Personal Finance

  • FMA keen to see personalised robo-advice enabled in New Zealand sooner than the law would otherwise allow

    By the end of the year, you may be able to plug in information about your financial situation to an approved computer programme, and have personalised advice spouted back out at you.

    The Financial Markets Authority (FMA) is proposing to use its powers to enable firms to provide personalised robo-advice at least a year before a pending law change is expected to allow this.

    The regulator is seeking feedback on a consultation paper that explains how it could make a class exemption for personalised computer or algorithm-generated advice under the current law.

    The issue is that under the Financial Advisers Act 2008, advice that takes an individual's financial situation or goals into account, can only be given by “a natural person". Only “class” robo-advice, or generic recommendations based on characteristics such as age and risk profile, is allowed.

    Yet given the proliferation of robo-advice around the world, and the fact it makes financial advice more accessible, the FMA recognises the law is outdated.

    “Globally, robo-advice is growing rapidly, with established financial services firms and new entrants offering the service. Due to advances in technology, over the last few years services provided solely through online channels have increased considerably,” it says.

    “Many new services target young, internet-savvy consumers. Some services offer low-cost advice options aimed at those without other financial advice options.

    “In New Zealand, our review of KiwiSaver sales in 2015 showed most consumers do not obtain personalised advice on KiwiSaver. Personalised robo-advice services could help address this advice gap.”

    Furthermore, it notes: “The line between personalised and class advice is unclear. This means providers may be hesitant to develop class robo-advice tools.”

    While proposed changes to financial adviser laws are designed to address this issue, these aren’t expected to come into effect until 2019.

    What’s more, this is only if the Financial Services Legislation Amendment Bill is passed.

    The Minister of Commerce and Consumer Affairs Jacqui Dean expects the Bill to be introduced to Parliament by the end of the month. From there, it will have to go through a select committee, which will give the public further opportunities make submissions on the Bill.

    The expectation has been for this process to be wrapped up and the legislation passed before the September 23 general election.    

    FMA Director of Regulation Liam Mason expands on the rationale behind the FMA’s move to try to fast-track the legalisation of personalised robo-advice while the new law is being passed and there is a transitionary period before it is completely enacted.

    “We’ve been looking at ways to enable innovation to help tackle the advice gap in New Zealand, but also to mitigate the risk of poor consumer outcomes,” he says.

    “We are seeking to ensure we maintain the standards of consumer protection provided by the legislation while encouraging innovation that can help more people get help with investment decisions.”

    The FMA would like to ensure firms can provide personalised robo-advice by late this year.  

    The public have until July 19 to make submissions on the FMA’s consultation document.

  • The banking industry is seeking the public's views on its proposed new, dramatically thinned down, Code of Banking Practice. But is the new Code too vague?

    By Gareth Vaughan

    The banking industry has put its Code of Banking Practice, banks' idea of what good banking practice should be, on an extreme diet.

    And bank lobby group the New Zealand Bankers' Association (NZBA) is now calling for submissions on its proposed new vastly thinned down Code of Banking Practice.

    The existing Code runs to 51 pages. In contrast, my print out of the proposed new Code only runs to 4½ pages.

    Why is this so and does it matter for bank retail customers to whom the Code applies?

    The Code is developed by the banking industry, and is the industry's idea of what good banking practice should look like. NZBA member banks agree to observe this good practice as a minimum standard in how they treat customers. The Code is used by the Banking Ombudsman, along with bank terms and conditions, and the law, to assess and make recommendations in disputes between banks and customers. The Code was launched in 1992 and is currently in its fifth edition, which was published five years ago.

    According to NZBA the existing Code is prescriptive and largely duplicates bank terms and conditions. In contrast, the proposed new Code takes a principles-based approach making it more accessible to bank customers, and gives the Banking Ombudsman more flexibility in deciding what good banking practice is. NZBA says the new approach will keep the Code up to date with changes in the way people are banking, as well as with new legal obligations for banks.

    What & who is the Banking Ombudsman?

    The Banking Ombudsman Scheme provides a free service helping customers resolve problems with their banks. It is funded by its bank participants, who are named here.  It's governed by a board whose independent chairperson is Miriam Dean QC. Other board members are BNZ CEO Anthony Healy and Rabobank NZ CEO Daryl Johnson from the bank side, plus Consumer NZ CEO Suzanne Chetwin and a second consumer representative, Kenina Court.

    The actual Banking Ombudsman is Nicola Sladden, who has two deputies. Sarah Parker is the Deputy Banking Ombudsman for resolution, and Tina Mitchell is Deputy Banking Ombudsman for prevention.

    NZBA says a new Code is needed because the current Code has grown and moved away from its original purpose.

    "The current Code now largely duplicates banks’ standard terms and conditions. The Code also hasn’t kept up to date with changes in the way we now prefer to do our banking. The review presents an opportunity to modernise both the content and structure of the Code. The current Code is 51 pages long, is prescriptive, reads like bank terms and conditions, and easily gets out of date in the face of banking innovation. We propose simplifying the Code and adopting a principles-based approach that is easy to read. The proposed approach should make the Code easier for customers to understand and avoid duplicating bank terms and conditions. It should also keep the Code up to date in terms of changes to the way we’re banking and new consumer law obligations for banks," NZBA says.

    Detail versus principles

    The existing Code features 10 detailed sections plus an appendix. They are an introduction, communication, products and services, cheques, credit, pins and password, cards, internet banking, other services including foreign exchange services, and statements and account information. Here's a video interview with then-NZBA CEO Kirk Hope when the Code was last updated in 2012.

    In stark contrast, the proposed new Code sets out five principles of good banking practice and provides some information on how banks will strive to meet these. The five principles are that banks will:

    · Treat customers fairly and reasonably
    · Communicate with customers clearly and effectively
    · Respect customers’ privacy and confidentiality and keep their banking systems as secure as they can
    · Act responsibly when offering or providing customers with credit
    · Deal effectively with customer concerns and complaints.

    What NZBA says

    Asked why the Code is being renewed now, NZBA CEO Karen Scott-Howman says it's reviewed every few years, with the current review beginning in 2015. Asked what benefits there are for banks in the proposed new Code, Scott-Howman says it presents some challenges for them.

    "For example, they’ll need to review their internal processes and policies to ensure staff are trained about the new Code and that their terms and conditions fit with the Code. It will also provide the Banking Ombudsman with more flexibility in making recommendations in particular cases," Scott-Howman says.

    "We have consulted closely with the Banking Ombudsman in developing the draft Code. We’ve also talked to other key stakeholders, including Consumer NZ and the Commission for Financial Capability, and incorporated their feedback. We’re currently seeking public feedback on the draft Code."

     She describes the Code as an example of industry self-regulation.

    "In the new Code we’re looking to set out some high level commitments in a way that’s accessible to customers. It’s a clear statement from the industry about how we want to relate to our customers. That has an important place in the broader regulatory framework in which we operate. Regulator involvement would move this from self-regulation to co-regulation. Regulators [such as the Commerce Commission, Financial Markets Authority and Reserve Bank] can, of course, make submissions on the draft Code," Scott-Howman says.

    Some of the change to the Code is designed to address changes in the way people bank.

    "For example, with cheque use declining year on year, and mobile banking hugely increasing, the current Code has a whole chapter on cheques and only a couple of clauses on mobile banking. A higher level principles-based approach avoids the Code quickly getting out of date in light of these innovations and customer banking preferences," says Scott-Howman. 

    Additionally the new Code will address regulatory change such as the Responsible Lending Code, and review of the Financial Advisers Act.

    What the Banking Ombudsman says

    Sladden says the Code remains relevant and is an opportunity for the industry to signal its commitment to meet community expectations of banking.

    "I accept that a number of new legal obligations have been introduced. However, there are still obligations in the Code that are not enshrined in law. Even where there is a double-up between the Code and the law, it is good to maintain industry consensus on the standard of practice that should apply. The Code principles are not black-letter obligations imposed on the banks...The idea of the Code being based on a voluntary commitment from the banks to the community is important. It promotes trust and confidence in the sector. It is also a way of ensuring no individual provider lags behind good industry practice. It forms an important part of the wider consumer protection framework," says Sladden.

    And, she says, the new Code will be more effective.

