
He repeated comments made last Friday about the bank's speed limit on high Loan to Value Ratio Mortgages remaining in place until at least the end of the year.
“The restriction of high-LVR mortgages appears to be having the desired effect of moderating house price pressures and reducing the risk of a severe market correction," Spencer said.
The bank said in its FSR that the impact on house sales volumes (a drop of 11% versus the bank's expectations of a 3-8% initial drop) was greater than expected, but that moderation of house price inflation was in line with forecasts. It repeated comments from March that house price inflation would have been around 2.5% higher than the current annual rate of 8.4%.
"House sales and mortgage credit growth have reduced and we estimate that house price inflation could have been 2.5% higher in the absence of the restriction,” he said. Spencer said the Reserve Bank expected the speed limits to remain in place "until the housing market comes into better balance."
"This will be assisted by the upward movement in interest rates and an increasing supply of new houses," he said.
“However, we will need to be confident that immigration pressures will not cause a resurgence of house price inflation. We consider that the earliest date for beginning to remove the LVR restrictions is likely to be late in the year.”
Spencer later said the high LVR speed limit could be phased out by lifting the limit on high LVR lending from the current 10% of new mortgage flow.
New stress testing
The Reserve Bank said it would be undertaking a stock-take of its bank and non-bank regulations over the coming year, "with the aim of improving their efficiency, consistency and clarity. "
"A further new initiative is the development of a comprehensive stress testing framework for the banking system," it said, adding the bank was now developing a framework for ongoing insurance supervision after the completion of its initial licensing process.
Spencer later said the Reserve Bank would not be following the practice in the United States of publicising the names of those who had failed stress tests, but would publish aggregated information across the banking system.
(Updated with more details and comments from news conference, RBNZ video of full news conference)
16 Comments
How China Fooled The World - Documentary
http://www.youtube.com/watch?v=w2-axIk5yyI
China is now the second largest economy in the world and for the last 30 years China's economy has been growing at an astonishing rate. While Britain has been in the grip of the worst recession in a generation, China's economic miracle has wowed the world.
It is a story of spending and investment on a scale never seen before in human history -- 30 new airports, 26,000 miles of motorways and a new skyscraper every five days have been built in China in the last five years. But, in a situation eerily reminiscent of what has happened in the west, the vast majority of it has been built on credit.
This has now left the Chinese economy with huge debts and questions over whether much of the money can ever be paid back. Interviewing key players including the former American treasury secretary Henry Paulson, Lord Adair Turner, former chairman of the FSA, and Charlene Chu, a leading Chinese banking analyst, Robert Peston reveals how China's extraordinary spending has left the country with levels of debt that many believe can only end in an economic crash with untold consequences for us all.
Postscript: Take this with a grain of salt… as we have been told, by the relative of a very senior figure in the Australian resources sector who has just returned from Sierra Leone via China – that his uncle came back from China very bearish. He reckons government is instructing all steel mills to reduce capacity back to minimum levels that will maintain employment at status quo, that stockyards are full everywhere and is suggesting iron ore could fall back to $80t.
http://rogermontgomery.com/china-watch-2/#more-7450
and
http://www.youtube.com/watch?v=8NqQXm_v9Qw&feature=youtu.be
In our world, it would be helpful for comment and observations of china milkpowder buyers over the last few weeks, we were thinking that LDC buyers locked out of market by price last year would have already come back at above these levels.
And the pop. of chinese still living in rural villages is equal to the entire pop. of USA (around 300million).
Watched a few hours of a talk last night about the 'new neutral' for global ecomony. China at 5-7% growth likely to still out shine the rest of the world. Our OCR won't be going much higher, one more hike next month then watch it pause for a very long time.
China's 'trillion dollar problem' of shadow banking was mentioned. Also mentioned was china's '3 trillion dollar wallet' which more than neutralises any real risk there.
Of course the Banking system is sound , we reduced their Costs of funds for them to 2,5% for about 5 years and allowed them to lend it to Mr Kiwi for anything form 5,5% to 19,5 %.
And we allowed them to hold only 10% in cash in reserve so the profits are exponential based on deposits
There is no Industry on the planet making these sorts of margins without producung anything tangible at all
The profits and growth in profits we will see in the banks this year will be obscene
The RBNZ does not use income figures from the IRD, Kimy. They use Statistics NZ household surveys and census data. What the RBNZ would be concerned with is seeing credit growth well above income growth since this leaves the whole system vulnerable - particularly since debt is already historically very high.
If we had big inflows of overseas cash buyers I don't see how this would be of concern to the RBNZ - that would most likely reduce the total credit/debt level. Differant story if it led to big price rises but that would be more of an issue for the government.
looks like the Chinese got a good deal here, got a vineyard for the cost of development.
http://www.stuff.co.nz/business/industries/10041533/South-Island-vineya…
Economic theory is what it is , and whether ists contextualised in a Capitlaist sense or a Communist economy or a hybrid as we see in China , almost all of the fundamentals apply across both ideologies .
- No one can spend more than they earn on a sustained basis without consequence.
- No one can build inftrastructure forever on borrowed funds when that infrastructure is not matched with growth .
- China is a de facto capitalist economy , with a basic communist social order run by dictators .
- The Chinese cannot avoid the inevitable , only delay it ... but it only makes the problem bigger when it goes pear shaped .
The Chinese cannot "call in the debt" , they can only sell the debt on the open market , until the paper reaches maturity .
And on maturity the Fed issues more paper to pay off the matured paper .
Interest payments are not a real issue as much of the Feds paper has been issued at Zero Interest rates for the past 6 years
Potentially the Chinese hold worthless peices of paper in a worst case scenario
The risk of the Federal Reserve "crashing " of "collpasing" is basically zero , and a severe fall in the value of the US$ amy even help America .
Between 2028 and 2033, Chinese citizens older than 60 years would number between 390 million and 440 million. In addition to that, the country would also need to look after another 270 million people. That number includes 40 million disabled and 230 million underage people.
What it means is that in less than 16 years time, the country’s 700 million working-age people need to support roughly the same number of old, young and disabled people. By way of comparison, more than 900 million working-age Chinese are looking after 500 million people today. And that is going to change dramatically in the next two decades.
What does it mean for the Chinese economy? It simply means that the number of jobs will shrink, the country has to take on more debt, innovation will suffer and mobility within corporations is also set to decline. There is no better example of this than Japan, the once-vibrant economic power house that has been weighed down by its greying population.
However, China would be lucky to be in Japan’s situation. There is a real danger that China may become old before it gets rich.
http://www.businessspectator.com.au/article/2014/5/12/china/chinas-hous…
There is another view Andrew. Growth and expansion costs. For example all the building and infrastructure development of recent years in China has consumed Zillions. That cost will largely disappear.
Similarly in New Zealand we have a changing demographic with many more people living longer. The pundits figure on the numbers of 'over sixty fives' versus the 'unders' and forsee doom. However using the idea of actual dependency, one can figure that people are living longer because they are healthier. So a 66 year old is not as commonly dependent as he/she might have been 40 years ago.
If one discards the "over 65" concept and uses say "Numbers of people with life expectancy of less than 15 years" the numbers of dependents to workers is not a concern, and unlikely to be in future.
And Japan. It might not excite the financial markets. But it is doing just fine, even with all the grey hairs.
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