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New RBNZ figures show mortgage borrowing growing at its slowest annual rate in well over a year; non-bank mortgage borrowing is starting to surge, however

Property
New RBNZ figures show mortgage borrowing growing at its slowest annual rate in well over a year; non-bank mortgage borrowing is starting to surge, however
31st Jul 17, 4:14pm by David Hargreaves

By David Hargreaves

The growth in mortgage borrowing is growing at its slowest annualised rate in well over a year, according to the latest Reserve Bank figures monitoring sector credit.

The figures show that borrowing for housing grew by 7.7% in the 12 months to June, down from an annualised rate of 8% as of May 2017.

This continued slow down in the rate of borrowing growth will please the RBNZ, which toward the end of last year brought in 40% deposit rules for investors as a way of taking heat out of the market.

Prior to those rules coming in the annualised rate of mortgage borrowing had been increasing, swiftly, but after peaking at 9.3% in December, this year it has been falling back even more swiftly.

The 7.7% annual growth rate is the slowest seen since March 2016.

In June the amount outstanding on mortgages was $237.792 billion, compared with $236.474 billion in May and $220.841 billion in June 2016.

Non-bank lending surges

One thing that will interest the RBNZ from the latest figures, however, is the surge - albeit from very low levels - in non-bank mortgage lending.

Non-bank lenders are not covered by the RBNZ's loan-to-value (LVR) lending restrictions and the RBNZ has said it would keep an eye on the amounts of mortgage money advanced by such lenders.

From a very low base, of $1.52 billion as of June last year, the amount outstanding of mortgages to non-bank lenders has surged 28.75% in the past year to $1.957 billion as of the end of June 2017.

In just the past month the total outstanding has surged by $125 million, or 6.8%.

These figures, taken at face value, might suggest that at least some investors are finding ways around the RBNZ's deposit limits.

Keep tabs

Undoubtedly the RBNZ will be keeping tabs on these figures and seeing if this trend will continue, or indeed accelerate, in coming months.

Elsewhere, business lending was virtually unchanged in June, at $104.564 billion, with rate of annual growth - at 6.2% - declining sharply from the 7.3% annualised growth rate recorded in May.

The rate of growth in agricultural lending has been slowing markedly in recent times as farmers look to recover from the poor returns of recent seasons.

Now, however, as dairy prices bounce back, the rate of annual growth in agricultural borrowing has risen for the first time this year. It rose 2.6% for the 12 months ended June, up from just 2.2% in the year to May.

The total amount borrowed stood at a new high level of $60.014 billion.

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113 Comments

by  J.C.  |  31st Jul 17, 4:45pm 1501476303

I think a better headline for this report would be "Robust Growth in Debt Continues across Mortgage, Personal, and Business Borrowers; Non-Bank Mortgage Lending Growth Relatively Strong".

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by  David George  |  1st Aug 17, 12:30pm 1501547447

I agree, the headline is a bit misleading. I've just totaled up the figures for the past 12 months; private sector debt is up by $30,400 million (from $387.6B to $418) that's housing, personnel, business and farming.
Because private sector debt is now so large (in dollar terms and as a share of the underlying economy) the percentage increases create a much bigger effect. Total debt is now so much higher than GDP that even if they were both growing at the same percentage increase (they're not) debt would continue to grow much faster than the economy.
The concern is; we have had 30+ billion (about $17,500/household) injected into the economy via new debt/credit issuance in the past 12 months: what happens to the economy when that stops or even slows down significantly?

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by  Eco Bird  |  31st Jul 17, 4:59pm 1501477186

Up to date numbers would show a bigger decline in Bank lending ... They are almost pushing borrowers away - every cent in income is being counted and risk factors are strict... wonder if the big ones have maxed their lending books and almost exceeding what they are allowed to hold as securities. They are not lending full stop.
Not sure if they know something we don't (yet) and if there is a storm on the way - but they are surely making the market a bit nervous ...and will be sending some developers to the wall ..again! -- that does not help the housing supply side.
Non bank lending thrives in such times, the danger comes from greedy fools who will borrow with high risk and insufficient cover.

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by  Laminar  |  31st Jul 17, 5:24pm 1501478662

Eco Bird: banks rarely, if ever, know when a storm is coming.

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by  Bobster  |  31st Jul 17, 5:29pm 1501478978

When houses are 10x income, household debt is 170% of income, houses are severely unaffordable for income earners, regulators are pressuring you to increase your capital and rating agencies are downgrading you because of your exposure to the housing market, it doesn't take rocket science to see the storm coming, does it

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by  Laminar  |  31st Jul 17, 5:57pm 1501480623

It all depends on interest costs so I cant answer that question in the dark. If interest cost rise a lot then a storm is coming, if they only rise a little then perhaps showers easing in the afternoon, if they fall then it'll be summer at the races. Even rocket Science hasn't figured where interest rates will be in a few years time.
The market can stay irrational longer than you can stay solvent.

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by  Bobster  |  31st Jul 17, 6:10pm 1501481429

Even at these low rates, houses are severely unaffordable. Cheap credit is the only thing keeping this house of cards together. I think this market is capable of big falls even without big movements in rates. At 3% yield this market only makes sense if there are capital gains: if there aren't, and people begin to anticipate price falls, that may become self fulfilling. Low interest rates isn't the oniy factor, you need to think about the psychology of asset price bubbles. And the Sydney market in particular is completely unsustainable and will severely hurt our banks when that implodes. I give that implosion 6-12 months.

