By Greg Ninness
In Auckland it is still possible for a young couple who purchased their first home five years ago to move up the property ladder and buy a more expensive home, even if one of them only works part time, according to Interest.co.nz's latest Home Loan Affordability Reports.
The reports track how affordable the mortgage payments would be for three typical couples at different stages of the property ladder in each of the major centres throughout the country:
- A couple aged 25-29 who both work full time and are looking to buy their first home at the REINZ's lower quartile selling price.
- A slightly older couple aged 30-34 with a young family where one works full time and the other for 20 hours a week, who would have purchased their first home five years ago at the lower quartile price at the time, and are now looking to move up the property ladder and buy their next home at the REINZ's current median selling price.
- A couple aged 35-39 who both work full time and who purchased their first home 10 years ago at the lower quartile price at the time, and are now looking to buy their next home at the current median selling price.
It is assumed each couple earn the median rate of pay for people of their age in and the mortgage payments are considered affordable if they take up no more than 40% of their take home pay.
The reports show that housing remains affordable for all three groups except in the overheated property markets of Auckland and Queenstown.
In Auckland, a lower quartile-priced home would be unaffordable for a couple on a median income because the mortgage payments would take up 43.6% of their take home pay, before allowing for other property related expenses such as rates, insurance and maintenance.
The rising house price effect
However moving on up to the second rung of the property ladder should still be affordable for couples who purchased their first home 5-10 year ago, because they would have benefited from a significant increase in their equity from rising house prices.
If they had purchased their first home five years ago at the REINZ's lower quartile price at the time and resold it at the current lower quartile selling price, they would have equity of $368,535 to put towards the purchase of median priced home.
Their equity comes from the increase in the value of their first home over the last five years less an allowance for agent's selling commission, plus the capital payments they would have made on their mortgage over that time.
To buy a home at the REINZ's current Auckland median price of price $825,000 they would need a mortgage $465,665 and the payments on that would be equivalent to $529.63 a week or 38.6% of their take home pay.
So moving up the property ladder would still be affordable for them, even when one partner is only working part time, although after the mortgage payments were made they'd have $842 a week to pay for everything else. So there wouldn't be much spare cash if they had a young family.
However their situation would improve significantly if/when the partner working part time returned to full time work.
For the slightly older couple aged 35-39 who purchased their first home 10 years ago and who now both work full time, moving up the property ladder would be even more affordable.
Selling their first home after 10 years would leave them with equity of $434,735, which means they'd need a mortgage of $390,265 to buy a median priced home.
Assuming the mortgage term was 30 years, their repayments would take up just 23.7% of their take home pay.
That gives the older couple plenty of options.
They could keep their mortgage payments modest and divert some of their money into savings and investments, or they could pay off their mortgage faster and then start saving in earnest for their retirement.
The reports highlight the disparity in wealth in Auckland between those who have owned their home for a number of years and have benefited from the increase in equity which rising house prices have provided, and those who are struggling to make the leap and get on to the first rung of the property ladder.
The only place facing affordability issues is Queenstown, where the problems are even worse.
The mortgage payments on a lower quartile-priced home in the resort town would suck up a whopping 48.9% of typical first home buyers' take home pay, and it's unlikely that a couple who purchased their first home there five years ago would be able to move up the property ladder and buy their next home in the town if one of them was working part time.
Even a couple who bought their first home in Queenstown 10 years ago and who both now work full time, wouldn't have a lot of cash left over if they traded up and bought a median priced home. That's because the mortgage payments would eat up 37.5% of their take home pay, which is just within affordable limits.
But outside of Auckland and Queenstown, housing remains affordable for all of the typical home buyers profiled in the Home Loan Affordability Reports, giving people outside of the two property hotspots more options when planning their financial futures.
The full suite of Home Loan Affordability Reports are available for most of the regional centres throughout the country - click on the links below to read any of the reports:
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The Commerce Commission has filed civil proceedings in the Auckland High Court asking the Court questions about how the Credit Contract and Consumer Finance Act 2003 (CCCFA) applies to consumer loans entered into through peer-to-peer lender Harmoney.
Harmoney says it's "disappointed' with the commission's action.
The loss-making Harmoney is already facing a six-figure fine in a separate Fair Trading case brought earlier by the commission, and to which it has pleaded guilty.
Since its incorporation in May 2014, Harmoney has charged borrowers a ‘platform fee’ that is added to all loans funded through its platform. Before December 2015 Harmoney set the fee at a percentage of the amount borrowed. The Commission’s view is that the platform fee is a credit fee under the Act, and that Harmoney is a creditor. Harmoney says it is not a creditor, and that the fee is the revenue it earns for running its loans marketplace.
From when it commenced business until December 2015 Harmoney charged a platform fee based on the percentage of loan amount. That was changed, but the commission says it understands that the lending transaction remains fundamentally the same. The commission says that while its case relates primarily to the original platform fee regime, the Court's answers will apply to any fee structures that are similarly constituted.
If the Court finds that the platform fee is a credit fee, the CCCFA requires the fee to be reasonable and only cover the lender’s transaction-specific costs, as recently confirmed in the Supreme Court’s MTF/Sportzone ruling.