    "The new Code is principles based, in plain-English with fewer qualifications. The new Code is more flexible, easier to understand and will keep apace as standards of good banking practice change and develop over time. The process of developing new law is neither speedy nor simple."

    Furthermore Sladden says by signing up to the Code banks agree to accept limits on their freedom to contract with their customers in the interests of ethical business practice and consumer protection.

    "The Code is therefore significant in that it gives banking customers an extra level of assurance, over and above the law, as part of a broader consumer protection framework. That standard is understood by the banks, which prevents issues from arising in the first place, and then reinforced by the Banking Ombudsman if complaints do occur. The Code also influences the standards imposed on other members of the financial services industry," says Sladden.

    In terms of moving from a prescriptive approach to a principled one, Sladden says a shorter, more principles based Code has the flexibility to cover new situations that may not have been anticipated when the Code was created.

    "With new innovations and technologies emerging at a faster rate than ever, it is important that the banking industry has a code of practice that is sufficiently flexible to adapt to a wide range of services and products. The Banking Ombudsman takes a similar approach to applying the Code to complaints – what was the purpose of the rule and how would a reasonable bank have applied the Code in the same circumstances," she says.

    "The benefits for customers are that the Code holds banks to a higher standard than the law, the Code is now future-proofed in that it is sufficiently flexible to cover new products and services, and a principled approach means banks will be expected to reasonably apply the spirit of the Code, rather than taking a litigious approach to detail," Sladden says.

    "Our advice to customers is to be aware that the law and the Code offers a robust framework for consumer protection, but customers must always be aware of the specific terms and conditions they agree with their bank. The terms and conditions set out the contractual obligations for the bank and the customer, and are likely to involve more detail than the law or the Code."

    My view

    A question I have in relation to the new Code is whether it is slimmed down too much, thus becoming too vague. For example, one paragraph from the proposed new Code says:

    "What may be fair and reasonable in any case will depend on the circumstances, including our conduct and yours, what our terms and conditions say, what the law says, and good banking practice."

    Such language potentially leaves massive wriggle room for banks and their lawyers when faced with customer complaints. And with such a drastic reduction in size, has something of critical importance to customers been left out?

    One could argue that the Code of Banking Practice is put together by the banks for the banks. However, as Sladden points out it's good to have industry consensus on the standard of behaviour banks should maintain.

    Ultimately, however, the Code doesn't form part of the terms and conditions of a customer's relationship with their bank. Nor does it override or replace these terms and conditions. And it doesn't form part of a contract between a bank and its customers.

    Nonetheless it sets a floor for ethics in banks' treatment of customers and is something bank customers ought to be aware of.

    NZBA is seeking public submissions on its proposed new Code by July 26. Detail on the submissions process is here. The draft Code is here, and the existing Code is here.

    *This article was first published in our email for paying subscribers early on Tuesday morning. See here for more details and how to subscribe.

  • Saving a 20% deposit for a lower-priced home in Auckland would take from 6.3 years to 8.7 years for typical first home buyers on median incomes

    By Greg Ninness

    Typical first home buyers in Auckland would have to save for an average of more than seven years to get a 20% deposit for their first home, according to's latest Home Loan Affordability Reports.

    In Wellington, typical first home buyers could save a 20% deposit in just over four years, and in Canterbury it would take 3.8 years.

    The figures show just how far out of reach home ownership is becoming for aspiring first home buyers on average wages in Auckland.

    The Home Loan Affordability Reports track the median take home pay of couples aged 25-29 in each region, if both were working full time, and then estimates how much money they would save if they put aside 20% of their after tax pay each week, and earned interest on their savings at the 90 day term deposit rate.

    It then calculates how long it would take them to save a 20% deposit for a home at the REINZ's lower quartile selling price in each region (see table below).

    Number of years it would take typical First Home Buyers* to save a 20% deposit on a lower quartile-priced home 
    Region Years
    Northland 4.2
    Auckland 7.3
    Waikato 4.1
    Bay of Plenty 4.8
    Hawke's Bay 3.4
    Taranaki 3.1
    Manawatu/Whanganui 2.2
    Wellington 4.1
    Nelson/Marlborough 4.4
    Canterbury 3.8
    Otago 3.0
    Southland 2.0
    All NZ 4.0

    That shows that it would take 7.3 years to save a 20% deposit in Auckland, where the REINZ's lower quartile selling price was $665,000 in May, compared to just two years in Southland, where the lower quartile selling price was just $174,000 in May (see table below for all regions).

    Within the Auckland Region the cheapest places to buy a first home were the Papakura and Franklin districts on the city's southern fringes, where the lower quartile prices were $570,000 and $575,000 respectively in May.

    That means it would take typical first home buyers 6.3 years to save a 20% deposit for a lower quartile-priced home in Papakura or Franklin.

    The most expensive area for first home buyers in Auckland was the North Shore, where it would take 8.7 years for typical first home buyers to save a 20% deposit on a home at the North Shore's lower quartile selling price of $792,500.

    According to the Home Loan Affordability Reports ,the median after-tax pay for Auckland couples aged 25-29 is $1590.83 a week.

    If they saved 20% of that each week ($318.17) to put towards a deposit, they would have $1272.66 left between them ($636.33 each), from which they would have to pay all of their living expenses including rent, so they wouldn't be living a lavish lifestyle.

    That assumes they have no children and do not receive the Working for Families allowance and do not make KiwiSaver contributions or student loan repayments, which would affect their ability to save for a deposit.

    Welcome Home Loans

    However first home buyers may be eligible for a Welcome Home Loan which would only require a 10% deposit, a scheme which is administered by Housing New Zealand, although the mortgages come from a mainstream bank or other lender.

    Separate Home Loan Affordability Reports are available for each of the following regions and cities (click to view).
    Northland Region
    Whangarei District
    Auckland Region
    Rodney District
    North Shore District
    Waitakere District
    Central Auckland District
    Manukau District
    Papakura District
    Franklin District
    Waikato Region
    Hamilton District
    Bay of Plenty Region
    Tauranga District
    Rotorua District
    Hawke's Bay Region
    Napier District
    Hastings District
    Gisborne District
    Taranaki Region
    New Plymouth District
    Manawatu/Whanganui Region
    Palmerston North District
    Whanganui District
    Wellington Region
    Masterton District
    Kapiti District
    Porirua District
    Hutt Valley District
    Wellington City
    Nelson/Marlborough Region
    Nelson City
    Canterbury Region
    Christchurch District
    Timaru District
    Otago Region
    Dunedin District
    Queenstown-Lakes District
    Southland Region
    Invercargill District
    All New Zealand

    To be eligible a couple would need to earn less than $130,000 a year between them (before tax), and in Auckland the maximum price of their property they were purchasing would be $650,000 for a brand new home or $600,000 for an older home.

    The gross income of the typical first home buyers used in the Home Loan Affordability Reports is $101,400 a year, so they would be eligible for the Welcome Home Loan, allowing them to buy a home for up $650,000 if it was brand new, or $600,000 if it was older, with a 10% deposit (up to $60,000 or $65,000 depending on the age of the property).

    However there are some disadvantages to such an arrangement, the main ones being that it increases the size of the borrower's mortgage from 80% to 90% of the purchase price, which would also increase the amount of their mortgage payments.

    It is also likely to restrict where they could buy a property because Pukekohe and Franklin are the only districts within the Auckland region where the median selling price is below $650,000, and many, if not most of the new homes that are being built are priced at the middle to upper end of the market, putting them beyond the reach of most first home buyers.

    So it's likely that even if they qualify for a mortgage with a 10% deposit, they may have difficulty finding a home that they would want to live in and that they could afford.

    Separate Home Loan Affordability Reports are available for each of the regions and districts listed in the box at left.

    To read them click on the areas from the list (at left) that you are interested in.


  • Less 'would you like fries with that' and more 'needs-based conversations' expected from ANZ staff, as bank changes its remuneration structure

    By Jenée Tibshraeny

    The days of ANZ staff pulling out the, ‘Would you like fries with that?’ line every time you set foot in a branch, are expected to be numbered.

    The bank is changing the way it pays staff so they’re less incentivised to hard sell products to customers who don’t want or need them.