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by  Laminar  |  31st Jul 17, 6:17pm 1501481856

In general investors do not buy 3% yields. Those are yields found in areas primarily owned by owner occupiers. With out significant change in interest rates youl find it hard to convince most investors to sell to you at a discount. If Sydney starts to implode the Ausi Central Bank will intervene and cut rates.

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by  Bobster  |  31st Jul 17, 6:27pm 1501482472

Central Auckland suburbs has circa 3% yields. There are plenty of rentals in central Auckland which by deftinition are investments.

If Sydney implodes the issue will not be cost of debt service but capital loss and bank solvency. If prices are falling, who wants to borrow at even 0%? And if bank balance sheets become impaired interest rate cuts are irrelevant, banks needs to be recapitalised in order to lend again. Or indeed to even survive.

Aussie wholesale rate is already at 1.5% I mean, how much lower can it even go!? The market will not be saved by rate cuts.

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by  Laminar  |  31st Jul 17, 6:39pm 1501483141

Bank solvency isnt dependent on house prices. Id buy at 0%, obviously. Most investors would. Well it can go to 0%or less Bobster. How much difference would it make? A lot. say mort. int is 4% at cash rate 1.5%, well a cut of 1.5% will bring that mort. rate to about 2.5%, that will send property up about 60%.

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by  Bobster  |  31st Jul 17, 7:02pm 1501484533

If house prices had fallen and were expected to fall further, no you wouldn't, as any drop in capital value would wipe out any yield you got and then some. If there is an expectation that the price of a good will fall in the near future people will be reluctant to by it, whatever the cost of finance. That is rational behaviour in a deflating bubble, whether you are an investor or owner occupier.

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by  Laminar  |  31st Jul 17, 11:21pm 1501500092

An investor doesnt ask what this will be worth tomorrow, he asks how much he has to pay for the income stream and how much that income stream can be expected to grow over time. From that he can derive a fair price today and if the price is materially below that then he can see the value and will buy. Investors dont care much about the value tomorrow, thats why they are investors not traders.

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by  MisterB  |  31st Jul 17, 6:57pm 1501484227

"Not sure if they know something we don't (yet) and if there is a storm on the way - but they are surely making the market a bit nervous" ... only what most commentators have been saying = that NZ market is in a bubble.

Only a fool breaks the bubble rule, or something like that.

PS - I dont think there is more up to date data than June! Lending growth down ~40% YoY. Ouch.

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by  MortgageBelt  |  31st Jul 17, 5:31pm 1501479067

If banks are pulling back from lending due to fears of asset price falls, won't this become a self-fulfilling prophecy. Less lending = less price growth.

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by  Bobster  |  31st Jul 17, 5:47pm 1501480038

Exactly. It's worse than that: less lending means less reduced prices, reduced prices means reduced collateral for banks for existing and new lending, which means less lending, etc, in a negative feedback loop.

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by  Laminar  |  31st Jul 17, 5:59pm 1501480782

That's not how banking works, a drop in prices does not cause banks to have to lend less unless we are talking about some huge market catastrophe.

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by  Peri  |  31st Jul 17, 6:04pm 1501481046

However it is how property speculation works: a rise in prices represents equity that allows more borrowing, that increases prices, that allows more borrowing etc. etc
A drop in prices kills this demand for lending stone dead.

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by  Laminar  |  31st Jul 17, 6:11pm 1501481505

Indeed it does, however it does not effect how much banks can lend.

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by  Bobster  |  31st Jul 17, 6:18pm 1501481908

Spot on

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by  MortgageBelt  |  31st Jul 17, 6:08pm 1501481302

When a bank is faced with a lending decision with, say, a couple attempting borrowing 700,000 on a 2 bed townhouse in an Auckland suburb while the bank knows that despite political denial that values are being buoyed up by foreign-based foreign-influenced money then I think you will see pullback in the amount the bank really wishes to lend.

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by  Laminar  |  31st Jul 17, 6:13pm 1501481639

Banks are of the opinion that foreign buying was not a major factor. As to your example, if that couple have the deposit and can service then the bank would love to issue that loan.

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by  MortgageBelt  |  31st Jul 17, 6:35pm 1501482957

However, greater scrutiny of the RV, the private valuation, sales data scanned, and extra assurance of the durability of the valuation of the asset financed etc is also part of the banks decision.
Banks are fully aware of the influence of foreign-derived influences on house sales, immigration, international students and related parties on house prices even if not discussed publicly.
This is why some auction sales are unsuccessful for NZ bidders. You may be prepared to bid over the odds, but the loan needs to stack up against the RV, QV, the private valuation etc. of course in the old days banks did their own valuations especially of new builds. Maybe that would be a good idea again.

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by  Laminar  |  31st Jul 17, 6:40pm 1501483241

Banks are doing well in making sure they are been responsible while still issuing loans to credit worthy borrowers with deposits.

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by  MortgageBelt  |  31st Jul 17, 7:05pm 1501484700

While the mortgage amount is set in stone, unfortunately the asset valuation is not so consistent over time. Therefore in order to be responsible, a lower valuation figure is always prudent. E.g. The RV is used instead of the sale price - now that is quite responsible.
As this starts rolling out, prices are dampened.