Different stance from Squirrel Money & Lending Crowd
There are now four P2P companies in operation, with different business models. Both Squirrel Money and Lending Crowd launched with flat fees, assuming they were party to the CCCFA. But LendMe has argued its fees are not credit fees under the CCCFA.
The commission said that Harmoney had indicated that it has been developing a proposal for a revised transaction structure, but this has not been finalised. However, the commission said it anticipated that this new structure may also give rise to questions regarding applicability and effect of the CCCFA. "If that is the case, and the details are finalised in the near future, the commission may seek the Court's leave to add further questions in relation to that proposed structure," the commission said.
The Commission is asking the Court a number of legal questions and it expects that the answers will provide more clarity about how consumer credit laws apply to loans offered by Harmoney and other peer-to-peer lenders.
The Commission has made its application under section 100A of the Commerce Act which enables it to seek the opinion of the High Court on issues of law. This is the first time that the Commission has made an application under section 100A in a consumer credit case.
Harmoney’s joint chief executive and founder Neil Roberts said that prior to launching the Harmoney peer to peer marketplace the company documented the business model in detail following extensive legal advice and working with all stakeholders during the licensing process prior to being granted its peer to peer licence by the Financial Markets Authority.
"As the first peer to peer provider to seek and obtain a licence, we consulted with the Commerce Commission and MBIE providing them with full details of our business model including detailed information about fees."
The Commerce Commission disputes this comment, saying it was not given all the information about Harmoney's set up and fees modelling prior to launch.
Through its PR company Harmoney has, later in the day, disputed the commission's assertion and produced two documents, here and here that it says shows the commission was consulted on fees and other aspects of Harmoney’s business prior to launch.
'Cooperative with the Commission'
Roberts said that from the time the Commerce Commission decided to consider further the application of CCCFA as it may apply to P2P lending providers, "which was sometime after our licence had been provided and the marketplace was in operation, Harmoney has been cooperative with the Commission".
“Thousands of New Zealanders borrow and lend every day on the Harmoney platform and we have gone about building, launching and operating the platform in exactly the manner anticipated by the new legislation that made p2p platforms possible in New Zealand. Harmoney has built a highly transparent and interactive marketplace since it became the first operator in this new area of financial services in New Zealand.”
For the year to 31 March 2016, Harmoney recorded a loss of $14.2 million before tax on revenues of $8.6 million. Roberts says, “We have invested heavily in the platform to open up a new asset class for retail investors and a frictionless experience for borrowers, a genuine alternative that creates competition in the financial markets. Like many tech start-ups we are not yet turning a profit, and continue to invest as an innovator in the P2P lending market.”
Harmoney chairman David Flacks says – “The peer to peer industry is new to New Zealand and is growing fast both in New Zealand and globally. It offers benefits both to borrowers and lenders over traditional lending options. Harmoney was the first licensed peer to peer platform in New Zealand and is the largest. It is disappointing that the Commerce Commission is seeking to clarify the legal position, as it affects the entire peer to peer industry, by bringing this case stated action using Harmoney’s operating model as the basis for the judicial review.”
“I am committed to ensuring that Harmoney complies fully with all laws and regulations. It is highly problematic however when interpretation of each law by government departments results in a lack of clarity as to how the regulatory framework applies overall to p2p platforms. For this reason we have also met with the Commerce and Consumer Affairs Minister Paul Goldsmith to request that this issue be clarified by an appropriate legislative change”.
LendMe CEO: 'Our fees aren't credit fees under the CCCFA'
LendMe chief executive Marcus Morrison said his company was "having quite a bit of dialogue with Comm Comm (and their lawyer) late last year" but have not had any since.
"We made our stance and process very clear to them at that time. We believe that the our platform fees are not deemed credit fees under the CCCFA in that the borrowers’ ability to drawdown their loan is in no way contingent upon their payment of the platform fee (paid to LendMe) and that the fee is not in any way passed on to the lender.
"In any case, virtually all of our borrowers have either been commercial entities or trusts and so are not subject to the requirements of the CCCFA," Morrison said.
By now, most banks have passed through their fraction of the August 11 RBNZ OCR cut.
Now is a good time to review the upshot.
The initial decisions by both Westpac and ANZ earlier in the year has given the industry 'permission' to hold on to some or most of the official cuts. And the growing boldness now extends to some retaining all the reduction for themselves.
Some public policy makers have said that it is "up to the market" to determine these rates.
The "market" is working on the supply side at least. Banks have held on to most of the cuts.
The pushback in the public conversation has been limited.
And there is little evidence that homeowners, or more importantly SMEs or farmers have moved banks as a consequence.
The banking industry has effectively got a free pass here.
And it is interesting to note that it is both the largest (ANZ) and smallest (Cooperative Bank, TSB Bank) that have been the most aggressive in retaining most or all of the latest reductions.
The banking industry clearly feels little threat, pressure or pushback from either regulators or consumers. Certainly there is little competitive retail rate pressures from within the industry.