    From October, 25% to 30% of frontline staffs’ bonuses will be derived from how much they sell. Currently this portion sits at over 50%, depending on employees’ roles.

    Speaking to in a Double Shot Interview, ANZ’s retail and business banking managing director Antonia Watson says she hopes this shift won’t change the customer experience too much, as she trusts staff are already doing best by their customers.

    “If you want to be in and out [of a branch] and are in a hurry, we’re not going to try to stop you by having a conversation about something you don’t want,” she says.

    “If you’re someone who’s saving for their first home loan, and the person behind the counter’s identified that, they might ask you if you want to come back and have a conversation about that later. That might still happen.”

    Watson says the change in pay structure will also encourage staff to better target those they cold call.

    “We might have found out you might have come to one of our home loan seminars and said you’re interested in buying a house. We might give you a call and say, ‘Would you like to come in and discuss whether we give you a mortgage pre-approval?’”

    77% of ANZ staff surveyed pressured to sell beyond customers’ needs

    Yet First Union, which represents around 1,100 ANZ staff, believes ANZ has a long way to go to change its sales-driven culture.

    Having recently surveyed employees (members and non-members) at 40 ANZ branches across the country, it found 77% felt pressured to sell beyond customers’ needs.

    First Union’s national organiser for the finance sector Tali Williams says this is around 7-10 percentage points higher than ANZ’s competitors.

    Williams says the survey outcome indicates that the unreasonable amount of pressure being put on staff is systemic, rather than stemming from a few “bad egg” managers.

    Having provided with a copy of the answers respondents gave when First Union asked them what they meant when they said they were under pressure, one can see Watson is correct in saying staff want to do what’s best for their customers.

    Yet being penalised for failing to meet high sales targets, they are put in compromising positions. Some responses include:

    "Personally I do feel pressured, but resist. You know that if you don't meet targets someone will start on you!"

    "The pressure is to sell, sell, sell otherwise we are not meeting our targets then you feel incapable, incompetent and disempowered with major lack of confidence in your ability to succeed."

    "Coming to work makes me feel sick. I am supposed to be thinking about giving good customer service and it is supposed to be an incentive but instead not achieving your target is used as a weapon against you as a threat to being dismissed. We all know that if customers do not buy the products we try and sell them then we could lose our jobs!"

    "…Particularly with credit cards. Made to call people and recommend even though the person can't afford. Pushed to make many calls. Know that some staff push products that people don't need. EG someone on a benefit being set up a serious saver for $5/week then they get charged when they then take the $5 back out. 18 and 19 year olds with $20,000 loans."

    Watson says she doesn’t want products to be sold to people who don’t need them.

    “So that’s one of the reasons that I’m passionately a proponent of the model that we’re going to, because we will be rewarding our staff for having good needs-based conversations with customers.”

    Under the new system, “customer, people, process and financial [IE sales volumes]” will be given even weightings when staff performance is measured.

    A changing tide when it comes to regulation

    These changes align with a wave of new regulations in both New Zealand and Australia that aim to transform the culture of the banking sector, from being sales to customer centric.

    ANZ’s new incentive programme, for example, meets many of the recommendations Australia’s ex-Public Service Commissioner, Stephen Sedgwick, made in a retail banking remuneration review published on April 19.

    Sedgwick, in the report commissioned by the Australian Bankers’ Association, concluded: “…there is not sufficient evidence of significant systemic risks of poor outcomes for customers to support an outright ban on all product based payments in retail banking.

    “Nonetheless… some current practices carry an unacceptable risk of promoting behaviour that is inconsistent with the interests of customers and should be changed.

    “Some of these relate to management practices that may reduce the effectiveness of the bank’s risk mitigation strategies. Other practices relate to the way incentives and remuneration are structured.”

    In New Zealand, the soon to be completed review of the Financial Advisers Act is also expected to specifically require all advisers to put their customers’ interests ahead of their own “regardless of the differing financial incentives offered by providers”.

    The Ministry of Business Innovation and Employment explains advisers “would not be expected to consider the full range of products from across the market, but would be required to recommend the best product for the consumer from their suite and, if no product from those providers is genuinely suitable, to advise the consumer on that basis”.

    ANZ NZ and Westpac NZ commit to Sedgwick

    Watson says that ANZ’s remuneration restructure wasn’t specifically based on the Sedgwick report or the Financial Advisers Act review. Rather: “Everything’s going in the same direction.

    “You’ve seen that with banking over the last number of years. It has been clear what our customers and our staff and our stakeholders are looking for.”

    While the four major banks were quick off the block committing to implementing Sedgwick’s 21 recommendations in Australia; in New Zealand, only ANZ and Westpac have reassured First Union of their commitment.

    Westpac has told “Westpac NZ is strongly committed to the principles behind the Sedgwick Report’s recommendations; while there are differences between the Australian and New Zealand environments, we will review and identify how we can use these recommendations to improve the way we operate and the service we provide our customers.”

    ASB says: “Where the Sedgwick report can add value to our customers and the service we provide to them, we will certainly consider its recommendations in the context of the New Zealand Banking environment.”

    BNZ says it is committed to honouring “the spirit” of the report. “Any changes we may make in the future will be done with customer front of mind, and in consultation with our staff as part of our normal employment negotiations.”

    Incentives to continue making up around 10% of pay

    ANZ has been piloting its new remuneration structure in the North Shore since April.  

    Asked whether she can provide any reassurances the change in pay structure has proven to alleviate pressures on staff, Watson says: “I would hope so, yes.”

    “In general, they are enjoying working under that new incentive programme…

    “It’s a different mindset for our staff I think. Understanding the different leavers - that we’re rewarding them for behaviours, for the types of conversations they’re having - not just for the outright sales points or the customer satisfaction score…

    “It’s not costly or anything like that. Our incentives tend to be a very low percentage of peoples’ pay - no more than 10%, depending on the role on average. That type of thing is not going to change.”

    Asked how we will know whether ANZ has in fact achieved the cultural change it is setting out to make, Watson says ANZ NZ’s parent company will undergo an independent review to ensure it aligns with the Sedgwick recommendations in Australia.

    “We [in NZ] tend to align a lot of things with them.”

    Furthermore, she says there will be audits, surveys and reviews of the new incentive structure once it’s rolled out throughout the country in October.

    “Although we need to test and learn a little bit. We’re not going to say it’s going to be perfect from day one, so there might be little changes that go ahead. And of course every year we do a thorough review of the plan for the coming year.”

    *This article was first published in our email for paying subscribers early on Friday morning. See here for more details and how to subscribe.

  • Gareth Vaughan suggests that whoever is in government after the September 23 election, the RBNZ's unlikely to get a DTI tool and largely has itself to blame

    By Gareth Vaughan

    Has the Reserve Bank missed the boat on getting itself a macro-prudential debt-to-income (DTI) ratio tool?

    That may seem a premature question when the prudential regulator has only just issued a consultation paper on the concept, and submissions aren't due until August 18 meaning the process has months to run yet.

    But, ahead of the September 23 election, the lukewarm response from the Finance Minister and his Labour shadow must be concerning to the boffins at number 2, The Terrace. That's because, under its Memorandum of Understanding with the Finance Minister, the Reserve Bank must get said minister's approval to have a DTI tool added to its macro-prudential toolkit.

    Grant Robertson, Labour's Finance Spokesman, issued a statement saying, “Labour does not support debt to income ratios for first home buyers."

    "The introduction of across the board debt to income ratios for home lending would punish first home buyers struggling to get into the housing market," said Robertson. "Thousands of young New Zealanders would be shut out of the security of home ownership."

    And, speaking to Radio NZ, Finance Minister Steven Joyce also sounded reticent.

    "There's a risk also that the Reserve Bank ends up taking over decisions for people that they really should think about themselves. There's a moral hazard in that. In other words people can think if the Reserve Bank and the banks let me do it I should do it. And actually we do need people to think carefully about the amount they borrow at any time," said Joyce.

    'A significant intervention'

    Joyce has also noted that DTI limits are designed to regulate the amount of debt a mortgage borrower can access relative to their incomes. And that the use of DTI ratio restrictions would be a significant intervention in the housing market. So reading between the lines it sounds as if allowing the Reserve Bank to have such a tool may be a step too far for the National Party.

