Personal Finance

  • NZ Initiative's Eric Crampton deconstructs Oxfam's 'wealth inequality' figures and points out that you might be more financially well-off than you think

    By Eric Crampton*

    Want to rail against the Global 1% rich-listers? Be a bit careful: if you own a house in Auckland, mortgage-free, you could easily be on that list. And roughly half the country is in the global top 10%. But, either way, the numbers miss some of the most important parts of Kiwis’ real wealth.

    Oxfam’s annual global wealth inequality figures came out last week. Every year, Oxfam repackages Credit Suisse’s annual report on global wealth figures into a more outrage-friendly format. This year was no different.

    The Credit Suisse reports do a decent job of pulling together statistics held in different formats, all over the world, and trying to make them comparable. Their household wealth figures count individuals’ assets, including housing and any stock portfolios, and net against those figures any household debt. They then provide Gini indices of wealth dispersion within countries.

    The Oxfam figures pick up from there by identifying a small number of high net worth individuals in each country, adding up their wealth, and then checking to see how many of the least wealthy households’ assets would equate to the holdings of the rich-listers in selected countries. The framing suggests that the poor are poor because the rich are rich, and that policies targeting the rich are the best way of helping the poor. And it ignores the massive drop in worldwide poverty since 1980.

    The framing hardly helps us to understand what’s going on in the world.

    To begin with, the measure of household wealth gives a very poor picture of households’ real asset stance.

    Consider two countries. In the first country, everyone has a private retirement account. A part of your taxes are shunted into it each year, with top-ups from the government if your income is too low. The portfolio is designed to give you an annual income equal to a reasonable fraction of the country’s average personal income when you hit age 65. If you live in that country, the value of your retirement account will count towards your personal wealth. By contrast, if you live in a country like New Zealand, where the public retirement system does the same thing without routing things through personal accounts, your NZ Super asset does not count in the personal wealth balance sheets.

    This automatically makes wealth look far more unequal in New Zealand: the main retirement asset for the country’s poorer households does not get counted toward their wealth, while richer households’ Kiwisaver accounts and houses will count in their favour.

    Countries using private medical savings accounts, with government-funded top-ups, to provide health care will count as having wealthier citizens than those relying on public health systems, even if the experienced outcomes for those using health services are identical in both places.

    Consequently, as the University of British Columbia’s Professor of Economics Kevin Milligan put it, “any measure of wealth that ignores the future consumption value from public programs is a fairly useless measure of wealth.”

    Consider too that human capital – your education, and the higher income it will bring over the course of your lifetime – does not count towards your wealth in these kinds of figures. But the student loan you used to finance that education will count against any assets you do hold. To slightly paraphrase another Canadian economics professor, Université Laval’s Stephen Gordon, if you’re using wealth as a measure of inequality, the exercise is pointless if you’re ignoring human capital. Auckland University’s Professor of Statistics Thomas Lumley raised similar concerns with this method. The method implies that a new graduate doctor, with a student loan, is poorer than a homeless person who has no debt and some change in his pocket. It is nonsense.

    Finally, different countries have different age profiles. Countries with a lot of people just moving into retirement will have a large number of people right at the peak of their financial wealth. You save and pay off student and mortgage debt during your working career to build up some assets for a more comfortable retirement, then draw on that wealth during retirement. Measures of national wealth inequality that do not adjust for national differences in age profiles will make a bit of a hash of things. Countries with a more dispersed age profile will then have greater measured wealth inequality.

    For all of these reasons, inequality in wealth as measured by figures like Oxfam’s give a very poor indication of experienced inequality. But even taking that into account, New Zealand’s wealth inequality figures are decidedly middling by international standards. New Zealand’s top 1% own a bit less than twenty percent of net national wealth, which is entirely on par with the OECD average.

    For a better measure, we should look towards inequality in household consumption. Income changes naturally over an individual’s life-cycle. People save during periods of relatively high earnings, and borrow during periods of relatively low earnings. Consumption then is more stable than income for any household. And consumption measures also reflect household wealth: wealthier households will be able to sustain higher ongoing levels of consumption because wealth provides a buffer against periods of lower income.

    The best measure of household consumption inequality in New Zealand comes from work by Chris Ball and John Creedy. It shows household consumption inequality rose a bit in the late 1980s, but subsequently fell and, by 2010, was below the figures from the early 1980s.

    The better take on the Credit Suisse figures is that New Zealand is an extraordinarily wealthy country. Credit Suisse said New Zealand placed second only to Switzerland, although that high placement is in part due to New Zealand’s house price appreciation and should be taken with a grain of salt.