As we have noted earlier, this is the third consecutive OCR change where retention has been the industry response. And this August 11 event has shown the most aggressive response by banks yet. It seems reasonable to expect an even more selfish response if the RBNZ cuts again on November 10, as many observers expect. (There is an official September 22 review in the meantime, but the RBNZ has recently signaled that it prefers a full MPS to change the OCR - which in turn makes you wonder why they have interim reviews.)
So, any market discipline of banking behaviour in this matter now seems up to borrowers. Unless they choose to change, the bank behaviour pattern is unlikely to be different.
The institution with the lowest floating rate is now Resimac, who changed its floating rate on Friday to 5.19%.
The bank with the lowest floating rate is now Kiwibank at 5.25%.
Otherwise, almost all banks now offer floating rates in the relatively tight range of 5.55% to 5.65%, with the Cooperative Bank now the only other bank outside that range.
The growing use of interest-only loans by New Zealand borrowers could prove "particularly problematic" if house prices fall, S&P Global Ratings says.
In a report on the risks of rising house prices for New Zealand banks, the credit rating agency notes imbalances are continuing to build. These imbalances include the increasing use of interest-only loans, which account for 40% of housing loan flows through 30% of owner-occupier loans, and 55% of investor loans over the past year against overall loan stock of 28%.
S&P points out interest-only loans are unlikely to be limited by the Reserve Bank's incoming, beefed up high loan-to-value ratio restrictions on banks' residential mortgage lending.
"The increasing use of interest-only loans could prove particularly problematic if house prices fall, most notably given the level of household wealth tied up in residential housing - the reverse event of rising house prices and related 'wealth effect'," S&P says.
The Reserve Bank recently lifted the lid on the extent of interest-only borrowing, with new official figures revealing around 40% of new mortgages by value are being taken out on interest-only terms.
Regulators in Australia became concerned when interest-only loans hit more than 40% of new lending across the ditch. In December 2014 the Australian Prudential Regulation Authority warned lenders it was "dialling up the intensity" of its supervision to reinforce sound residential mortgage lending practices. And the Australian Securities and Investments Commission announced it would "conduct a surveillance" into the provision of interest-only loans.
Here's a detailed look at interest-only lending as offered by New Zealand banks.
High LVRs fall as other imbalances build
The Reserve Bank's challenge
Meanwhile, S&P says that while some indicators of financial stability have improved since the Reserve Bank embarked on its macro-prudential intervention in 2013 with the introduction of the LVR restrictions, their effect has been narrow. This is because housing-related imbalances continue to build, highlighting the challenge facing the regulator as cyclical and structural impediments, mostly out of the Reserve Bank's control, remain unaddressed, S&P says.
"Against a backdrop of falling interest rates (which appear to have further to fall), strong net migration and thus far insufficient supply response, particularly in Auckland a city that accounts for around 50% of permanent (net) migration flow, the new restrictions can only be realistically expected to deliver a narrow improvement to financial stability, while the aforementioned issues - including the favourable tax regime for investing in housing debt - remain largely unaddressed," S&P says.
"It's probably also too early to determine what impact Auckland Council's Unitary Plan will have on housing supply in the longer run (400,000 new homes over the next 30 years appears a little hopeful given the average over the last 25 years is around 7,500 per year), although it does provide some optimism that supply constraints are being addressed."
"We also believe it is increasingly likely some form of debt-to-income measures will be introduced, in a similar capacity to the minimum serviceability requirements introduced in Australia more recently. These could prove effective in shoring up financial stability across the board as wage growth remains subdued and interest rates remain very low," says S&P.
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New Zealand First Leader Winston Peters has fired up at the Retirement Commissioner for saying NZ Super isn’t sustainable in its current form.
Diane Maxwell, in a Double Shot interview with interest.co.nz published on Wednesday, stressed the importance of laying the groundwork for policy change to make Super more sustainable.
She said that as our population ages, it’s inevitable that in time, we will have to increase the age of eligibility for Super, make it harder for migrants to qualify to receive Super, introduce means testing, and hike private contributions through the likes of KiwiSaver.
Peters has since released a statement saying Maxwell is “demonstrably wrong”.
Referencing Treasury’s 2013 Affording Our Future statement, he says NZ Super is still expected to be under 8% of nominal GDP by 2060.
It’s currently worth just under 5% of nominal GDP. An individual on Super receives around $380 a week after tax.
“NZ Super is not lavish and it is taxable,” Peters says.
“By international standards the cost of public pension provision in New Zealand is modest. Most OECD countries have public pension costs that, as a percentage of public expenditure and GDP, are above New Zealand.”
New Zealand currently spends around $12 billion a year on Super. Maxwell believes that if Super remains in its current form, in 20 years’ time, it will cost taxpayers $40 billion a year.
Peters claims: “New Zealand First is the only party with a common sense and long term approach to ensuring NZ Super remains sustainable.
“When it was introduced to Parliament, National voted down NZ First’s New Superannuation and Retirement Income (Pro Rata Entitlement) Amendment Bill 2015.