    And with Labour wanting to protect the sacrosanct first home buyer, it sounds as if they would prefer a different approach to tackling the issues a DTI limiting tool would target. Robertson's statement suggests as much by promoting "building more affordable homes and cracking down on speculators who are driving up prices."

    Ahead of the September election media headlines on DTI stories like Radio NZ's Thousands of home buyers could be knocked out of housing market, and Stuff's Debt-to-income ratio would stop thousands from buying houses, won't be encouraging politicians to speak out in favour of giving the Reserve Bank the tool. That might feel a bit too much like turkeys voting for an early Christmas.

    Looking further down the line there's a five-year review of the macro-prudential Memorandum of Understanding due in 2018. With a new Reserve Bank Governor set to be appointed next year at an early point in the next electoral cycle, I won't be surprised if the DTI can is kicked down the road until then.

    A good case

    But even then will politicians' appetites have changed? If I was to take a punt on answering  this question, I'd say no. That's whether Auckland house prices begin a renewed surge, or continue on their recent downward trajectory. And that's despite the fact that, from a financial stability perspective - which is what macro-prudential tools are all about - there's a strong case for the Reserve Bank to have a DTI tool.

    New Zealand households are carrying more debt than they ever have, with the household debt-to-disposable-income ratio at a record high of 167%.

    Reserve Bank Governor Graeme Wheeler recently highlighted that borrowers taking out loans at high DTIs are vulnerable to rising interest rates or declines in income. The Reserve Bank says the share of new bank lending at DTI ratios above five, which the Reserve Bank views as "pretty high" and I'd agree, has continued to grow over the past year for first-home buyers and other owner-occupiers, to 36% and 42% respectively in March. Meanwhile, Wheeler also points out Auckland's house price to income multiple has risen to 9.5 or 10 times from 6.5 five years ago. A median multiple of 3.0 times or less is generally regarded as a good marker for housing affordability

    Look in the mirror

    Back in February, when Joyce requested a cost-benefit analysis and public consultation from the central bank before any decision was made on potentially adding a DTI tool to the toolbox, I argued the RBNZ had itself to blame. That's because if the prudential regulator had requested a DTI tool be included in its macro-prudential toolkit when the toolkit was being established in 2013, it's unlikely to have faced the political heel dragging of 2016-17. The debate at that time, to the extent there was any, was whether the Reserve Bank should get the toolkit, not what tools should be in it. 

    In its consultation paper the Reserve Bank has acknowledged problems with collecting DTI data from banks, with inconsistencies in how the banks collate it. About a quarter of the high DTI loans featured in Reserve Bank data are reported "erroneously" by banks, the Reserve Bank says, meaning banks' DTI data contains "artificially high results," and these issues may "disproportionately affect investor lending." 

    This means the Reserve Bank's analysis and case for needing a DTI tool is wide open for attack from self interested debt peddling banks, property spruikers and other critics through their submissions and lobbying of politicians.

    Here I can't help thinking the Reserve Bank's light touch idiosyncratic oversight of banks will come back to haunt it. It was only really in late 2014 that the regulator started to sound remotely interested in probing the concept of DTI restrictions, with Deputy Governor Grant Spencer saying, "We've been doing some investigations about debt-to-income, about debt service ratios, collecting more data."

    The Reserve Bank could have had banks reporting uniform DTI data for years. But for a regulator that,  as the International Monetary Fund recently highlighted, doesn't even conduct on-site inspections of the banks it regulates, such a move wasn't on the agenda.

    And now the Reserve Bank hierarchy wants to add a shiny new DTI tool to its toolkit. They'd be wise to not hold their collective breath while they wait.

    *This article was first published in our email for paying subscribers early on Tuesday morning. See here for more details and how to subscribe.

  • Generation Rent Investment Guide Episode 2: Index-tracking investment offerings by Smartshares, SuperLife, Simplicity and ASB compared

    By Jenée Tibshraeny

    Can you relate to this? 

    You have $5,000, $30,000 or $150,000 sitting in a savings account.

    You’re keen to invest it, but don’t have the knowledge or inclination to trade shares in individual companies yourself. Plus, you’re all about diversification, so don’t want to put all your eggs in a few baskets.

    You could hire someone to buy and sell shares for you, but you realise this is too expensive unless you have hundreds of thousands of dollars to invest.

    You could invest in a managed fund, much like many KiwiSaver funds. However you need to be willing to pay more in fees to have a fund manager constantly move your money around in an attempt to maximise your returns. If you go down this route, you need to believe your fund manager can outsmart the market.

    If you're of the mind this isn’t possible, or the fees you pay to use a fund manager outweigh the higher returns you’re expected to receive, investing in funds that simply track the market could be the way to go.

    Big picture stuff

    There is a raft of material out there that debates managed versus passive investing. I won’t wade into this argument now.

    But when you do your own research, you should remember New Zealand has a very different market to the US, where a lot of financial literature comes from. Investing in index-tracking funds is much cheaper in the US due to there being more competition, economies of scale and investors having greater access to markets. You may consequently not save as much in fees going down this route than the likes of passive investing evangelist/life coach Tony Robbins may have you believe.

    Another thing to be mindful of when considering investing in index-tracking funds is that the market has been performing well since the 2008 Global Financial Crisis. So people you talk to who have gone down this path in the last 10 years are likely to be boasting about their returns.

    The question is whether they can sit tight and ride out the wave when the market turns and the values of their investments fall, while their mates with managed funds possibly suffer softer blows.

    Some of the newer index-tracking products available in New Zealand haven’t yet seen a major downturn, so are essentially yet to be tested.

    Getting into the detail 

    With this in mind, if you see merit in passive investing, this second instalment of my Generation Rent Investment Guide is for you.

    I have put together a table comparing the nuts and bolts of a few products that enable you to do so. Click on the headlines to see the product disclosure statements for more information.

      ASB Investment Funds Simplicity Investment Funds SuperLife Investment Funds SuperLife Sector Funds SuperLife ETF Funds Smartshares ETFs
    Who Part of the Commonwealth Bank of Australia Group. NZ not for profit company owned by The Simplicity Charitable Trust. Subsidiary of the NZX.
    What Funds with different portfolios made up of cash, bonds, shares and property to reflect different risk/reward profiles. Funds with portfolios limited to individual sectors and assets classes such as cash, bonds, shares and property. ETF funds that invest almost entirely in the equivalent Smartshares ETFs. There are cash, bonds, shares and property ETF funds available. ETFs listed on the NZX. 20 track the performance of specific indices; 3 are actively managed and aim to outperform specific indices. There are cash, bonds, shares and property ETFs available.
    Number of funds 5 3 6 14 23 23
    Access to global markets Yes
    What it costs to get started Contribution fee: 0.45% of amount invested. Nothing Application fee:
    $30 when you first invest in an ETF.
    Minimum investment $2,000. Funds only available through ASB’s Wealth Advisory Service, subject to ASB's eligibility criteria. $10,000 No minimum $500
    Minimum you can add to investment $500 lump sum. $100/month or $50/fortnight if part of regular savings plan. No minimum $250 lump sum or $50/month if signed up to regular savings plan.
    What adding to your investment costs Contribution fee: 0.45% of what you invest. Nothing
      ASB Investment Funds Simplicity Investment Funds SuperLife Investment Funds SuperLife Sector Funds SuperLife ETF Funds Smartshares ETFs
    How to switch investments Fill in application form to switch lump sums of at least $500 between funds. You can switch online but can only hold one portfolio at a time. Login and switch online, or fill in an application form. Sell units in one ETF, buy units in another ETF.
    What switching investments costs Nothing Brokerage fee + application fee if you're investing in an ETF you haven't invested in before.
    How you earn income Returns automatically reinvested. You can set up regular withdrawals from the Conservative and Conservative Plus funds. Returns automatically reinvested. You can set up regular withdrawals. Returns can be automatically reinvested into the fund they came from, or invested into a NZ Cash fund (designed for investors making regular withdrawals). You can set up regular withdrawals. Distributions paid quarterly or six-monthly depending on fund. Automatically reinvested, unless you choose to receive distributions as cash.
    Annual fees From 0.97% to 1.25% of the value of your investment $30 + 0.31% of the value of your investment. $12 admin fee (spread across all funds) + from 0.45% to 0.59% of the value of your investment $12 admin fee (spread across all funds) + from 0.39% to 0.94% of the value of your investment. $12 admin fee (spread across all funds) + from 0.42% to 0.63% of the value of your investment From 0.33% to 0.75% of the value of your investment
    How you withdraw your money You can withdraw lump sums of at least $500. If in the Conservative and Conservative Plus funds, you can withdraw regular amounts of at least $100 fortnightly or monthly. You can withdraw as much as you like. You can sell some or all of the units in the ETF you've invested in. You have to do this through a broker not Smartshares.
    What it costs to withdraw your money Nothing Brokerage fees. IE:
    ASB Securities: 0.3% brokerage fee (minimum $30)
    ANZ Securities: $29.90 plus 0.40%
    Returns over past year, after fees and tax, as at May 31 3.43% -
    Not applicable as Simplicity has not been around for a year. 3.04% - 9.99% -11.96% - 18.13% -3.45% - 24.90% -2.54% - 23.99%
    Tax rate Based on your prescribed investor rate (PIR), which is dependent on your regular income and investment income. At 28%, the top PIR is below the top income tax rate of 33%.