    Anyone in New Zealand with net assets of around $100,000, including the equity in your home, is in the global top 10%; anyone with net assets of just over a million dollars – the value of the average Auckland home – is in the global top 1%. Over 270,000 Kiwis count in the global top 1%, without even considering New Zealanders’ high levels of education or the value of the entitlements like superannuation and health services provided by the government.

    So be careful in railing against the global top ten-percent or top one-percent. You may well be a part of it.


    *Eric Crampton is head of research at The New Zealand Initiative which provides a fortnightly column for

  • Housing prices headed south in most parts of the country last month, providing a faint ray of hope for those struggling to get onto the property ladder, even in Auckland

    By Greg Ninness

    Housing became more affordable for first home buyers in many parts of the country including Auckland last month, as falling prices more than offset rising mortgage interest rates.

    According to’s Home Loan Affordability Reports, lower quartile selling prices peaked at record highs in November and then fell back in December in Auckland, Waikato/Bay of Plenty, Hawke's Bay, Manawatu/Whanganui, Taranaki, Nelson/Marlborough, Canterbury/Westland and Southland.

    But lower quartile prices kept rising to set new records in December in Northland, Wellington, and Otago.

    The lower quartile price also rose in Central Otago/Lakes in December, but remained below the record high that was set in September last year.

    The Home Loan Affordability Reports track the monthly changes in the REINZ’s lower quartile residential property prices, mortgage interest rates and incomes in each region and the impact these would have on how much of their weekly income typical first home buying couples would have to put towards mortgage payments to buy a home at the latest lower quartile selling price. (Click on the links in the box below for the individual reports for each region).

    Separate Home Loan Affordability Reports are available for each of the following regions and cities (click to view).
    Northland Regional
    Auckland Regional
    North Shore
    Auckland Central
    Waikato/Bay of Plenty Regional
    Hawke's Bay/Gisborne Regional
    Taranaki Regional
    New Plymouth
    Manawatu/Wanganui Regional
    Palmerston North
    Wellington Regional
    Wellington City
    Hutt Valley
    Nelson/Marlborough Regional
    Canterbury Regional
    Central Otago/Lakes Regional
    Otago Regional
    Southland Regional
    All of New Zealand

    The reports show that the average of the two year fixed mortgage rates charged by the major banks has risen in each of the last three months, rising from 4.42% in September to 4.58% in December.

    Offsetting interest rate rises

    Although the falls in lower quartile prices were relatively modest, when combined with a modest allowance for rising incomes they were enough to more than offset the effect of the rise in interest rates in December, making mortgage payments slightly more affordable.

    The biggest fall in the lower quartile selling price last month was in Nelson/Marlborough where it declined by $15,700, or 4.2%, falling from $374,100 in November to $358,400 in December.

    Other regions to post declines were Southland -$14,000, Taranaki -$13,500, Manawatu/Whanganui -$11,000, Auckland -$10,800, Canterbury/Westland -$9700, Waikato/Bay of Plenty -$3700 and Hawke's Bay -$1500.

    The biggest increase in the REINZ’s lower quartile price last month was in Central Otago Lakes where it climbed by $34,600, or 7.6%, from $455,400 in November to $490,000 in December.

    However big swings in lower quartile prices are not uncommon in Central Otago Lakes where they can be volatile due to the type of properties in the area and relatively low sales numbers compared to other regions.

    Also posting gains in lower quartile prices from November to December were Wellington +$33,600, Otago +$13,300 and Northland +$6300.

    Small drop in mortgage payments

    Unfortunately, while the fall in lower quartile prices will be welcome news for first home buyers in the affected regions, the differences they would make to mortgage payments are small.

    In Auckland, the $10,800 drop in the lower quartile price would only result in mortgage payments dropping by $6.55 a week and in Waikato/Bay of Plenty where the lower quartile price dropped by $3700, mortgage payments would have reduced by just $1.79 a week.

    And a fall in prices for a single month does not make a trend.

    With a lower quartile price that’s still above $700,000 and mortgage payments on that coming in at almost $750 a week at current interest rates, Auckland remains seriously unaffordable for typical first home buyers.

    The small dip in prices that occurred in Auckland last month would need to turn into a sustained and substantial correction before it would start taking housing in our largest city back into affordable territory for typical first home buyers.

  • Elizabeth Kerr tried the sensible, frugal and weird savings tips that you sent her a year ago and owns up to how they worked out for her

    Some great ideas from a full letterbox
    Image sourced from

    By Elizabeth Kerr

    What better way to begin a New Year than by naval gazing at what I said I’d do last year.

    I’m sure I wrote something to the effect of “this year there will be no major changes.” And for 10 months that’s exactly what happened – we bumbled along doing our thing. Saving, spending and investing accordingly…..aaannnnd then we moved to Auckland.