“This Bill was designed to address long-term pension affordability and the unfairness of the current system which gives certain elderly arrivals to New Zealand an exceptionally generous NZ Super entitlement.
“Tens of thousands of elderly migrants have gained access to NZ Super when they have contributed nothing towards it.
“On taking office National stopped paying into the NZ Super Fund (the Cullen Fund). As a result, NZ has lost out in billions as stock markets have surged in the low interest rate environment of recent years.
“The Cullen Fund is designed to prepare for and offset the pension costs of the ageing population. But National has taken no interest in the sustainability of NZ Super over the long term.
“NZ Super is sustainable. What is not sustainable is almost net 70,000 new immigrants a year; What is not sustainable is allowing foreign multinational corporations to indulge in widespread tax avoidance; What is not sustainable is the wholesale selling of New Zealand land, housing and businesses into foreign ownership.”
The Retirement Commissioner warns New Zealand Superannuation isn’t sustainable in its current form, so we need to prepare for change.
Diane Maxwell says it’s inevitable the period of time you need to have lived in New Zealand to receive Super, as well as the age of eligibility, will need to be pushed out.
She says means testing is on the horizon - as difficult as it is to implement.
And the amount individuals and their employers are made to contribute towards schemes like KiwiSaver will need to be hiked.
It takes 12 people who earn $60k a year to fund a super-annuitant
Speaking in a Double Shot Interview, Maxwell says, “We have to prepare the ground for policy change.”
Under the existing system, you may be eligible for Super if you’re a 65-year-old legal New Zealand resident, who’s lived here for at least 10 years since you were 20, with at least five of these years being since you were 50.
You may qualify for Super with less than 10 years’ residence if you have migrated to New Zealand from a country we have a social security agreement with.
Super is universal, you will receive it even if you continue to work, and it’s indexed to wages, so went up 2.7% this year.
Maxwell explains the Government used around $11 billion (net) of taxpayer money to pay for Super in the past year.
A person with an annual salary of $60,000 pays around $1,800 towards a super-annuitant, which means it takes around 12 of these people to fund a super-annuitant for a year.
Maxwell points out the NZ Super Fund, which is worth around $30 billion at present, isn’t going to start paying out until around 2030. When it does, it will fund around 9% of our annual super needs.
“We know that in 20 years, the number of people over 65 will have doubled. In 20 years, the cost will have tripled. So it will be up to almost $40 billion (net) to pay out in Super in its current form.”
“That’s not going to work… It’s just simply not going to be possible.”
Maxwell says you have to think about the costs of health and residential care in additional to Super, when considering the cost of our ageing population.
For example, over 65s already account for 42% of the $11 billion New Zealand’s district health boards spend in a year.
Maxwell admits that at around $380 a week after tax for an individual, the amount super-annuitants receive is already lean.
“Nobody’s going to the Bahamas on it.”
Yet she concludes: “It [Super] won’t be sustainable in its current form.”
So what do we change?
Where to draw the line with means testing?
Maxwell says means testing is a tough option, yet inevitable.
The question is, where do you draw the line?
For example, should a couple, in a good financial position at retirement after being frugal most of their lives and selling their home, be excluded from receiving Super, while someone who’s lived up large, bought a BMW, drank Veuve and reached retirement with nothing, qualifies?
“The critical thing with means testing is, where do you draw your line so you don’t capture the people who’ve just worked hard and done it well and saved?
“If you draw the line too high, you don’t really capture that many people. And I know we’ve all got stories about billionaires and millionaires on Super, and people banking millions. In reality, in numbers terms, those numbers aren’t very many people.”
Maxwell says taking Super away from this top echelon won’t make much of a difference in terms of making Super sustainable, because there simply aren’t many people in this category. The bulk of New Zealanders have no, very little or moderate amounts of money.
Maxwell adds: “If you include the family home in assets testing for means testing, then things get very very messy. There’s a lot of arbitrage; people sell homes and do all sorts of things.”
She’s received feedback means testing isn’t working that well in Australia.
Asked whether a move away from universal Super would be political suicide in New Zealand, she says: “I think we’ll get to a point when it becomes inevitable.”
Making it harder for migrants to qualify for Super
Maxwell agrees that as migration sees our population burgeon, the 10-year time period you need to have lived in New Zealand as a resident, will need to be expanded.
“I suspect where we’ll get to is that 10 years is not long enough.
“We are a very diverse nation. We have great immigration - that’s because this is a great place to be. Over time, that will not be sustainable and I believe that will have to go up.”
NZ First Leader, Winston Peters, has campaigned it’s unfair that New Zealanders who have paid taxes here for most their lives, are subsidising the retirement of people new to the country, who may never have contributed at all.
He claims around 80,000 immigrants have arrived in New Zealand since 2000, who were over the age of 50 and came under the parent reunion category.
Maxwell says, “I don’t think people come to New Zealand with a view that in 10 years they’ll be on Super.”
Yet she admits: “The pinch will be when people bring parents to New Zealand and within 10 years they’ll be on Super if they’re a resident or citizen.”
Getting individuals and/or their employers to hike their contributions
“The role of private provision… will have to increase. We’re all going to have to work out how we do that,” Maxwell says.