    Here is my take on the various options:

    Investing in a fund with a set portfolio vs going down the Exchange Traded Fund (ETF) route

    Putting your money in an investment fund through the likes of ASB, Simplicity or SuperLife enables you to let the experts do the work to put together a portfolio with an asset mix that matches your risk/reward profile - much like when you invest in a KiwiSaver fund.

    If you think you’re capable of putting together a portfolio that gives you the right level of diversification and exposure to risk, ETFs or SuperLife’s sector funds may be appropriate. These options give you flexibility and agility, which could be useful if you understand the market and have a clear strategy.

    All of the options can be used as longer-term savings vehicles, in that you can make regular contributions to your investments. ASB will however charge you a 0.45% contribution fee.

    The other general difference is accessibility. All of SuperLife’s products don’t require you to have a certain amount to invest, you only need $500 to invest in Smartshares ETFs, and you need $10,000 to invest in Simplicity’s investment funds.

    In theory you need $2,000 to invest in one of ASB’s funds, but believes that in practice you need much more. has asked ASB for an explanation around who its funds are targeted towards and why, but hasn't received one.

    Show me the money

    This is where things get really difficult.

    Ideally when comparing returns across products designed for longer term investors, you should look at what their annual rates have been over a number of years. The problem is many Smartshares ETFs, as well as Simplicity’s funds, haven’t been around for that long, so don't have a track record.

    You can therefore only make a fair comparison using returns over the past year, as I have done below, but you should remember returns could look a lot different over say a 10-year period.

    It is also difficult to compare returns, as different products have different compositions, so you’re never quite comparing apples with apples.

    Nonetheless, I believe there’s some value in looking at the extent to which returns may differ and how various fee structures affect your return.

    So I have done what I have been advised not to do, and created ETF, ETF fund and sector fund portfolios that somewhat reflect the composition of SuperLife and ASB growth funds, to do a comparison. I haven’t included Simplicity as its investment funds have only been available to the public since April.

    Returns on a $20,000 investment, after fees and tax at highest rate, after 1 year (as at May 31, assuming distributions are reinvested)
      ASB Growth Investment Fund


    SuperLife Sector Funds

    $4000 invested in each of the following funds: NZ Shares, Aus Shares, Overseas Shares, Emerging Markets, Overseas Bonds 

    SuperLife ETF Funds

    $4000 invested in each of the following ETF funds: NZ Top 50, Aus Top 20, Total World, Emerging Markets, Global Bond

    Smartshares ETFs

    $4000 invested in each of the following ETFs: NZ Top 50, Aus Top 20, Total World, Emerging Markets, Global Bond

    Assuming you invest in the fund(s) for the first time

    Contribution fee:
    $20,000 x 0.45% = $90

    $19,910 x 8.71% 

    = $1,734

    Administration fee: $12

    $19,988 x 9.99%

    = $1,997


    Administration fee: $12 (spread across funds) - NZ Shares:
    $3,998 x 5.40%
    - Aus Shares:
    $3,998 x 9.92%
    - Overseas Shares:
    $3,998 x 10.21%
    - Emerging Markets:
    $3,998 x 15.15%
    - Overseas Bonds:
    $3,998 x 3.89% = $1,782
    Administration fee: $12 (spread across funds) - NZ Top 50:
    $3,998 x 6.01%  
    - Aus Top 20:
    $3,998 x 5.52%
    - Total World:
    $3,998 x 10.09%
    - Emerging Markets:
    $3,998 x 16.53%
    - Global Bonds:
    $3,998 x 3.91% = $1,682
    Application fee:
    $30 x 5 = $150

    - NZ Top 50:
    $3,970 x 5.49%  
    - Aus Top 20:
    $3,970 x 6.02%
    - Total World:
    $3,970 x 9.71%
    - Emerging Markets:
    $3970 x 15.55%
    - Global Bonds:
    $3,970 x 3.94% = $1,616
    Assuming you already have $20,000 invested in the fund(s)

    $20,000 x 8.71%

    = $1,742

    - NZ Top 50:
    $4,000 x 5.49%
    - Aus Top 20:
    $4,000 x 6.02%
    - Total World:
    $4,000 x 9.71%
    - Emerging Markets:
    $4000 x 15.55%
    - Global Bonds:
    $4,000 x 3.94%<

    = $1,628

    Smartshares ETFs vs SuperLife ETF funds

    As you will see, there is around a $60 difference between the returns you would have received over the past year if you bought units in Smartshares ETFs yourself, compared to if you did so through investing in corresponding SuperLife funds.

    NZX Head of Funds Management Aaron Jenkins says there will always been a minute difference because SuperLife’s ETF funds include a bit of cash, as there is a delay between people investing in the funds, and SuperLife buying the ETFs. 

    Furthermore, the fees differ a little due to the buying power SuperLife has as it buys ETF units on behalf of a number of investors.  

    The other difference between investing in Smartshares ETFs directly or through SuperLife is that you have to pay brokerage fees if you’re trading ETF units on the stock exchange yourself. ANZ and ASB Securities provide online brokerage services, with the latter being cheaper.

    Therefore, investing in ETFs through SuperLife may be better for a more active investor. However Jenkins says people investing in ETFs are generally playing a long game, so aren't too fixated on doing a lot of trading.  

    Throwing SuperLife’s sector funds into the mix, Jenkins says the appeal with these is that they’re a simplified version of ETFs. So this might be the way to go for someone who wants to invest in a range of New Zealand shares, but doesn’t know whether it’s best to invest in a NZ Top 10 or Top 50 ETF, for example.

    The fees across Smartshares ETFs, SuperLife ETF funds and SuperLife sector funds are fairly similar.

    ASB vs Simplicity vs SuperLife investment funds

    As with the three investment options discussed above, the returns you can expect to receive from investment funds that largely track the market, should theoretically be quite similar.

    The make-up of their portfolios are fairly standardised across different risk profiles and therefore one is broadly expected to be as affected as another when the market shifts.

    While the annual returns (after fees and tax) of ASB’s investment funds over the last three years range from 4.18% to 8.40%, SuperLife’s range from 4.02% to 10.48%.

    Differences are partially derived from fees. ASB’s range from 0.97% to 1.25% p.a of the value of your investment, while those for SuperLife’s investment funds range from $12 + 0.45% - 0.59%.

    Simplicity has marketed itself as having the lowest fees in the market, setting a standard annual fee across all its funds of $30 + 0.31% of the value of your investment.

    Furthermore, being a not for profit, Simplicity has vowed to pass on the gains it gets through economies of scale to its investors, by dropping fees when it can.

    Its Managing Director Sam Stubbs says since launching in September last year, $150 million has been invested in Simplicity’s KiwiSaver and investment funds. The organisation will break even once funds under management hit $400 million.

    While this innovative business model is appealing, I would be interested to see what Simplicity’s returns look like in a few years’ time.

    Finally, there is an argument that you’re better off investing in an established institution with backing from a larger parent company like the NZX or CBA. However Stubbs says all the money you invest through Simplicity is held by the Public Trust, so will be protected if Simplicity goes belly up.