    But before we get onto how that all came about lets review the frugal tips and tricks you had emailed me and that I promised to try for the year.

    No buying new clothes – partially achieved

    This was much easier to pull of than initially thought. Wellington has but one season to dress for – winter.

    For 12 months I lived in a few motherhood staples supported by a woolly hat, a decent jacket and old running clothes. I managed to personally get all the way to July thanks to living near a swish 2nd hand shop and hand-me-over’s from my neighbour. Subsequent purchases were made very deliberately.

    Clothes did start to get a bit dull after awhile and thus this year I’m focussed more on quality items which will handle more frequent washing (which pretty much takes out 90% of most clothing retailers here). I never found myself naked so not a bad goal to have had.

    It certainly got me thinking about what was necessary and what was just for frills.

    No TV – partially achieved

    This worked surprisingly better than I thought it would for us. The kids watched less screen time and I went back to uni. But we only lasted until Easter.

    It was a cold rainy day and the kids were doing our heads in. Hubby took them to the DVD store whilst I made up some story about how Santa needed to get back to the workshop and voila – it was back in our lounge. (Ironically just in time for Game of Thrones to start).

    Barter - Fail

    Nope, the closest I got to this was “I’ll mind your kids Tuesday if you can take mine Friday.  No TV - into jet ski - into luxury holiday home.   I kept my ear close to the ground for an opportunity but no one even mentioned it.   Has bartering died?

    Better Grocery Habits - Achieved

    The real money savings didn’t kick in until I decided I wanted to be vegan and since I do the cooking everyone is having less meat and processed foods.

    But saving money is the last reason someone would go vegan because, regardless of all the benefits it is a giant pain in the arse some of the time. 

    Insurance Review - Achieved

    This was done early in 2016 and we stripped off about $1200 in premiums.   A recent review upon moving to Auckland has stripped it back more and made some insurance redundant.

    Hussle Hard - Fail

    While I personally didn’t hustle at all I loved all your side hustles in the comments section last year and am now the owner of ‘Jack Feels Big’ and a stunning water colour painting. There are some wonderfully talented people in the community and I am so pleased you all wrote in and shared your ideas with me.

    No 'Poo - epic Fail

    What was I thinking?  This was an epic fail and took some time to recover from. However not to be discouraged I tried a variety of products until I settled on a shampoo soap bar from based in Christchurch.   I think their deodorant bar is the amazing. (They are having a sale this week by the way, but you don’t shop just for sales do you?)

    AirBnB – Partially Achieved

    Our tenant didn’t move out so I never got a chance to try this BUT I did stay in an AirBnB apartment in Tokyo.  It was perfect, comfortable and saved us a small fortune compared to a hotel.

    Cutting the boys hair - Failed

    Did it once and it was okay.   Though I still have scissor anxiety and prefer a hairdresser to do it.   However, there are so many good resources on the net that if you’re confident then you could easily pull this off without anyone knowing.

    Test Drive the Retirement Budget - Achieved

    We actually had a chance to do this when my husband had time off between jobs.  

    It’s not the same as true retirement I know … but two really big things stuck out at me during this time. 

    1. With our kids being so young and still in school we have natural boundaries around how we spend our time so we’re not exactly taking spontaneous holidays on a whim, and

    2. Part of our plan is to sell down our assets and move them into more conservative investments.  In a growth market this is really hard to do.  “No its okay I don’t want any more gains on that asset” said no one ever. 


    So that was 2016 and although your tips didn’t all work for me I would still say that they weren’t a total waste of time, so thanks for writing in and sharing them.

    2017 is all about minimalism.

    Our family home now consists of 55 square metres in Auckland city and I love every inch of it and the freedom it provides.

    It’s hands down the most frugal decision we’ve ever made, and while it has come with some raised eyebrows from nearest and dearest, so far it’s been a raving success.

  • ANZ changes rates for investors, decreasing some, and raising others but by a much smaller change than for borrowers. However ANZ remains remains very competitive compared with its main rivals

    At the same time ANZ raised most of its mortgage rates (including its floating rate), it also announced a range of term deposit rate changes.

    There were no changes this time to the bank's 'at call' savings products, and some short term deposit rates were reduced.

    Most other changes were modest increases. (ANZ's PIE rates rose by the same amounts at the same time.)

    The full change activity is recorded in our rate tables here and here. But as the summary below shows, ANZ's changes affected term investors at a lower quantum than the impact on borrowers.

    All term deposit changes are effective Thursday, January 19, 2017.