She recognises hiking minimum contributions to KiwiSaver is an obvious way of doing this, as it’s a joint effort between individuals and their employers. Yet high KiwiSaver fees need to be dealt with first.
“If we can get fees down on KiwiSaver, because it eats into your sum, then fantastic. It’s a good vehicle.”
Maxwell says she will also be talking to the Government about taxation on KiwiSaver returns.
Furthermore, she will be recommending people over 65 are able to join KiwiSaver.
“As people continue to work longer, someone may get themselves in a position where for whatever reason they haven’t joined. I’d like [them] to be able to join.”
Maxwell does however recognise: “KiwiSaver is a great savings vehicle. It’s not for everybody. For some people who are self-employed, starting a new business, low income or no income, it may not be the vehicle.”
Getting voters on board the concept of raising the age of entitlement for Super
Maxwell is all for raising the age of entitlement for Super, but hopes this won’t happen for at least another 10 years.
“Nobody’s grabbing it today. But I think our view of 65 is a historical one. We see 65-year-olds as old - they’re not. In another 20 years, it will seem a no brainer. Getting Super at 65 in 20 years’ time will just seem a little bit odd.
“If the age was 67 today, we’d save $1.6 billion [a year].”
Yet as she’s mentioned to Interest.co.nz before, she says it’s vital the Government gives people enough warning before implementing any changes.
She says until people like herself communicate the pressures our ageing population is putting us under, changing the age of entitlement is “going to be a vote loser”.
“Until the voting public are given, rightfully, more information that they can make their judgement calls on, then we won’t get a change. We have to prepare the ground for policy change.”
Maxwell says this is happening already.
“We are going to have to change, but we’ve got time.”
Eighteen OECD countries have raised the age of entitlement for super to 67, 69 and 70.
Maxwell says New Zealand is watching what is being done in this space overseas.
She maintains New Zealand is doing well gearing up to deal with an ageing population compared to Australia, the UK and US. As for Asia, a number of countries don’t even have schemes like Super in place.
“Our population’s not ageing nearly as fast as many Asian populations - certainly Japan... They think their population will fall below 100 million in the next 30 years, just because of their ageing population.
“They have 1.3 million people die every year and it’s going to go up to 1.7 million people.”
Maxwell concludes: “We are going to have to change, but we’ve got time.”
By Jenée Tibshraeny
There are growing cohorts of New Zealanders either locked out of the housing market, or choosing to steer clear of property in fear of the Auckland housing bubble bursting.
The home ownership rate has fallen to 63% from 73% over the last 25 years.
ASB’s most recent quarterly Investor Confidence Report (unsurprisingly) shows property owners largely see their homes or rental properties as their most profitable investments.
Yet only 6% of those surveyed believe shares deliver the greatest returns, while 11% say these come from managed investments and 13% from term deposits.
With interest rates historically low, people aren’t getting much for putting their money in the bank, yet they’re nervous about investing elsewhere.
So we talked to Authorised Financial Adviser, Martin Hawes, about what those in ‘Generation Rent’ should be doing with their money.
To begin with he says: “You can have a good life without owning your own home… If we look around the world, there are lots of people in lots of countries who don’t demand home ownership.”
Being a renter with a homeowner’s mentality
Yet he says the real trick is for renters to save any cash they may otherwise have put towards home ownership.
Renting requires less cash. While you can’t make a capital gain, you don’t have to fork out for a mortgage or rates and your insurance costs are lower.
“The trouble is that young people get a message that says, ‘This is the cost of my home - I’m renting - and I can spend everything else’. Well they can’t. If they want to keep in the same financial position as a homeowner, they have to make sure they save that difference between ownership and renting,” Hawes says.
“When you do long-term numbers between home ownership and renting, there’s not too much difference between them. We’re having a boom, so that will skew the figures between the two, but from a strict financial point of view, home ownership is probably not that much better than renting and saving the difference.
“The really good thing about home ownership though, is the discipline that is imposed on you by the bank for the mortgage. Because banks get really grumpy if you don’t meet your mortgage repayment schedule, whereas nobody gets grumpy if you don’t save that difference between renting and home ownership costs.”
Hawes bearish on the sharemarket
Hawes is bearish on the sharemarket, noting the headwinds coming from instability in the South China Sea, the Brexit, the Auckland housing market and New Zealand’s reliance on dairy as our main export.
He has cut back the portion of his personal portfolio made up of shares and property funds, from 50% to 40%, and has advised his clients to follow suit.
“I see a lot of risks out there, the least of which is Donald Trump,” he says.
“It’s a bit of a sell down. It’s not a wholesale exit.
“Back in 2008, before the GFC, I got really concerned and we sold everything. We sold every share and every property trust that we had. I’m not doing that at the moment.
“You can actually make a very good case for shares at the moment… Whatever you position you take, you should be able to make the case of the other side. So I’ve got a little bit bearish, but I can make the bulls’ case.