    Final two cents

    I have only brushed the surface of this topic, but trust this article has given you an idea around what's out there and how various products differ.

    While I have drawn my conclusions having studied product disclosure statements and talked to the NZX's Head of Funds Management Aaron Jenkins, Smartshares Product Manager Dean Anderson, Simplicity Managing Director Sam Stubbs, Simplicity Head of Operations and Compliance Craig Simpson, ASB spokespeople, and financial columnist Mary Holm, among a few other experts, please remember I am a financial journalist, not a financial adviser.

  • TSB Bank says it has lent $50 mln in unsecured consumer lending through P2P lender Harmoney

    TSB Bank has finally acknowledged that it's lending money through peer-to-peer (P2P) lender Harmoney.

    The bank has disclosed this in its annual report, released on Friday, saying it has lent $50 million through Harmoney to date.

    "A relatively new lending facility for us has been through Harmoney - a New Zealand peer-to-peer [online] lending marketplace. We have funded $50 million as an institutional investor with Harmoney with our funds designated to the personal lending market in New Zealand. This relationship aligns with our diversification strategy and provides a means for us to support customers indirectly in achieving their financial goals," TSB says. asked TSB in February 2016, and again in June last year, if it was lending money through Harmoney. On both occasions the bank declined to confirm or deny this. That's even though on the second occasion we asked it was obvious TSB was lending through Harmoney.

    Harmoney is currently embroiled in a pivotal High Court case with the Commerce Commission. The regulator is arguing Harmoney's $500 platform fee for borrowers falls within the definition of a credit fee under the Credit Contracts and Consumer Finance Act. Harmoney disagrees. 

     Harmoney facilitates unsecured personal loans for the likes of debt consolidation, home improvements, holidays and cars by matching borrowers and lenders through its website. Having launched in September 2014, Harmoney says it has facilitated $490 million of lending to date.

    Heartland Bank, which holds a 12.59% stake in Harmoney, also lends money through the P2P lender. By December 31 last year Heartland had lent $62 million through Harmoney's online platform. TSB has not disclosed a shareholding in Harmoney.

    Asked how much money the bank plans to lend in total through Harmoney, a TSB spokesperson declined to say, citing commercial sensitivity. For the same reason, the spokesperson declined to provide details of the bank's returns from its Harmoney lending or loan default rates. Heartland has said it has an agreement to lend up to $85 million through Harmoney in total.

    Profit drops by a quarter

    Meanwhile, TSB has posted a $15.2 million, or 25%, fall in March year net profit after tax to $46.3 million from $61.6 million. The drop came as operating expenses surged $13.2 million, or 20%, to $80.2 million. 

    The bank attributed its expense blow-out, which pushed its cost to income ratio to 53.9% from 46.6%, to a 14% increase in employees, and technology improvements including two "major" core banking platform upgrades, a new lending application system and redesigned website. TSB says it added just over 50 staff during its March financial year and now has about 500 in total.

    Net operating income rose $4.9 million, or 3%, to $148.8 million. A $12.7 million swing to $4 million of impairment losses from write-backs of $8.7 million last year, also hit the bottom line. Annual dividends almost halved to $10 million from $19.85 million.

    Year-on-year, TSB's net interest margin fell eight basis points to 2.01%, and its cost of funds dropped 78 basis points to 2.79%.

    TSB grew gross lending by just under $832 million, or 22%, to almost $4.7 billion. Total deposits increased by nearly $344 million, or 6%, to $6.157 billion.

  • The RBNZ says debt to income restrictions could prevent about 10,000 borrowers from buying a house, reduce house sales volumes by about 9%, trim house prices and credit growth by up to 5%, and shave 0.1% off GDP

    By Gareth Vaughan

    Restricting the debt to income (DTI) ratio of some mortgage borrowers could prevent about 10,000 borrowers from buying a house, reduce house sales volumes by about 9%, trim house prices and credit growth by up to 5%, and shave 0.1%, or $260 million, off Gross Domestic Product, the Reserve Bank says.

    These estimates are included in the Reserve Bank's consultation paper Serviceability Restrictions as a Potential Macroprudential Tool in New Zealand. Including a cost-benefit analysis showing benefits outweigh costs with net benefits estimated at just under 0.1% of GDP per annum for the period over which the tool is used, it was issued on Thursday. The Reserve Bank is calling for submissions by August 18.

    The Reserve Bank's analysis and estimates, and possibly even its views on the scale of the issue it's attempting to address, are likely to be met with some scepticism given the central bank itself says about a quarter of the high DTI loans featured in its data are reported "erroneously" by banks. This means the Reserve Bank's DTI data currently contains "artificially high results."

    The key benefit of a DTI tool would be reducing the costs of a housing and financial crisis. The main costs would stem from a reduction in short-term economic activity, and the cost to some potential homebuyers of having to delay house purchases. (See more in the table at the foot of this article).

    The Reserve Bank says any DTI tool would apply to both investors and owner-occupiers. It reiterates that, whilst it's "desirable" to add a DTI tool to its macro-prudential toolkit, it doesn't see a case for actual implementation at this stage.

    "If actual policy implementation was ever proposed there would be a further detailed consultation on the specific terms of the policy proposal, including a Regulatory Impact Statement," the Reserve Bank says.

    The prudential regulator of the country's trading banks argues DTI restrictions would reduce the risk of a significant rise in mortgage defaults during a severe economic downturn, mitigate the potential amplification of a downturn due to economic stress and increased house listings among high DTI households, and "lean against" periods of rapid house price and credit growth thus reducing the probability and magnitude of a sharp correction in house prices.

    The Reserve Bank says a DTI policy would be introduced at a time when it judged that house price appreciation and high DTIs created a risk of crisis.

    "So we consider 5%, one crisis every 20 years, is a conservative baseline risk of housing crisis in an environment that RBNZ would apply a DTI policy," the Reserve Bank says.

    A limit on the total debt of the borrower as a ratio to gross income

    It says a DTI restriction would be likely to take the form of a limit on the total debt of the borrower as a ratio to gross income (TDTI).

    "The total debt of the borrower would include other debts at the bank and other material debts, such as mortgages on other properties at other banks. Banks would be expected, as now, to inquire as to the other debts of borrowers and borrowers would be expected to provide this information to the bank. The Reserve Bank might also periodically scrutinise the approach taken by banks to verify this information when supplied by the borrower," the Reserve Bank says.

    Under a DTI policy banks would be required to maintain their share of non-exempt mortgage lending at a DTI exceeding, say five, to, say, below 20%. Thus a "speed limit" would be put in place, as with the loan-to-value ratio restrictions on high residential mortgage lending. The Reserve Bank says the current share of high-DTI lending is reported at about 45%, although it thinks this is an over-estimate that will drop as banks improve their reporting systems.

    "Currently the data suggests around 27% of lending is above TDTI six and around a further 13% is between TDTI five and six. A rule that limited new lending to borrowers with total debt to income ratios above five, to no more than 20% of new lending, would thus significantly reduce the amount of high TDTI lending that was possible, even assuming, as we do, around a quarter of the high DTI loans in our data are reported erroneously at present."

    "This is only an illustrative calibration, and any actual policy could vary from this. For example, the speed limit and level designated as ‘high-TDTI’ could vary based on the circumstances prevailing at the time, and the Reserve Bank’s ongoing assessment of the TDTI data and market risks. The rule could potentially take a different form, e.g. a limit on debt service ratios, but our current thinking is that a TDTI speed limit would offer the best trade-off between effectiveness and simplicity," the Reserve Bank says.


    There would be exemptions similar to those available within the LVR restriction policy. For example, exemptions for new builds and for owner-occupiers wanting to buy and occupy a "relatively low-priced" home. The exemptions would aim to eliminate unintended consequences.

    "The limit would apply to standard residential mortgages as defined in Reserve Bank’s capital adequacy framework. This includes some loans secured by residential mortgage that fund businesses, but not some larger business loans. E.g. a very large loan where the owner’s home is used as security but is not the key factor behind the lending decision. It does not include reverse mortgages."