    As at September 30, 2016, ANZ had almost $40 bln in customer term deposits, another $42 bln in "on demand and short term deposits", and a further $7.8 bln in deposits that don't earn any interest. All up (and excluding UDC), ANZ has $90 bln in Total Customer Deposits.

    A summary setting out the ANZ changes for the same time periods reveals this:

    Term deposits Today's
      Home Loans Today's
      %     %
    At call n.c.   Floating +0.10
    30 days - 0.15      
    3 months n.c.      
    6 months - 0.05   6 months n.c.
    9 months n.c.      
    1 year n.c.   1 year +0.20
    18 months n.c.   18 months +0.06
    2 years +0.10   2 years +0.16
    3 years +0.10   3 years +0.20
    4 years +0.10   4 years +0.25
    5 years +0.10   5 years +0.25

    Despite the ANZ term deposit changes being significantly less that the mortgage rate changes, the new ANZ TD rates leave the bank positioned well against its main rivals, and that is true for most term options.

    ANZ offers the highest carded term deposit rates for all terms by the main banks except for three months and one year, where Westpac has an edge.

    For higher rates, you need to asses the offers of institutions with a lower credit rating.

    As we have earlier noted, savers may wish to think through the wisdom of locking up of funds for longer terms in what seems to be a turning rate environment. This situation should have savers thinking through the risk/reward scenarios.

    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 mths 8/9 mths 1 yr 18 mths 2 yrs 3 yrs
    Main banks                
    AA- 3.00 3.30 3.60 3.35 3.60 3.80 3.90
    ASB AA- 3.00 3.20 3.60 3.20 3.50 3.65 3.80
    AA- 3.00 3.30 3.65 3.25 3.60 3.75 3.80
    Kiwibank A+ 3.00 3.10 3.20 3.35   3.40 3.60
    Westpac AA- 3.15 3.20 3.10 3.40 3.20 3.70 3.50
    Other banks                
    BBB 2.95 3.40 3.50 3.60 3.65 3.75 3.85
    Heartland Bank BBB 3.10 3.30 3.70 3.40 3.40 3.40 3.70
    HSBC Premier AA- 2.50 2.80 2.90 2.90   2.90 2.95
    ICBC A 3.05 3.35 3.65 3.45 3.65 3.75 3.85
    RaboDirect A 2.85 3.40 3.35 3.40 3.40 3.45 3.80
    RaboDirect BBB 2.75 3.55 3.60 3.60 3.70 3.80 4.00
    A- 3.00 3.30 3.75 3.50 3.70 3.80 4.00
    Selected fincos                
    F&P Finance BB* 3.10 3.80 4.00 4.10 4.15 4.25 4.35
    RaboDirect BBB 3.40 3.95 4.15 4.40 4.80 4.95 5.15
    RaboDirect A- 3.00 3.50 3.75 3.80 3.65 3.60 3.55
      * = the only credit rating in this review that is not investment grade.  

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

  • RBNZ given free pass to chill, as retail banks expected to continue to raise mortgage and deposit rates to close funding gap

    Mortgage and deposit rates are expected to keep increasing this year, despite the Official Cash Rate (OCR) remaining the same.

    ANZ economists, in their latest Market Focus publication, say the spike in rates is likely to “persist”, due to higher wholesale rates, a turn in the credit cycle and the need for banks to close a funding gap.

    This will buy the Reserve Bank (RBNZ) some time before it raises the OCR from 1.75%.

    ANZ economists explain average fixed mortgage rates across the major lenders have increased by 0.1-0.6% points since the end of September, with some floating rates also rising.

    Term deposit rates (longer than 12 months) have increased by about the same amount.

    Funding gap has narrowed but is still too large

    “While some of the movement can be put down to higher wholesale rates and shifting perception towards the RBNZ (from potentially cutting to hiking), the moves, especially most recently, have occurred largely independently of shifts in wholesale interest rates,” ANZ economists say.

    “In fact, local swap rates fell over the holiday period, largely following the retracement off highs seen in global interest rates more generally.

    “This disconnect will partly reflect timing (swap rates spiked pre-Christmas) and typical lags at play (mortgage rates do not bounce around as quickly or reactively as petrol prices for instance), but also reflects other influences.

    “In particular, higher retail interest rates also reflect the funding gap facing banks.

    “We noted extensively over the latter part of 2016 that the large gap between bank deposit and credit growth was unsustainable, and that without a further ramping up of banks’ offshore borrowing (which would not be desirable from a financial stability perspective), higher deposit rates and increased credit rationing would result. We are now clearly seeing that.

    “And while RBNZ data from November showed the gap between credit and deposit growth has now started to narrow, it is still wide. That flags more pressure on retail interest rates to rise to a) attract more deposits and b) slow lending.”