“And the bulls’ case for shares, is that the equity risk premium [the difference between what you’d get for a close to risk-free investment like a government bond and shares] is about right. Because interest rates are so low, they’re likely to stay lower for longer than anybody ever thought. And therefore shares, with their superior and greater dividends, deserve perhaps to be up there, and that might be sustainable in the long-term.
“Now I’m worried about a lot of other events that might befall us and therefore I’ve lowered risk.
“By some historic valuation method - particularly the price-to-earnings ratio - shares look very expensive, but not when you look at the equity risk premium.
“My advice to that young person who’s saying, ‘I’m not going to buy a house. They’re too expensive, it’s all ridiculous, but I’ve got $75,000 saved’; my advice to that person would be to make sure they save enough, because the savings rate almost always beats the investment rate. The amount that you can put aside is almost always more important than the rate of return that you will get on it.”
Hawes adds: “You can’t beat some diversification… because we never know what economic or political event might happen and the different asset classes - shares, property, bonds and cash - perform differently depending on what happens.”
‘Time to keep yourself firmly grounded’
Asked whether the New Zealand stock exchange in particular is overvalued, with returns of 23% over the past year, Hawes says:
“Again that equity risk premium appears to be about right. On a price-to-earnings ratio basis, it does look very expensive… They [NZX shares] are sustainable at that level.
“My problem is that New Zealand’s got some vulnerabilities at the moment. We’re based on construction, we’re based on immigration, and we’re based on tourism. Those three things are the big players in our economy at the moment and each of them is quite brittle. Each of them could slow down or stop at some point.
“Construction’s the least likely, but if immigration slowed, then construction would slow. Tourism is always quite a fickle industry.”
Hawes recognises Economic Development Minister Steven Joyce made a good argument around the strength of New Zealand’s economy on TVNZ’s Q + A programme over the weekend.
Yet he remains cautious: “I think it’s just a time to keep yourself firmly grounded I guess.”
P2P to reveal the value banks add as the middlemen between savers and borrowers
Hawes doesn’t have a firm stance on the sustainability of peer-to-peer lenders.
The likes of Harmoney and Squirrel Money have provided investors with decent returns since entering the New Zealand market, yet cracks are beginning to show in Harmoney’s business model.
It is expected to plead guilty to charges laid by the Commerce Commission, alleging it misled consumers. The six-figure fine expected to be imposed on the P2P lender will hit hard, given it suffered a $14m loss in the year to March.
Hawes says he has a small investment with Harmoney, which seems to have “worked pretty well”.
Yet he has his hesitations: “I’m always a bit concerned when I run my eye down the list of people wanting to borrow money, because it says what they want to borrow it for, and it’s house repairs and it’s holidays and it’s stuff I wouldn’t be borrowing to buy.
“What is happening with P2P is that you are taking the bank out of the middle... It takes money from depositors and it lends money out to borrowers. In sitting in the middle, it [the bank] makes a very good assessment of the borrower’s capacity to repay.
“With P2P you’re sort of making that assessment yourself, or Harmoney’s doing some of it, but you’re looking at it and you’re thinking, ‘I don’t even know this person. I don’t know the person’s age, I don’t know much about the person’s financial capacity, or their income…’
“Whereas certainly for bigger amounts of money, the bank will actually sit down with somebody and make the assessment on the basis of the person’s character, the person’s collateral or security and the person’s cash flow.”
Hawes concludes: “It will be very interesting to look back in 20 odd years to see if the banks are really adding value by sitting in the middle between people who want to deposit money and people who want to borrow money.”
KiwiSaver shouldn’t be used for general savings
Despite KiwiSaver funds performing well, Hawes says it generally isn’t a good idea to invest any extra cash in KiwiSaver, as it isn’t liquid.
The money is basically locked up until you’re 65, unless you’d like to buy your first home or suffer serious illness or financial hardship.
Hawes admits that making additional KiwiSaver contributions may work for those lacking in discipline, who might be tempted to blow money they put in a bank account or some other type of investment.
“But I think those people are few and far between.
“I think people shouldn’t use KiwiSaver for general savings.”
Back in July, I wrote an open letter to the bank CEOs highlightling the extent of their margin grab from floating-rate mortgage borrowers.
I followed that up, pointing out that it is not principally home owners who are funding this margin grab. Rather it is small business and farmers who borrow based on the floating rate benchmarks
The margin grab continues - albiet with a sanitising term deposit salve - and we can now extend and update our tally of how much the banks have withheld.
The current round of retentions involves the largest grab we have seen so far. In March they held on to 11 bps of the OCR cut. This time they have held on to 15 bps of the 25 bps cut. (These averages would be higher if we did not include Kiwibank.)
These grabs are cumulative and they are mounting up, as the table below shows.
Finance Minister Bill English is on record calling for the policy reductions to be passed on through to borrowers via market competition (although he got badly off track batting back opposition calls for the same thing).
Prime Minister John Key has made similar calls.
And the governor of the Reserve Bank, Graeme Wheeler, this week said the banks should pass on most of it to borrowers.
These calls by public officials are being ignored by bank CEOs.
The current series of rate cuts started with a -25 bps OCR reduction on June 15, 2015 when it was reduced from 3.50% to 3.25%.