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by  Laminar  |  31st Jul 17, 7:22pm 1501485767

A simple issue there is that it doesnt make any sense for renovations and so forth.

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by  MortgageBelt  |  31st Jul 17, 7:47pm 1501487237

True, do you remember the days when banks would send their own valuers out to check each build stage and then approve the progress payment to the builder on a new build or renovation? At their own cost!
Now that was a great system.

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by  Laminar  |  31st Jul 17, 8:39pm 1501490366

The current system requires many to obtain registered valuations, selected at random by the banks from a pool of approved valuers, the selected company is then not able to disclose the specific person valuing the property to the potential borrower until the valuation is complete. I respect your prudence and luckily, at least for now, so do the banks.

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by  Bobster  |  31st Jul 17, 6:15pm 1501481703

No, it's exactly how banks lend. Rising prices create a positive feedback loop on the way up: higher prices, more collateral, more lending, etc. that's how investors became such a big part of the market, they can leverage their growing equity for bigger and bigger loans. On the way down it's a negative feedback loop of lower prices, less collateral, less lending, etc.

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by  Laminar  |  31st Jul 17, 6:26pm 1501482364

The reduced collateral you refer to does not in itself affect bank balance sheets. Investors have the equity, its the change in servicing calculations that is actually stalling out the remaining investors who do want to buy at these prices (not many do). As prices fall more people will be able to buy which is why most markets dont get trapped in some sort of doom-spiral. If a doom-spiral did form then rates would get cut.

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by  Bobster  |  31st Jul 17, 6:34pm 1501482858

The falls in equity go to the value of equity that can be leveraged. Reduced equity via price falls means reduced available credit. Falling prices will reduce available lending by virtue of the reduced ability to leverage.

Again, interest rate cuts will not save this market. Rates will only be cut to maintain general price inflation or overall economic health. House prices are in themselves irrelevant to assessments of general price inflation and rates setting.

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by  Laminar  |  31st Jul 17, 7:24pm 1501485850

Any substantial and sustained fall in house prices will cause general price deflation and will be met by rate cuts.

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by  Bobster  |  31st Jul 17, 7:28pm 1501486105

No....it won't. It may cause a recession. A recession does not mean there is therefore and necessarily general price deflation ie a reduction in prices generally in real or even nominal terms.

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by  Laminar  |  31st Jul 17, 7:32pm 1501486333

If Ausi goes in to recession the inflation outlook over the medium term will require rate cuts, thats the play book as it stands.

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by  MortgageBelt  |  31st Jul 17, 7:50pm 1501487454

So there is a good likelihood of rate cuts in the near future?

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by  Laminar  |  31st Jul 17, 8:35pm 1501490116

If a minor decline occurs perhaps not, but if a major decline occurs then yes.

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by  Bobster  |  31st Jul 17, 6:38pm 1501483085

You fail to understand how asset price bubbles work. Falling prices may well reduce demand, not increase it: if prices are falling, why not wait? When prices are rising, demand increases: "lets get in before prices go up more, and as prices are going up we'll make money whatever stupid price we pay".

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by  Laminar  |  31st Jul 17, 7:30pm 1501486205

Falling prices bring on more demand. Its the demand curve. The less a thing costs the more of a thing people will buy. You wanna sell stuff, cut the price. If you mean specifically panic, then sure, in major market failures you can get people scared to buy but major market failures will be met by rate cuts.

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by  MisterB  |  31st Jul 17, 7:59pm 1501487967

1) That analogy may work for potatoes, but not for houses at 10x+ income. If people can't afford to buy, the prices would have to drop a lot. It there's say 1,000,000 residential properties and they are worth $1trillion, and now they are worth $800m, how will that not result in less total lending?
2) Rate cuts are challenging in QE world, there is little to play with since rates never really went up - and what's more, since funding costs in NZ are largely disconnected to OCR, even if they did cut, it's debatable what difference that would make to credit. It could make a difference to NZ deposit funding though.

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by  Laminar  |  31st Jul 17, 8:34pm 1501490060

Its true with potatoes and its true with houses.
Your looking at the wrong balance sheet. The equity in homes does not change what a bank can lend unless the impaired loan rate destroys the banks capital. It isnt the loss in house value but rather the default rate that destroys a banks ability to loan. If house prices fell from 1 trillion to 800m but everyone kept paying their loans, the flood of buyers could in fact result in aggregate debt rising.
Rate cuts work the same as they always have, NZ has an interest rate and it can be cut. As to this cost of funds stuff, thats simply not how banking works for marginal loans during rate cut season. Youre talking about fixed loans which are less responsive to the OCR (they still do as arbitrage grinds down the interest rate for depositors). However during rate cut season the marginal cost to borrow is the cost to borrow on a variable rate and these funds can be supplied solely by borrowing from the reserve bank, so the variable rate is effectively married to the OCR. Rate cuts work and they can at any point easily arrest a (non-sudden) decline.

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by  Bobster  |  31st Jul 17, 8:41pm 1501490471

By reducing the value of equity you reduce the nominal value of the loan that can be leveraged against that equity. When prices are going up, investors are obtaining new valuations to show increased equity to support increased borrowings to buy ever more properties. Constant revaluations is a classic investor device in a bubble to releversge. When prices are going down, banks are obtaining new valuations to show decreased equity, calculating the reduced level of lending that can be supported by that lending and required prepayments (ie disposals) to get the outstandings to the required level. Changes in equity value cut both ways.