    ‘RBNZ officials should feel quietly satisfied’

    With retail banks raising rates, this will take pressure off the RBNZ to act. “Banks are implicitly doing the central bank’s job for it,” ANZ economists say.  

    “RBNZ officials should feel quietly satisfied watching retail rates move up.”

    While the official line is they don’t see the OCR moving until June 2018, ANZ economists say there’s a risk of a move sooner.

    The New Zealand dollar is strengthening again, there are growing capacity pressures, there’s been a turn in the domestic and global inflation cycles and growth activity is continuing to be strong.

    Credit crunch to dampen spending across the board - even housing

    However ANZ economists maintain rates rises will slow credit growth, which will dampen demand. This is expected to see GDP growth of 3½-4% ease towards 3% over the year.

    They also believe a credit crunch will constrain house building in Auckland, intensifying the shortage.

    That said, the economists note the Auckland housing market is cooling slightly, and “activity is unlikely to get back to its dizzy mid-2016 heights in a hurry”.

    “Falling mortgage rates, together with prudential restrictions, and a likely more active Government response lifting supply, is a significant combined set of headwinds in our eyes.”

    As higher rates sees the pendulum swing towards saving, as opposed to spending, ANZ economists also believe households will start closing their wallets.

    “The sharp acceleration in consumption growth and deterioration in household saving seen over the middle of last year will not persist…

    “Supporting our case, the latest Electronic Card Transaction figures pointed to a softer end to the year for household consumption than was seen over Q2 and Q3.”

  • We put an age old mantra to the test to find out whether institutions with similar credit ratings offer similar term deposit rates

    The more similar the risk, the more similar the return; it’s a pretty reliable mantra when it comes to term deposits right?

    Yes - but there are exceptions.

    We have looked at the extent to which term deposit rates vary among banks and finance companies with similar credit ratings, following UDC Finance joining a bunch of other New Zealand banks and finance companies at the bottom end of Standard & Poor’s ‘investment grade’ band.

    S&P has downgraded UDC’s credit rating by two notches below parent ANZ after the bank announced it agreed to sell the asset and financing company to Chinese behemoth, HNA Group.

    With a new rating of BBB, UDC joins the Bank of Baroda, Bank of India, The Cooperative Bank, Heartland Bank, SBS Bank and Liberty, which have ratings between BBB and BBB-.

    As the table below shows, all institutions in this category have similar term deposit rates, but there is an outlier - Liberty Financial.

    Across the board, rates generally don’t differ by more than around 40 basis points, however the difference can be as large as 190 basis points in Liberty’s case.

    for a $25,000 deposit Rating 3/4 mths 5/6 mths 8/9 mths 1 yr 18 mths 2 yrs 3 yrs
    p.a.   % % % % % % %
    Bank of Baroda BBB- 3.10 3.25 3.35 3.40 3.40 3.50 3.50
    Bank of India BBB- 3.10 3.25 3.25 3.50 3.60 3.75 4.00
    BBB 2.95 3.40 3.50 3.50 3.65 3.75 3.85
    Heartland Bank BBB 3.10 3.30 3.70 3.40 3.40 3.40 3.70
    RaboDirect BBB 2.75 3.55 3.60 3.60 3.70 3.80 4.00
    RaboDirect BBB 3.40 3.95 4.15 4.65 4.85 5.00 5.40
    RaboDirect BBB 2.95 3.45 3.75 3.80 3.65 3.65 3.60

    (Update: This table has been changed to reflect changes by UDC effective 13 January 2017.)

    Put in dollar terms, the difference between what you can earn each year above the lowest rate on offer for a certain term, is generally only around $40 for a $25,000 term deposit.  

    In Liberty’s case, you can earn up to $342 a year more in interest.

    for a $25,000 deposit Rating 3/4 mths 5/6 mths 8/9 mths 1 yr 18 mths 2 yrs 3 yrs
    after-tax variation, annual $ $ $ $ $ $ $
    Bank of Baroda BBB- +63 0 +18 0 0 +18 0
    Bank of India BBB- +63 0 0 +18 +36 +63 +90
    BBB +36 +27 +45 +18 +45 +63 +63
    Heartland Bank BBB +63 +9 +81 0 0 0 +36
    RaboDirect BBB 0 +54 +63 +36 +54 +72 +90
    RaboDirect BBB +117 +126 +162 +225 +261 +288 +342
    RaboDirect BBB +36 +36 +90 +72 +65 +65 +18

    We made these calculations using our term deposit calculator, assuming we pay tax of 28%.  