    "The Reserve Bank considers that an exemption to a TDTI policy that facilitated people becoming or remaining homeowners might not have a serious impact on the effectiveness of any policy, and could reduce the risk of the policy impeding first home buyers and labour mobility. For example, an exemption could allow homes to be purchased for owner-occupation if their value was below the ‘cap’ for Housing New Zealand’s homestart programme, [which is] currently $600,000 in Auckland, $400,000 to $500,000 elsewhere. This is the example we have modelled, but there would be alternatives: for example, the policy could allow first home buyers slightly higher TDTIs. The aim would be to diminish the welfare costs of the policy, as well as recognising that first home buyers had relatively low default rates in the Irish downturn experience," the Reserve Bank says. 

    Since last October the Reserve Bank says it has been obtaining "more detailed data" from banks showing the total debt to income ratios of borrowers with "a clearer split" between investors and owner occupiers, and between Auckland borrowers and borrowers elsewhere in the country. This data is, however, described as "preliminary," with the Reserve Bank "continuing to engage with banks to understand their reporting standards and improve the consistency in data methodology."

    'Artificially high results'

    The Reserve Bank says total debt to income ratios should include debts a bank's borrowers have at other financial institutions, but some banks have difficulty reporting this comprehensively.

    "Some banks also report that they do not necessarily capture all sources of borrower income if the borrower has demonstrated enough income to pass the servicing test. Also, some banks have system problems which mean they are unable to capture all the income details used to pass the servicing test when calculating total debt to income ratios. These factors appear to lead to artificially high results."

    "As our data is improved and we understand cases...better, the share of high-DTI lending in the data is likely to decline. To some degree, these issues may disproportionately affect investor lending, since the systems used to store data on those customers are often more complicated reflecting the complex relationships that sometimes exist within groups of related borrowers," the Reserve Bank says.

    "However, we are confident in the conclusion that New Zealand DTIs are relatively high...Given the international evidence in the previous section that high DTIs are likely to increase default risk in a downturn, we consider this a policy concern."

    The Reserve Bank says that over the three months to January, about 60% of the new property investor lending across the big five banks was at a DTI of more than five, compared to 37% from owner-occupiers.

    "Indicatively, our work suggests that around 2000 owner-occupiers and 9000 investors might be prevented from purchasing each year. The relatively high number of investor purchases that are constrained reflects (i) a greater share of high DTI lending than for owner-occupiers (ii) more limited ability to claim exemptions. The policy would also likely constrain some of the 160,000 or so top-up loans that occur each year, and we estimate that around 14,000 top-up loans could be constrained assuming that the limit binds roughly proportionately on top-ups and purchases."

    'No significant impacts on rents'

    The Reserve Bank argues DTI restrictions wouldn't have a significant impact on rents. Even though DTI limit would be likely to reduce the number of rental properties over time because landlords are significantly more likely to have high DTI loans, each additional property bought by an owner-occupier would reduce both the supply of and demand for rental properties.

    "So the impact on rents should not be significant."

     Based on an estimate that about 10,000 borrowers could be stopped from buying a house due to a DTI limit, and allowing for the likelihood some of them would be replaced by low-DTI buyers, this suggests house sales could fall by around 9% following the implementation of the policy, the Reserve Bank suggests. (See chart below).

    "This could reduce house prices and credit growth by 2% to 5%."

    "To proxy the effect of the DTI policy, we have assumed an increase in mortgage spreads, and a shock to house prices. Mortgage spreads increase by 10 basis points to 30 basis points while the policy is in place, based on an assumed additional cost of obtaining a high-DTI loan from other sources, such as non-bank lenders, of around 250 basis points, and around 8% of new borrowers being constrained by the policy. Additional judgement was used to ensure that house prices fall by around 2%  to 5% in the first year after the policy is implemented," says the Reserve Bank.

     "The simulation suggests that [economic] activity would decline by a peak of around 0.1% to 0.5% one year after the policy is implemented. Activity recovers fairly rapidly after the first year, as the impact on house price inflation dissipates and monetary policy eases. The average impact on GDP is around 0.05% to 0.24% per annum while the policy is in place, [which is] assumed to be four years). We adopt 0.1% of GDP as an expected macroeconomic cost, per year that the policy is expected to be in place, reflecting that GDP is likely to move above trend further out due to the policy being removed and the prolonged effects of the monetary policy easing."

    The Reserve Bank says that if house prices accelerate again it  could happen in an environment where interest rates remain low because of weak global economic growth and inflation.

    "In this event, house prices would be rising even further relative to income, stretching affordability even further. In the Reserve Bank’s view, this would create risks of an eventual downturn similar to that seen in countries like the US and Ireland during the Global Financial Crisis," the Reserve Bank says.

    The charts and tables below all come from the Reserve Bank consultation paper.

  • ANZ's Cameron Bagrie suggests New Zealanders may be ready to 'eat broccoli' by making some hard economic decisions such as implementing a comprehensive capital gains tax

    By Gareth Vaughan

    New Zealand needs to deal with the "500 pound gorilla" of housing through a comprehensive capital gains tax among other things, if household savings are to be meaningfully boosted, ANZ New Zealand chief economist Cameron Bagrie says.

    In their last two weekly New Zealand Market Focus reports ANZ's economists have highlighted a need for domestic savings growth to help fund the country's investment needs. This has seen them describe savings as the missing link from the Budget, and note that, on the evidence of the Reserve Bank's Financial Stability Report, the reliance on offshore funding by banks, given a significant gap between domestic debt and deposit growth, is coming under greater regulatory attention and scrutiny.

    A key point Bagrie and his team are making is that if domestic savings is to increase significantly, more proactive savings policies will be needed. This, the ANZ economists say, will require "the finger to be pointed at the playing field between housing versus the rest."

    "How New Zealand funds its future gargantuan investment needs remains at the forefront of our minds. Our previous modus operandi of back filling a domestic saving shortfall with offshore borrowing, and running a large current account deficit, is facing far more challenges in the current regulatory and global environment, which is all the more pertinent given a massive pipeline of investment needs," says Bagrie.

    "It’s a basic accounting identity that investment needs savings, and the local pool is insufficient. The offshore tap can still be turned on, of course, but we just can’t be as dependent on it as we have been historically. Heavily indebted countries are under a brighter spotlight. We can run a current account deficit up to 4% or 4½% of GDP from today’s 2.7% level, so this lever can be pulled to a degree. But anything beyond that will see the stock of net external debt lifting as a share of GDP, drawing negative attention," Bagrie says. 

    'We've typically wanted to have our cake and eat it too'

    Bagrie told that whilst banks reining in offshore funding and starting to "swing the pendulum" away from borrowers towards depositors through higher interest rates is "jolly good stuff," people need to connect the dots and look at the downstream implications. If we're not funding our investment requirements for the likes of housing, roads, hotels to meet tourism demand, and broader infrastructure needs, through overseas money so much, then domestic savings rates need to increase. 

    "If domestic savings goes up then you have got to forsake consumption, which has not been within New Zealand's DNA. We've typically wanted to have our cake and eat it too," says Bagrie.

    "I'd like to see more of the debate brought to the forefront because I think it's a big significant issue in the next two to three years," he adds.

    "I don't think people have thought through what the natural consequences are of what is going on, what they mean in practice. We're going to borrow less money overseas because that seems like the right thing to do. [It] reduces the point of vulnerability. We give ourselves a little pat on the back and say 'we're going to do that.' But what does that actually mean? Because those offshore savings will be used to prop up domestic savings to meet our domestic needs. Where's plan B? Or what does Plan B, C, D or E even look like?"

    "We've got to pull more levers and the big 500 pound gorilla here is the housing market versus everybody else. It's the untouchable one," says Bagrie.

    'It's all a bit like eating broccoli. You don't like it but it's good for you'

    That said, he argues there's more maturity among New Zealanders now than there was five or 10 years ago, noting that we're now talking about raising the retirement age.

    "We're starting to think about the hard decisions that just need to be made. It's all a bit like eating broccoli. You don't like it but it's good for you," says Bagrie.

    "You've got to look at ring fencing [tax losses on rental properties so they can't be offset against other income]. [And] I think the lack of a full blown capital gains tax is a weakness of our tax system."