It's got nothing to do with an effect on a banks balance sheet.

All lending needs to reflect the average cost of funds of a bank. If the banks lends money at below its average cost of funds, it loses money.

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by  Laminar  |  31st Jul 17, 8:42pm 1501490549

These 'investors' your referring to are not the greater body of investors. Most investors are prudent but unafraid, most investors are conservatively positioned with decent yields and eager to buy if prices or interest rates fall. You act like they are morons and yet every cycle they own more and more of this country.

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by  Bobster  |  31st Jul 17, 8:50pm 1501491020

No, what I have described us exactly the attitude and behaviour of the investors I have encountered on this website. Buy, revalue, releverage, buy more, never sell, have a yield that barely washes your face. Some of them are morons. Many others are well intentioned people who have never had to deal with a serious correction of what is now a grotesquely bloated credit bubble. The very things that helped them on the way up will kil them on the way down.

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by  MisterB  |  31st Jul 17, 8:53pm 1501491220

It's hard to assume there isnt a decent chunk of moronism of "investors" jumping on board as asset prices spiked last year.

To be fair, it's equal parts moronity and greed.

However, let's be generous and say they were all prudent. A falling market still limits their ability to leverage, in the same way the rising market escalated it ...

let's spell out some maths for you....

Investor bought property A for $600k, 60% of it's value at the time, now if prices remained the same and he wanted to buy another identical property, he could borrow another $600k, ... so $1.2m secured over $2m in securities.

Now, values go up to an average of $1.25m, so he now has $1.2m / $2.5m .. and wants to buy a 3rd @ $1.25m, so he can borrow a total of $2.25m / $3.75m, he only needed to find a 20% deposit in the third property, as the rest was increased equity in the other 2, off the back of gains.

Now, assume scenario B, where instead of going up by 25%, the properties go down by 25%. Now his $1.2m loan is secured against property worth $1.5m - 80%... if he was interested in another, even though prices are much lower ... he'd only be able to borrow $150k, to keep the whole portfolio =60%. That is, if the bank didn't lift his interest rates to reflect the increased risk.

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by  Bobster  |  31st Jul 17, 8:56pm 1501491413

Or more likely, tell the investor he needed to sell a property to repay debt to improve the banks collateral ratio, failing which the bank would accelerate the loans and sell them itself.

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by  MisterB  |  31st Jul 17, 9:56pm 1501494975

Well, the RBNZ current capital adequacy rules judge LVR based on value at origination, so unlikely. But I could see rates going up. RBNZ may also change risk weighting rules to reflect additional risk and therefore require more capital.

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by  Laminar  |  31st Jul 17, 9:24pm 1501493046

A falling market limits an investors maximum debt, not the banks ability to loan. Most investors are not maxed out.
In your example how can he borrow $150,000? He looks tapped out to me.

Scenario C - Property price fall 25%
Assets 2,200,000
Liabilities 1,200,000
LVR 60%
Int Rate 6.0%
Borrowing capacity $300,000
- Prices drop 25%, LVR restrictions removed, interest rates cut to 4%
Assets 1,650,000
Liabilities 1,200,000
LVR 73%
Borrowing capacity 600,000 (executes and buys)
Int Rate 4.0
- buying pressure sends market up 50% over 6 years
Assets 3,375,000
Liabilities 1,800,000

Thats how actual investors play it, these fly the wire investors are not the main body of investors. The main body of investors is getting very very rich, very carefully over long periods of time.

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by  Bobster  |  31st Jul 17, 9:23pm 1501493028

Haha, so our man is saved from bankruptcy by a miraculous 50% increase in prices over 6 years? I suppose houses would now be....20x income?

Praise be to the Gods of Property!! Now why didn't I think of that!?

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by  Laminar  |  31st Jul 17, 9:27pm 1501493252

Its not miraculous, its the incremental effect of keeping interest rates at 4%, down from 6%. Your income multiple isnt a driving factor, affordability is the driving factor.
And why would he go bankrupt?
Look you may not like it, you may feel that this game only ends badly, and id be inclined to agree, but that doesnt change the fact that this is the game as it stands.

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by  Bobster  |  31st Jul 17, 9:35pm 1501493740

So the answer is yo give yourself a "get out of jail free" card with a mere 50% increase in 5 years? Sorry, but that's just bonkers.....the Property Force is strong with this one.

Best laugh I had in ages

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by  Laminar  |  31st Jul 17, 9:45pm 1501494351

Its just mechanically how asset prices work.
A cut from 6% to 4% over a sustained period will see asset prices rise by ~50% over 'some period of time' assuming all other factors are held constant.

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by  MisterB  |  31st Jul 17, 9:57pm 1501495074

Oh, right. That's why Irelands cash rate is at zero or less for 3+ years... during which time house prices and credit growth have done what???

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by  Laminar  |  31st Jul 17, 11:26pm 1501500371

Irelands economy failed and unemployment exploded. The resulting bad debts caused the banking system to fail. If the NZ economy fails then interest rate cuts wont help us either.

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by  MisterB  |  31st Jul 17, 9:48pm 1501494526

Firstly, not sure what you base your assumption that most investors are not maxed out on.

Your above scenario assume LVR restrictions would be lifted. Why on earth would RBNZ do that in a falling market? That would decrease financial stability.

Anyway...