    So what’s the moral of story? Deposit takers with similar risk profiles, will in most cases deliver similar returns.

    For more on how credit ratings work, see our explainer here

  • The World Gold Council looks at what to expect from the yellow metal and finds six global trends that will support demand for gold

    Content supplied by the World Gold Council*

    In 2016, investors around the world returned in large numbers to the gold market, as a combination of macroeconomic drivers and pent up demand kept interest in gold high.

    As we start the new year, there are some concerns that US dollar strength may limit gold’s appeal.

    We believe that, on the contrary, not only will gold remain highly relevant as a strategic portfolio component, but also six major trends will support demand for gold throughout 2017.

    Major trends in 2017

    The gold price had a strong performance in 2016, rising close to 10% in US dollar terms (higher in most other currencies) and amassing multi-year record inflows through physically-backed gold ETFs - making it one of the best performing assets last year, despite a post-US election pullback. And the price has gained more than 5% since the Federal Reserve (Fed) increased rates in mid-December.

    But, what does 2017 hold for the gold market?

    Using the economic perspective from our guest economists as a backdrop, we believe there are six major trends in the global economy that will support gold demand and influence its performance this year:

    1. Heightened political and geopolitical risks
    2. Currency depreciation
    3. Rising inflation expectations
    4. Inflated stock market valuations
    5. Long-term Asian growth
    6. Opening of new markets.

    Heightened political and geopolitical risks

    Political risk is rising. Europe will hold key elections in the Netherlands, France and Germany in 2017. As John Nugée says, the election cycle will happen “against a backdrop of continued citizen unrest, fuelled by the ongoing uneven distribution of economic welfare.” In addition, Britain must negotiate its exit from the European Union.

    While the UK economy is still expanding, the pound fell sharply following the referendum decision and continues to weaken every time the markets sense that there is an increased chance of a ‘hard’ Brexit.

    In the US, there are positive expectations about some of the economic proposals of President-elect Donald Trump and his team, but there are also concerns. The US dollar has gained ground since Trump swept to victory last November, but uncertainty is rife. Jim O’Sullivan sees “a meaningful risk that negotiations on trade will turn belligerent" and suggests that “confidence in markets could be affected by geopolitical tensions triggered by the new administration”.

    As a high-quality, liquid asset, gold benefits from safehaven inflows.

    Gold is especially effective as a safe have during times of systemic crisis, when investors tend to withdraw from risk assets. As they pull back, gold’s correlation to stocks becomes progressively more negative and its price tends to increase. Gold historically performs better than other high-quality liquid assets during periods of crisis and that makes it an excellent liquidity provider of last resort.

    In 2016, gold-backed ETFs increased their collective holdings by 536 tonnes (US$21.7bn), the highest since 2009. And while US-listed gold backed ETFs saw a 40% plus reduction in their gold holdings in Q4 2016 – relative to the three previous quarters – UK, Asian, and Continental Europe-listed ETFs fell by just 14%, 9% and 1%, respectively. In all, Europe and Asia accounted for 57% of total ETF flows last year. And we expect that gold investment demand is likely to remain firm.

    Currency depreciation

    Monetary policy is likely to diverge between the US and other parts of the world. The Fed is widely expected to tighten monetary policy, but it is far from certain that other central banks may be willing and/or able to do so.

    The situation in Europe is a case in point. As John Nugée states: “Europe’s economies are likely to face a continuation of the current tight fiscal, expansionary monetary policy as they have for at least the last five years.” Since the European Central Bank announced further quantitative easing measures in January 2015, its balance sheet has increased by approximately €1.5 trillion, resulting in an increase of 70% and bringing the current balance sheet total to more than €3.6 trillion.

    This will inevitably lead to fears of currency depreciation.

    In fact, over the past century, gold has vastly outperformed all major currencies as a means of exchange. One of the reasons for this is that the available supply of gold changes little over time – growing only 2% per year through mine production. In contrast, fiat money can be printed in unlimited quantities to support monetary policies.

    This difference between gold and fiat currencies can drive gold investment demand as investors seek to preserve capital from depreciating currencies, exemplified by European investors last year, when they turned to gold through bars, coins and ETFs. German investors added 76.8 tonnes of gold (+76%) to ETFs in 2016. They also bought 72.3 tonnes through bars and coins between Q1 and Q3 2016 (based on the available data).

    But gold’s relative steadfastness can also support central bank demand. To that end, central banks continue to acquire gold as a means of diversifying their foreign reserves and we expect them to continue to do so in 2017.

    Rising inflation expectations

    Nominal interest rates are widely expected to increase in the US this year, but all the economists we spoke to forecast that inflation will rise as well.