    "if we roll into 2018 and we're not tapping offshore funding markets, where's the money going to come from for that big investment pipeline? The corporate sector is generating cashflow, [and] the government sector's going from the red into the black. Where we've got a glaring savings deficiency across New Zealand is in the household sector. And it's blatantly obvious that the house is a big part of that reason," says Bagrie.

    "The last thing we want across this economy at the moment is for the investment line to start nudging lower. We've got to keep that investment line up which means we've got to have a well articulated plan, strategy in regard to how we're going to drive more savings."

    Household savings rate negative

    The most recent Reserve Bank data shows a household saving rate of -0.7%, or -$876 million, in 2015. Meanwhile, the household debt-to-disposable-income ratio is now at a record high of 167%.

    The International Monetary Fund recently suggested the Government ought to make changes so that the ring-fencing of tax losses on housing investments could only be applied against housing income and not all income.

    "The incentives for buying real estate increase when real estate investors can write off interest payments against their other taxable income," the IMF says. "This ‘negative gearing’ encourages investment that would otherwise be loss making, and thereby acts as an amplifier of price movements in the real estate market. Ring-fencing housing losses to within real estate earnings would therefore weaken an important price driver."

    Through its 2015 Budget the Government introduced a so-called bright line test to tax gains from residential property investments sold within two years of purchase. In addition to this capital gains can be taxed in specific cases, as detailed by EY's Aaron Quintal here. However, calls for the introduction of a comprehensive capital gains tax continue from others aside from Bagrie, including from contributor Terry Baucher here.

    Seven ways to boost household savings

    Bagrie and his colleagues have listed seven potential ways New Zealand's household savings could be improved.

    1. Stronger income growth. This is the obvious fix. But it is easier said than done, of course. A decent terms of trade outlook certainly helps, but the productivity story is not signalling much in the way of prospects for a decent lift in real wage growth. Education needs to be more of a focal point, but the pay-offs there are of the long-term variety. 

    2. Households lift saving of their own accord. That is possible, but arguably unlikely based on historical experience. The tendency remains to ‘save’ via the house. 

    3. More money is put in the back pocket. Tax cuts (driving more incentive to work and get ahead) or additional welfare payments could help, but we have to be mindful that sometimes this is just redistributing income, not creating it. You need to drive the right behaviours, which is why using tax policy is favoured. But if it just means an equivalent drop in government saving, then it won’t lift aggregate saving. 

    4. Well-targeted social investment. Improved prospects for the vulnerable mean the same for incomes, and higher incomes lift the ability to save. Some levers are being pulled but this is a multi-decade long investment. 

    5. Make it cheaper to live. New Zealand is not a cheap place to live, particularly housing-wise. The weekly wage gets whittled away pretty quickly. Construction costs are a problem. Local authority rates move up faster than inflation. Thankfully the electricity sector is functioning a lot better than it once was. 

    6. Interest rates rise. That is already happening given the funding pressures banks face, but if domestic saving doesn’t lift enough to meet our investment needs, then interest rates will need to keep rising until they do. That’s bad for the investment side of the equation. 

    7. There is a more proactive push on the policy front. This is something that we think is increasingly going to be necessary to drive the desired outcomes. And without getting into details, it is going to require the playing field between housing and other investments to even up. We have the new bright-line test but that doesn’t go far enough. Some tough, but necessary, discussions are in store. 

    *This article was first published in our email for paying subscribers early on Wednesday morning. See here for more details and how to subscribe.

  • Banks are competing harder for term deposit funding, even as wholesale interest rates start slipping lower. Who is offering market-leading rates keeps on changing

    By David Chaston

    Since our last review of interest rates on offer to term deposit savers, there have been a series of small but regular changes.

    Generally this shift has been to higher interest rates, in a growing contrast to falling wholesale rates.

    And these changes have shifted who the market-leading offerers are across a range of terms.

    That is especially true for the shorter terms.

    For the very short three month term, RaboDirect now offers 3.35% pa, a change that was effective from today (Thursday). That is way out ahead of any other bank, with seven rivals still back on 3.00%.

    In the five, six and seven month categories, the clear leader is the SBS Bank 3.70% seven month offer, also a change this week. That rate bests the recent Heartland Bank offer of 3.55%, the previous market leader.

    For eight or nine months, Heartland Bank's 3.70% nine month offer stands above all other banks, even the BNZ's 3.65% eight month offer.

    And for a full one year term, three banks offer 3.60%. These are the Co-operative Bank, SBS and TSB Bank. This rate is far above what the four large Aussie banks are offering, even above the 3.50% currently offered by Kiwibank.

    Most term deposit savers chose terms of one year and less and that preference is overwhelming.

    But if you are prepared to go longer, the rates are higher.

    For example, you can get 3.80% from the ICBC online option. You can get 3.75% from many other banks, including ANZ.

    For two years, 4.00% pa is available at TSB.

    And rates above 4% at banks are available for longer terms.

    If you seek even higher rates, you will need to look outside bank offerers to non-bank institutions. Liberty Finance and UDC are investment grade offerers and the Liberty Finance offers are particularly strong.

    And if you have a tolerance for even more risk, there are some sub-investment grade institutions with rates that reflect the higher risk perceptions involved. NZCU Baywide, F&P Finance (Flexicard), and FE Investments are well worth a review.

    Wholesale swap rates have fallen sharply in the past month, and are now at their lowest point of the year. Lower wholesale rates usually effectively cap what banks can offer retail clients for longer term rates. But there is a growing disconnect between these wholesale markets and the local retail offers. How long that can last is untested at this point.

    Wholesale rates may be options for banks, but they are not for savers. But you can access bond rates on the secondary market, which offer liquidity in a way fixed term deposit commitments don't. But for that flexibility, you do concede retail rate levels. Depending on how you assess risk, you may well judge the flexibility to get your capital returned when you need it via an early secondary market transaction as more important than the yield return. That is up to your personal tolerance for risk.

    The benchmark 'risk free' return for savers is AAA Kiwi Bonds. They return just 1.75% for terms of six months and one year, 2.00% for two years, and 2.25% for four years. Any rate above that is a premium for risk. Credit ratings are one way to assess risk.

    Use our deposit calculator to figure exactly how much benefit each option is worth; you can assess the value of more or less frequent interest payment terms, and the PIE products, comparing two situations side by side.

    All carded, or advertised, term deposit rates for all institutions for terms less than one year are here, and for terms one-to-five years are here.

    Term PIE rates are here.

    The latest headline rate offers are in this table.

    for a $25,000 deposit Rating 3/4 mths 5/6/7 mths 8/9 mths 1 yr 18 mths 2 yrs 3 yrs
    Main banks                
    AA- 3.00 3.30 3.50 3.35 3.75 3.90 4.00
    ASB AA- 3.00 3.50 3.35 3.25 3.65 3.90 4.00
    AA- 3.00 3.10 3.65 3.15 3.60 3.85 4.00
    Kiwibank A 3.00 3.30 3.60 3.50   3.85 4.00
    Westpac AA- 3.00 3.30 3.35 3.20 3.60 3.80 3.90
    Other banks                
    BBB 2.95 3.35 3.55 3.60 3.75 3.85 4.05
    Heartland Bank BBB 3.00 3.55 3.70 3.40 3.40 3.40 3.70
    HSBC Premier AA- 2.50 2.80 2.80 2.90   2.90 3.00
    ICBC - online A 3.00 3.30 3.60 3.40 3.80 3.80 3.85
    RaboDirect A 3.35 3.35 3.35 3.40 3.70 3.85 3.95
    RaboDirect BBB 2.75 3.70 3.55 3.60 3.75 3.90 4.00
    A- 2.75 3.40 3.60 3.60 3.75 4.00 4.05
    Selected fincos                
    FE Investments B*   5.00   6.00 6.50 6.60 6.60
    F&P Finance BB* 3.45 3.80 4.00 4.10 4.25 4.35 4.50
    RaboDirect BBB- 3.60 3.95 4.25 4.30 4.35 4.40 4.45
    NZCU Baywide BB* 3.40 4.25 4.25 4.25 4.25 4.25 4.25
    UDC (limited acceptance) BBB 2.70 3.45 3.75 3.80 3.75 3.85 3.85
      * = these credit ratings are not investment grade.  

    Our unique term deposit calculator can help quantify what each offer will net you.

    Term deposit rates

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