Not sure how borrowing capacity doubles, when interest rates drop by 2% (not that the bank would pass that on, because their risk just increased as LVR went from 60% to 73%)

If price dropped 25% (price down from $1.1m to $825k), and LVR restrictions stayed in place at 60%, then to buy another $825k property, he would only be able to lift his total lending to $1,485,000, or, in other words a $285,000 top up.

Very large swathes of equity - and therefore potential to borrow - are very easily wiped out by price corrections

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by  Bobster  |  31st Jul 17, 9:57pm 1501495048

Agreed

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by  Laminar  |  31st Jul 17, 10:00pm 1501495216

Investors are not maxed out, I look at their balances sheets every day.
The drop in interest rates did not grant the borrowing capacity change, the LVR change did.
The LVR restriction is there as a macro prudential tool and it will be used to slow the rate of gain, and reduce the rate of falls. Thats what stability means in terms of the reserve bank.
Banks will pass on the cut, banks dont use flexible approaches like you seem to think. If you fit in the box then bam, loan issued. They just maintain their margin at roughly the same level so as the OCR falls the variable rate falls with it.
As prices fall risk falls in functional markets.

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by  Bobster  |  31st Jul 17, 10:04pm 1501495486

Household debt is 170% of income. They are maxed

When prices fall, banks will impose their own LVRs, they will be pretty conservative. Regardless of what RB does

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by  MisterB  |  31st Jul 17, 10:13pm 1501496035

Wow, if you're a financial adviser, you're giving out the wrong juice.

The whole purpose of the LVR restrictions per RBNZ site is
"These restrictions provide a buffer in the face of a sharp housing downturn, which would particularly affect highly-indebted home owners and investors."

So, in the event of a sharp housing downturn, why would they lift? It could keep falling.

FYI banks did not pass on the last cut and most have increased, even without an OCR increase, i.e. Kiwbank, who have raised over 0.50% this year alone, while OCR was flat. Where on earth have you been dude??

When prices FALL, risk INCREASES because the current exposure is secures against a security that has a falling value.... OMG ** double sigh **

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by  Laminar  |  31st Jul 17, 11:46pm 1501501560

"OMG ** double sigh **" Im just here for a bit of fun MisterB, try and keep it adult.

The long term expectation on return falls as prices today rise. Risk, as it pertains to profit and loss, falls as prices fall.
http://www.investopedia.com/articles/fundamental-analysis/09/right-side…

The LVR restrictions would be lifted because a steep downturn in house prices would cause the expectation of medium term inflation to fall. The Govennor would be forced to arrest a major decline before it caused recession and possibly deflation. A major market failure in housing causes aggregate debt to fall, that decline in the money supply causes strong deflaionary pressures. Job losses erode spending and the velocity of money falls, further supresing general prices. Because of these risks the Reserve will likely use what tools it has to avoid a major market failure.

Day to day interest rates can deslocate from the OCR as banks manage margin but over time the variable rate is essentially glued to the OCR.

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by  Peri  |  1st Aug 17, 7:19am 1501528770

The RBNZ took four years to stabilise risky lending with its latest LVR limits, surely it would take another four years to lift them. Otherwise the RBNZ looks as though it is not seeking to control risky lending but rather to encourage it.

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by  Laminar  |  1st Aug 17, 11:54am 1501545258

The reserve bank is not so clumsy as to require symmetry in its responses. It will weigh the pros and cons and remove the LVR limit to curb a steep drop and it will reinstate them to curb excessive exuberance.

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by  Bobster  |  1st Aug 17, 12:13pm 1501546438

As above, if expectations are for significant drops the banks will impose their own LVRs. 40% and 20% don't look obviously unreasonable LVRs if sentiment changes significantly. So I don't see LVR changes as being a magic bullet either.

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by  MisterB  |  31st Jul 17, 8:42pm 1501490548

*sigh*

The equity in the homes absolutely affects the total the banks will lend, as the lending is secured against the home. I am not talking about lending being constrained by funding, but rather lending being constrained by the value of the securities attached to the lending. There are LVR limits at play.

My understanding is that Loan to deposit and liquidity ratios mean the banks do not lend off the back of borrowing from the RBNZ - unless you can point me to something in the GDS's that say otherwise.

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by  Laminar  |  31st Jul 17, 8:47pm 1501490875

No need to sigh MisterB we are all adults :-)

Banks have two balance sheets, the loan/deposit book and the capital reserve. The loan deposit book is essentially unconstrained as every loan creates a deposit. The capital reserve is also (in practice) unconstrained as they can simply sell bonds. A banks ability to loan is actually primarily constrained by its expectation of profit.
here: http://www.bankofengland.co.uk/publications/Documents/quarterlybulletin…

And here is the how the OCR works in NZ:
http://www.rbnz.govt.nz/monetary-policy/about-monetary-policy/what-is-t…

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by  MisterB  |  31st Jul 17, 8:59pm 1501491595

Funding is not unconstrained - read the RBNZ FSR which said

"Credit growth has continued to exceed deposit growth in the past six
months (figure 3.7), increasing the banking system’s reliance on market
funding. This increases the volume of funds that banks must raise
offshore, given New Zealand’s relatively low domestic savings rate and
small capital markets. If the gap between credit and deposit growth
is sustained, banks are likely to become more dependent on offshore
markets to sustain credit growth and to replace expiring funding. This
would increase their vulnerability to international risks that could increase
the cost or reduce the availability of funding"
http://www.rbnz.govt.nz/-/media/ReserveBank/Files/Publications/Financia…

I am no expert, but TBH, I trust their view over yours.