There have been five more similar cuts since then with banks passing on the full -25 bps reduction to their clients for the first three of them.
Here is the track record so far:
|The track record ...||1-Dec-15||10-Dec-15||28-Jan-16||10-Mar-16||28-Apr 16||9-Jun-16||18-Jul-16||11-Aug-16||Total
|- change bps||-25||-25||-25||-75|
|- avg change bps||-20||-14||+2||-10||-42|
|shaded cells||show margin grab|
|90 day bill rate||2.85||2.75||2.70||2.38||2.39||2.41||2.37||2.23|
|- change bps||-10||-5||-32||+1||+2||-4||-14||-62|
|CDS Aust IG||125.6||125.5||143.6||144.5||115.5||109.2||95.6||90.2|
|- change bps||-0||+18||+1||-29||-6||-14||-5||-35|
|6 m term deposit||3.36||3.33||3.31||3.23||3.15||3.12||3.18||3.20||-16|
|1 yr term deposit||3.51||3.49||3.43||3.41||3.25||3.25||3.24||3.31||-20|
|- avg change bps||-2.5||-4||-5||-12||-1.5||+2.5||+4||-18|
Kiwibank stands out as having only withheld -10 bps from its customers over this period. At the other end of the scale, BNZ stands out as having retained -50 bps or two thirds of the OCR rate cuts.
All bank CEOs claim their margins are under pressure. But the public evidence does not support the claim.
No bank, or their industry lobby group, has revealed any data yet to support the "under pressure" claim.
What we see in the public record does not support the claim. The 90 day bank bill rate has fallen by -62 bps, and the risk premium (as measured by CDS spreads) has fallen by -35 bps. These reductions add together.
Personally, I don't buy the recent tactic of offering higher terms deposit rates for selected terms as anywhere near rebalancing the ledger. It is only a PR strategy. They are borrowing this tactic from their Aussie parents and the evidence across the ditch is that the 'benefit' will be very short-lived.
Revealingly, equity analysts who follow banks for stock market reviews applaud the bank actions as enhancing margins.
And no bank is reporting significantly lower profit. In fact one is still reporting a long-running stream of record profits.
Without the banks providing concrete evidence, the "margins under pressure" claim has little credibility.
There are victims here; small business and farmers.
It seems a simple case of a dominant oligopoly imposing its pricing power on its customers (without fear of any official or public body acting to restrain them). By their actions, it appears the four largest banks are acting in concert and pulling their floating rates into a very tight band.
At the start of this margin-grab cycle, there was an 11 bps range between the four biggest banks. Now that has almost halved to a range of only 6 bps.
There seems a clear case for a public inquiry into how banks are behaving in this matter and to construct a system where oligopoly power is restrained. Clearly market forces are not working. There is no sense of any healthy competition in pricing for floating rate mortgage-based lending.
Bank pricing actions give the unsettling impression of growing collusion, even if it does not involve direct communications and secret meetings. The RBNZ OCR cuts seems to have given them the cover to pull this off.
The country's largest bank, ANZ, is passing on just a fifth of today's Reserve Bank interest rate cut to mortgage borrowers and is urging people to pay down debt and save more.
"Record low interest rates are an opportunity for households to pay down their home loans and to focus on saving," ANZ New Zealand CEO David Hisco said today.
Hisco's comments follow on from his recent unusual move of writing a newspaper article that outlined his current thinking on the property market and the economy.
ANZ announced today it will lower floating home loan rates by 0.05% p.a. to 5.59% p.a. but will increase rates for some term deposits by up to 0.30% p.a. to 3.60% p.a. in response to the Reserve Bank’s official cash rate cut.
To "continue support for the business community, particularly farmers", floating rates for Commercial, Agri and Business loans will be reduced by 0.15% p.a.
Westpac was the second bank to move, saying it's cutting its floating mortgage rate by 10 basis points to 5.65%, with the reduction applying to its Choices Floating, Choices Everyday and Choices Offset rates. The cut is effective for new lending from Friday, August 12, and from August 31 for existing customers. Westpac's also introducing a "special" six month term deposit rate of 3.50%, an increase of 50 basis points on its existing six month term deposit rate, effective Friday August 12.
ASB has matched the Westpac move in an announcement at the end of the day.
Hisco said ANZ was "refocusing" its lending and borrowing emphasis.
“On the deposits side, we have five times as many customers as those with home loans. Lifting term deposit rates will help customers grow their savings,” Hisco said.
“We are sending a strong signal today to New Zealanders that at a time of record low interest rates, it is more responsible to pay down home loans and save, than borrow more. New Zealanders need to consider changing their financial strategies.”
So that first home buyers weren’t disadvantaged by the changes, ANZ was also today launching a "special home loan package".
Only available to first home buyers using KiwiSaver, it will include a 0.20% p.a. discount on the prevailing ANZ standard variable interest rate and access to ANZ Buy Ready, a comprehensive set of tools, resources and special benefits to help people through the house purchase process.
“The Reserve Bank’s decision to cut the OCR to try and drive the New Zealand dollar lower is the right move to protect our export industries which employ many Kiwis,” Hisco said.