    An upward inflationary trend is likely to support demand for gold for three reasons. First, gold is historically seen as an inflation hedge. Second, higher inflation will keep real interest rates low, which in turn makes gold more attractive. And third, inflation makes bonds and other fixed income assets less appealing to long-term investors.

    Jim O’Sullivan expects US CPI to rise by 2.6% in 2017. And “while those inflation numbers are not high by historic standards, they would signal that momentum remains upward.” He is also concerned about the tightness of the US labour market and consequent wage growth. In Asia, David Mann expects “exports prices to rise,” which may eventually make their way down to Western consumers.

    In all, the massive amount of stimulus that has been pumped into the global economy for years may eventually create an upward spiral of price inflation that could surprise investors.

    Inflated stock market valuations

    Stock markets had a significant rebound in the last stretch of 2016. And while some stock markets are just recovering from lacklustre multi-year performance, stocks in the US have reached historical highs.

    In many cases, valuations have been elevated, as investors increase their risk exposure in search of returns in a very low yield environment.

    Until now, investors have used bonds to protect their capital in the event of a stock market correction. As rates rise, this is a less viable option – and in the meantime, the risk of a correction may be increasing. The interconnectedness of global financial markets has resulted in a higher frequency and larger magnitude of systemic risks. And as Jim O’Sullivan puts it: “The [US economic] expansion will not last forever.”

    In such an environment, gold’s role as a portfolio diversifier and tail risk hedge is particularly relevant.

    Long-term Asian growth

    Macroeconomic trends in Asia will support economic growth over the coming years and, in our view, this will drive gold demand. In Asian economies, gold demand is generally closely correlated to increasing wealth. And as Asian countries have become richer, their demand for gold has increased. The combined share of world gold demand for India and China grew from 25% in the early 1990s to more than 50% by 2016. And other markets such as Vietnam, Thailand and South Korea have vibrant gold markets too.

    As David Mann notes. “Asia has reduced its economic exposure to the West. […] The region has achieved relatively strong growth since the global financial crisis, despite persistently weak growth in the West. Domestic demand – from both consumers and investment – is behind this resilience, and has cushioned the region against its high degree of openness to external trade. Asia will account for approximately 60% of global growth in 2017.”

    While jewellery demand in China has suffered from changing consumer tastes, the investment market has undergone a remarkable period of development. In little more than 10 years its bar and coin market has become one of the world’s largest. China’s gold-backed ETFs continue to grow as well. Investors bought 30.3 tonnes of gold in 2016 through ETFs – an almost six-fold increase in assets under management. Trading volumes on the Shanghai Gold Exchange are increasing. And interest in new products continues to increase; we believe innovation should continue to support China’s gold market in years to come.

    In India, the government’s decision to remove large denomination rupee notes (Rs. 500 and Rs. 1,000) took around 86% of India’s circulating cash out of its economy. While the purpose is to replace them with newly printed notes, we believe that the liquidity squeeze could have a temporary negative effect on economic growth, and may also affect gold demand in the short term. But more importantly, we believe that the transition to transparency and formalisation of the economy will lead to stronger Indian growth in the longer term, thus benefitting gold.

    Opening of new markets

    Gold is becoming more mainstream. Gold-backed ETFs made gold accessible to millions of investors, primarily in the West, over the past decade, but other markets continue to expand too. China has seen dramatic growth in recent years through Gold Accumulation Plans, physicallysettled gold contracts in the Shanghai Gold Exchange.

    In Japan, pension funds have increased their gold holdings over the past few years. In the corporate sector, more than 200 defined-benefit pension funds have invested in gold. In addition, more than 160 defined-contribution plans have added gold to their list of investments.

    We expect this trend to continue and expand into Western markets, where pension funds have had to rethink asset allocation strategies following prolonged exposure to low (and even negative) interest rates. In our view, this will result in structurally higher demand.

    Innovation is evident across all markets, but at the end of last year one development stood out. The Accounting and Auditing Organisation of Islamic Financial Institutions (AAOIFI), with support from the World Gold Council, launched the Shari’ah Standard for Gold, opening up the Muslim world to gold investment.

    Mark Mobius of Franklin Templeton thinks that the new Shari’ah Standard on Gold will be a “game changer.”

    Whereas previous Shari’ah rulings were fragmented or nonexistent, the Standard provides definitive guidance on gold products, potentially allowing millions of Muslims to invest in gold. Furthermore, Islamic finance has expanded rapidly in recent years with many countries actively promoting this sector as part of their economic development and diversification policies. These factors can potentially propel gold demand across many Muslim markets from Malaysia, the UAE and Saudi Arabia, where Islamic finance is well established, to countries such as Indonesia and Pakistan, which are pushing for Islamic finance to play a greater role in their economic infrastructure. With the size of Shari’ahcompliant AUM expected to grow to US$6.5 trillion by 2020, according to the Islamic Finance Stability Board, just a 1% allocation to gold would equate to nearly US$65 billion or 1,700 tonnes in new demand.