FYI - Banks wont expect make profit on an asset book secured against properties with falling values. Who will buy their bonds if the underlying securities are toxic? Where on earth were you in 2007/8?

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by  Laminar  |  31st Jul 17, 9:43pm 1501494188

Nothing in the above disagrees with my point, im extremely familiar with this material :-)
Please read the BOE document I provided as it will explain in detail how bank funding works.
Banks expectation of profitability is what limits their ability make new loans.

In 2008 I was sitting in gold

If NZ hit something like a US style 2008 rates would be cut along with dramatic additional measures. However NZ will not hit a US style 2008 just yet, maybe one day but not anytime soon. Any substantial fall in housing will be arrested by rate cuts and changes to the LVR rules.

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by  MisterB  |  31st Jul 17, 9:54pm 1501494882

RBNZ is not BOE.

RBNZ has not issued bonds via QE.

RBNZ clearly states banks funding is limited and heavily exposed to offshore. NZers are net debtors by a long way.

You're living in a dream world mate if you think any rate cut would arrest a fall in prices if it starts to go fast. The banks will not pass it on, as any improvement in margin v OCR would be eaten up by offshore funding costs ... NZD falls, so hedging costs increase, funding rolls off and is re-priced at higher rates, credit ratings drop, so funding costs also increase.... hence RBNZ concern on exposure.

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by  Bobster  |  31st Jul 17, 10:02pm 1501495320

Absolutely agree, there seems to be a complete indifference on this site regarding price falls, as apparently all price falls will be corrected via the magic of rate cuts. When prices fall after the top of an asset bubble rate cuts are like pushing on a piece of string. They may help the wider economy, but when expectations are for asset price falls interest rate cuts will not support prices.

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by  Laminar  |  31st Jul 17, 10:16pm 1501496172

Bobster asset price expectations are in principal (theses days) set by interest rate expectations.

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by  Bobster  |  1st Aug 17, 9:38am 1501537094

I would say prices are a function of debt service costs ie interest, the quality of banks balance sheets ie how much they can themselves borrow and lend, income levels ie predominantly employment levels and macroprudential regulation. Price willingness is also affected by past price movements ie what is going up will continue to go up, and vice versa. Interest rates are but one component. So while it may often be a necessary condition for price rises that debt service costs fall, it is not a sufficient condition in itself.

If prices are falling and this becomes the expectation, and general employment conditions deteriorate, then cutting interest rates will not support house prices, it's like pushing on a piece of string.

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by  Laminar  |  1st Aug 17, 12:26pm 1501547219

The term statement there Bobster is employment conditions deteriorating. It would need to be a substantial and sustained deterioration but that would result in interest rates failing to save us. So if your proposal is that the NZ economy will experience a significant failure then I agree, in that instance housing would fall and the Reserve would have little in its bag to save it. But to my awareness you are arguing that housing will fail, not the economy.
As to your notes on the importance of interest rates to asset prices, those factors are all good to be aware of, however interest rates, particularity the US rates, are the primary driver of global assets prices. Now to use your terms, the global asset price bubble was inflated by interest rates, not by macro prudential regulation, not by the strength of bank balance sheets, not by employment levels, not by debt servicing costs or price willingness, it was inflated by management of interest rate expectations.
Reserve banks know that provided the underlying economy doesn't completely fail, they can reflate assets at will, look the BOE, the Fed and the BOJ for clear examples of this approach. To suppose NZ will not follow the heard when we did so in 2000 and 2008 requires extraordinary evidence as it is an extraordinary claim.

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by  Laminar  |  31st Jul 17, 10:18pm 1501496305

RBNZ is the BOE ;-) It is the same in all countries with a central bank.

In short, every loan creates a deposit. Banks do not require a deposit to make a loan. They do however need to find where the resulting deposit ended up and borrow it back. That is sometimes domestically located and sometimes it is overseas. In aggregate its immaterial as so long as our banks are solvent they will be able to borrow back the loan they made from 'someone', overseas or not. As such bank lending is not constrained by deposits.
As to the OCR and its effect on loans, the variable rate is married to the OCR and in rate cut season variable rates are the marginal rate that govern house prices. If overseas lenders overcharge then the banks can borrow direct from the Reserve, this is explained in the Reserve bank link i provided to you. The amount they can borrow is not limited, which is why the OCR works. We have a very prudent central bank and they do worry about overseas exposure because over long periods of time to combat a major decline via the OCR causes inflation expectations to climb.

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by  MisterB  |  31st Jul 17, 10:33pm 1501497183

Forget it, there's no use. So much is wrong with this barely coherent comment. The variable rate is NOT married to the OCR. That's a misconception. It's related, sure, but the two are not inextricably linked.

I will close out this fruitless discussion by quoting RBNZ:

"Although the OCR influences New Zealand’s
market interest rates, it is not the only factor doing so.
Market interest rates – particularly for longer terms – are
also affected by the interest rates prevailing offshore since
New Zealand financial institutions are net borrowers in
overseas financial markets. Movements in overseas rates
can lead to changes in interest rates even if the OCR has
not changed."

Most lending is at fixed rates which has to be matched with equivalent term funding. OCR is variable funding and not used to fund a fixed rate book - no bank in their right mind would commit to interest rate income at x% and fund it with interest rate cost of a variable y%. It all has to be hedged.