“Dramatically lowering lending rates would only throw fuel on the fire in an overheated housing market. That would be irresponsible and negate any economic benefit to New Zealand and drive up the country’s debt as banks seek expensive offshore funding for increasing home loan books.
“While this may mean we write fewer investment loans, we believe it is the right thing to do.
“Meanwhile, we still want to help first home buyers and commercial, agriculture and business customers.”
He said ANZ would monitor the impacts of this decision and may adjust its market position in future to ensure it remained competitive.
The Commerce Commission says insurer Youi will plead guilty to 15 Fair Trading Act charges alleging it employed misleading sales techniques when attempting to sell policies to consumers who were only seeking a quote.
The charges are being filed against Youi in the Auckland District Court.
Specifically, the Commerce Commission alleges Youi: made false or misleading representations on its website regarding consumers’ ability to obtain a quote online; made false or misleading statements during telephone sales calls with consumers, including telling them bank or credit card details were required to generate a policy quote; asserted a right to payment for unsolicited insurance policies by sending letters demanding payment and/or debiting consumers’ bank or credit card accounts without their express permission or knowledge, and; sent invoices to consumers in relation to unsolicited insurance policies that did not specify that the consumer was under no obligation to pay for the policies.
"Youi has co-operated with the Commission’s investigation and has indicated that it intends to plead guilty to the charges," the Commerce Commission says.
For its part Youi says it acknowledges the validity of customer complaints relating to instances where policies were sold, when only quotes were requested and the failure to cancel insurance policies after being notified.
"Youi immediately took steps to resolve these complaints with affected customers directly. While these transgressions were not part of Youi's standard operating procedures, where the actions of employees or processes failed customer expectations appropriate remedial actions have been taken. Changes have been implemented to improve compliance with operational processes. Furthermore, the website content and disclosures have been updated to improve clarity, compliance and alignment with customer expectations," Youi CEO Danie Matthee says.
“From the point the issues were brought to our attention we co-operated fully with the Commission and speedily implemented changes to our business practices that had fallen short of customer expectations, service standards and legal requirements. We unreservedly apologised to all affected customers," Matthee adds.
Here's the Commerce Commission's full statement
The Commerce Commission has filed charges in the Auckland District Court against insurance firm Youi NZ Pty Limited, alleging it employed misleading sales techniques when attempting to sell policies to consumers who were only seeking a quote.
The 15 charges Youi faces under the Fair Trading Act are representative and relate to alleged misrepresentations made between July 2014 and February 2016. Specifically, the Commission alleges that Youi:
- made false or misleading representations on its website regarding consumers’ ability to obtain a quote online
- made false or misleading statements during telephone sales calls with consumers, including telling them bank or credit card details were required to generate a policy quote
- asserted a right to payment for unsolicited insurance policies by sending letters demanding payment and/or debiting consumers’ bank or credit card accounts without their express permission or knowledge
- sent invoices to consumers in relation to unsolicited insurance policies that did not specify that the consumer was under no obligation to pay for the policies.
Youi has co-operated with the Commission’s investigation and has indicated that it intends to plead guilty to the charges. As this matter is before the Court, the Commission cannot comment further at this time.
Youi is an insurance company that offers home, contents and vehicle insurance products. It was incorporated in New Zealand on 6 June 2013 and began to operate in the New Zealand market on 28 July 2014. Youi is a wholly owned subsidiary of Youi Holdings Pty Ltd, which in turn is a subsidiary of OUTsurance International Holdings Pty Limited – part of the Rand Merchant Insurance Holdings Group, a large international insurance provider registered in South Africa. Youi has sister insurance companies registered and operating in Australia and South Africa.
And here's Youi's response
This response refers to a recent media publication that the New Zealand Commerce Commission (‘The Commission’) has filed charges against Youi NZ Pty Limited (“Youi”), under the Fair Trading Act 1986 (FTA).
This follows customer complaints to the Commission in the period between March 2015 and February 2016. During the course of the investigation, Youi co-operated fully with the Commission by providing all requested data and information in a timely and transparent manner.
Youi acknowledges the validity of customer complaints relating to instances where policies were sold, when only quotes were requested and the failure to cancel insurance policies after being notified. Youi immediately took steps to resolve these complaints with affected customers directly. While these transgressions were not part of Youi's standard operating procedures, where the actions of employees or processes failed customer expectations appropriate remedial actions have been taken. Changes have been implemented to improve compliance with operational processes. Furthermore, the website content and disclosures have been updated to improve clarity, compliance and alignment with customer expectations.
Youi CEO Danie Matthee says “From the point the issues were brought to our attention we co-operated fully with the Commission and speedily implemented changes to our business practices that had fallen short of customer expectations, service standards and legal requirements. We unreservedly apologised to all affected customers.
We entered the New Zealand market late in 2014 and experienced rapid growth. We are confident in our plans to build the business and to continue offering New Zealanders a compelling insurance alternative. We are also committed to our people who number more than 400 and whose collective commitment to Youi’s future is resolute.”