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by  Laminar  |  31st Jul 17, 11:55pm 1501502128

The price of housing is based on the marginal rate of lending, that is the cost of the next loan taken out, and in rate cut season that is the variable rate. The variable rate is essentially married to the OCR because the bank can borrow without limit from the reserve bank and so in practice it wont pay much above that level for short term funds.
To qoute from the reserve bank of NZ:
"The most crucial part of the system is the fact that the Reserve Bank sets no limit on the amount of cash it will borrow or lend at rates related to the OCR."

The sections you are posting are in perfect agrement with me. Id sugest you read the BOE document i posted for you. Its probably the most important central bank publication on money creation in recent history.

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by  Bobster  |  31st Jul 17, 8:26pm 1501489567

That doesn't reflect demand for assets in an asset bubble. Everyone wants them while they are going up, no one wants them when they are going down. It is the fact the asset is increasing in price that makes them of interest to buyers ie it increases demand. The fact the price is going down reduces demand ie if you bought a falling asset you would lose money. Buyers will re enter the market when an equilibrium is reached is the market bottoms out.

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by  Laminar  |  31st Jul 17, 8:33pm 1501489981

And what is the equilibrium based on? Usually its affordability and affordability is controlled by interest rates. If you mean major market failures can cause panic, then again, as ive said yes. However major market failures will be met by rate cuts.

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by  MisterB  |  31st Jul 17, 6:59pm 1501484360

@laminar... "a drop in prices does not cause banks to have to lend less"

I think it does mean that. Speed limits and all.

If a property was worth $1m, banks would lend $800k, now if it was worth $800k, they would lend $640k. Aggregate that, and factor in reduced demand, and wouldnt that mean less aggregate growth?

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by  Bobster  |  31st Jul 17, 7:03pm 1501484590

Exactly

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by  Laminar  |  31st Jul 17, 7:27pm 1501486023

The drop in value does not cause banks to have to lend less in aggregate, on any one property yes. This has the simple proof that property price corrections do not typically spiral, they arrest. Banks loan based on their balance sheet but more so on perceived profitability. As prices fall more people can buy and the decline is arrested.

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by  MisterB  |  31st Jul 17, 7:41pm 1501486874

I am not sure you're understanding correctly. The market is the sum of the parts.

Of course it results in them lending less - because there's less collateral ... it's nothing to do with their balance sheet. If the total value of NZ housing stock goes down, then potential lending against said stock will go down.

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by  Bobster  |  31st Jul 17, 7:49pm 1501487365

Exactly...again

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by  Laminar  |  31st Jul 17, 8:30pm 1501489858

The potential will fall but not the aggregate. The aggregate can rise even as the maximum potential falls and in normal corrections the fall is arrested by increased demand. Equity is not the key factor that drives prices, it is affordability.

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by  MisterB  |  31st Jul 17, 9:32pm 1501493534

I think you should read up about Ireland my friend.
https://www.centralbank.ie/docs/default-source/statistics/data-and-anal…

Housing debt there has dropped from a peak of €127b in May 2008 to €74b 9 years later - a 42% fall. It's now back at 2005 levels. And, what do you know, the house price now is roughly the same as 2005 (having peaked at about 30% above 2005 levels) ... see how the two move together?

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by  Laminar  |  31st Jul 17, 9:40pm 1501494052

Housing value and debt are linked yes, thats correct. If NZ has a major banking failure then we could be in a slimier situation, however we can dilute our currency and bail ourselves out with more ease than Ireland. Never the less the main point is Irish banks went bust and ours are not going to, well not any time soon.

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by  MisterB  |  31st Jul 17, 10:02pm 1501495371

That's what they said in Ireland and Italy and Spain....

That's precisely what the RBNZ is trying to avoid and why it will absolutely not be concerned with leaving LVR restrictions in place and not lowering OCR.

Diluting currency would drive up lending costs, given offshore exposure.

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by  Bobster  |  31st Jul 17, 10:07pm 1501495620

Absolutely, no one lends to our banks in nzd, all repayments will be in usd or the like

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by  Laminar  |  1st Aug 17, 12:00am 1501502427

Diluting our currency would not be used to repay debt, it ould be used to tranfer wealth from the public to the banks in the form of recapitalizations.

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by  Laminar  |  1st Aug 17, 12:05am 1501502733

Letting housing death spiral would cause deflation and job losses, that would cause bad loans and insolvency. The dramatic destuction of credit would set NZ on fire. Look at what the reserve bank did during the 2000 and 2008 corrections.

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by  PocketAces  |  1st Aug 17, 7:16am 1501528615

Yet, in order for balance to be returned, in order for housing to be affordable for actual NZers, that is precisely what has to happen, as earnings are not going to suddenly skyrocket to do it. Should never, ever been allowed to happen and this government can take the blame for it, because they have done nothing other than deny.

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by  scarfie  |  1st Aug 17, 12:43pm 1501548189

Our interest bearing credit driven money supply leaves little choice but to end in the current connundrum. It is a system, and once set in place there is a certain amount of predictability about it. Meaningful change within it isn't possible, only tweaks. As I have said before: "you can't change the trend, only the peaks and troughs within the trend.

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by  Yvil  |  31st Jul 17, 5:38pm 1501479528

I'm actually really surprised that there was mortgage growth over the last 12 months (7.7% to be exact), I was expecting mortgage reduction with the 40% LVR rule and bank's tightening

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by  MisterB  |  31st Jul 17, 7:01pm 1501484497

Roughly 2/3 of new loans are Owner Occupied only.
http://www.rbnz.govt.nz/statistics/c30

Add to that all the exemptions, and it does mean credit growth, albeit WELL DOWN YoY.

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by  theglc  |  31st Jul 17, 7:40pm 1501486858

Yeah me too, however its only Auckland where sales have come to a standstill, the rest of the country has still been holding its own until recently

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by  MisterB  |  31st Jul 17, 7:54pm 1501487689

Not sure that's true.

REINZ shows sales volume was down ~20% NZ excl Auckland (month on month and year on year) ...
https://www.reinz.co.nz/Media/Default/Statistic%20Documents/2017/Reside…

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by  Fritz  |  31st Jul 17, 9:20pm 1501492823

Looks a pretty average house. Perhaps new owner will bowl it and build 2-3 high end townhouses, and maybe that is why such a high price was reached.

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by  Double-GZ  |  31st Jul 17, 10:00pm 1501495250
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by  fat pat  |  1st Aug 17, 5:27am 1501522052

Classic! - kiwis up the front bid as high as they can, but the house gets sold to the Chinese. That's the reason why all the doctors, nurses, firefighters, scientists, engineers, lawyers, accountants, patent attorneys etc are leaving Auckland.

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by  O4 normal  |  31st Jul 17, 9:04pm 1501491864

The WISE would sell now if finances are tight and to the bone, and really think about the offers you get if you are lucky to get one, BIG gamble thinking the government could save the day at these historic low interest rates, not possible, the banks threw it out and new will pull it back faster, when will people learn, the locals in a area works out the prices in the end, you can try and change things like overseas investors and or high low immigration or like large amounts of money leaving say Auckland to less valuable areas in droves, BUT IN THE END ITS BACK TO BASICS, 5X INCOMES , wages go up or prices come down, this in going to be the mother of corrections , we have never pushed these limits before, even the GFC was only about 30% of these limits (only my guess)

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by  MortgageBelt  |  31st Jul 17, 9:12pm 1501492340

Don't worry, if house prices fall, then interest rates will fall. So lower mortgage payments.

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by  MisterB  |  31st Jul 17, 10:07pm 1501495671

Not sure why you think that.

1. Bank risk increases, so only naive would think the margins wouldnt need to increase to offset
2. According to RBNZ, ~80% of NZ loans are on fixed rates, average tenor 2 years or so. These mortgage payments won't change.
3. I may have missed it in their monetary statements, but RBNZ have not indicated a desire to lower rates to arrest decline anyway.

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by  Bobster  |  31st Jul 17, 10:12pm 1501495925

This idea that interest rate cuts will be the saviour of a falling property market is dangerous nonsense and it needs to be knocked on the head

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by  swapacrate  |  31st Jul 17, 11:47pm 1501501661

Maybe they are joking.

It seems to be what Laminar is saying. Or maybe Im wrong.

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by  O4 normal  |  31st Jul 17, 9:57pm 1501495023

It's amazing you can read what bobster and misterB writes and straight away you can see laminar talks a lot of shit

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by  O4 normal  |  31st Jul 17, 10:16pm 1501496169

Trust Double-GZ to spend the time hunting out a house like that in Glendowie , cvs are done more on averages , that house is only 3 bdm 1 bath , but it's really big with a great section and in great condition, this is why not many people think much about cvs , they never give a good light on a great property and even shitty I guess and usually out of date, good for some peoples agenda,s tho, RE

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by  O4 normal  |  31st Jul 17, 10:32pm 1501497141

MasterB and bobster, thank you very much, tonight's reading has been really great, best ever on here, you two most have great jobs, easy to tell, thanks again

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by  MisterB  |  31st Jul 17, 10:37pm 1501497423

Thanks. Just like to have a good robust fact based discussion. I genuinely don't need others to agree, but I'd like a counter view to be presented with some sound logic and coherency. #NotTheHerald

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by  Bobster  |  31st Jul 17, 10:44pm 1501497871

Laminar is a good sport

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by  Peri  |  1st Aug 17, 7:25am 1501529125

Agree, the debate between you Laminar and MisterB et al has been enjoyable and thought provoking Thanks guys

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by  O4 normal  |  31st Jul 17, 10:34pm 1501497246

Wish I could read an write haha with out going over it 20 times

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by  O4 normal  |  31st Jul 17, 11:01pm 1501498879

NotTheHerald , haha

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by  fat pat  |  1st Aug 17, 5:55am 1501523703

This could be worse than an Austrian style bust. NZ was never the first choice for all those foreign buyers, and having successfully laundered / offshored their money, they may choose to migrate it to a safer jurisdiction. It's not hard to imagine a negative feedback loop involving capital outflows, falling prices, lower exchange rates and higher interest rates.

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by  Conrad  |  1st Aug 17, 4:35pm 1501562102

Nah, the dodgy crooks would be furious to lose 20%+ of their ill-gotten gains if prices fell. I'd expect they'd sit tight and wait it out if at all possible.

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by  RickStrauss  |  1st Aug 17, 4:47pm 1501562829

How much does laundering through a casino usually cost though? Around 10%?

I guess, yeah, 20% would be worse indeed.

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