    This content was supplied by the London-based World Gold Council and the original document can be found here.

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  • The New Zealand mortgage market grew by more than $20 bln in the past year and one bank is winning an out-sized share of that - despite being the least price-competitive

    Yesterday we reviewed the 2016 mortgage rate trends, and noted that the largest bank not only had the highest rate offers during the year, they ended the year with the highest [two year fixed] rates as well.

    Today, I want to look at market shares more closely.

    And what we find is that same bank is gaining market share.

    And those gains are not insignificant.

    They are gaining on their four main rivals, capturing significant new share, leaving those rivals with languishing market positions.

    The richest is getting richer; the biggest is getting bigger.

    Here is the key fact; in the three years to June 2016, ANZ won 40.3% of all new mortgage business, even though it started with just a 26.7% share.

    In the 12 months to June 2016, it won 35.8% of all new business.

    Mortgages now represent 55.4% of all its loans, a record high for the bank. Commercial and other personal lending are now a minority part of its business.

    Meanwhile, the rivals that could challenge it are going backwards.

    ASB has seen its market share fall to 22.3%, down from 23.5% three years ago.

    BNZ has seen its market share fall to 15.8%, down from 17.1% three years ago.

    Kiwibank has also struggled to keep up its earlier market gains. Its market share is now 7.2%, a slight slippage from the 7.3% it had three years ago.

    And Westpac has also gone backwards. Its market share is now 20.7%, down from 21.6% three years ago.

    All four rivals are conceding ground to ANZ.

    The minnows don't count; ANZ grew in 2016 by more than the total mortgage loan book of HSBC, SBS Bank and TSB Bank combined.


    In a rising interest rate market, what can its rivals do to stop being run over?

    in 2016 we saw that customers ignored ANZ's higher interest costs of up to 25 bps.

    A new strategy is required; new tactics are needed.

    The problem is that shareholders (especially Aussie shareholders) want their returns and dividends without having to stump up any more capital. Management of all banks are under pressure to keep the profits flowing in the short term. And their bonuses depend on this. Blind eyes are being turned to the atrophy in market share. A short term game is being played here.

    Another problem is that mortgages are a commodity, and the cheapest funding goes to the largest player, reinforcing its dominance and its ability to punish rivals who threaten it.

    Another brutal fact is that Kiwibank is in no position to shake things up any more - unless its new NZ Super Fund and ACC shareholders are in for a long game of low margins to chase a meaningful market share objective.

    It will make for an interesting market to watch in 2017, one that may not benefit borrowers, or in fact any of ANZ rivals.

    It is not hard to see [a more activist] Commerce Commission perhaps taking a new interest in our biggest oligopoly. Don't hold your breath, but at some point unless current trends change, 'new management'; at the competition regulator could take an interest.


  • Non-bank lenders warn borrowers may have to pay the price for rise in personal loan fraud

    Borrowers may be paying the price for a spike in loan fraud.

    The executive director of the Financial Services Federation (FSF), which represents finance companies, warns there’s been a rise in people using increasingly convincing looking, fake documentation to secure personal loans.

    Lyn McMorran says car finance companies and other consumer finance providers are having to be more vigilant to spot forged drivers’ licences, bank statements, etc.

    “The information being provided in support of the loan is so sophisticated - so professionally produced - it would suggest that there’s more than one person behind it,” she says.

    “Any kind of loan fraud affects the ability of the finance company to be able to on-lend funds and that puts up the cost of borrowing to consumers.”

    McMorran says the reason for the uptick is unclear, but acknowledges improved technology, which makes it easier to forge documents, might have something to do with it.

    She can’t attribute the misconduct to a certain demographic of society, and doesn’t believe people are scamming the system out of desperation.

    The FSF’s members say they’re happy with their loan volumes and their arrears are low.

    “It’s good quality lending. They’re not seeing the desperation that a payday lender might see, for example,” McMorran says.

    What will happen when interest rates go up?

    She says it’s difficult to get a sense of exactly how widespread the problem is.

    “Apart from cases where there have been convictions, it’s awfully hard to tell what’s going on. You don’t necessarily know that there’s been fraud until all of the sudden there are no loan repayments and the money’s gone and you can’t recover it.

    “There might be stuff bobbling away under the surface that people don’t know about.”

    McMorran acknowledges that if the market turns, and the fraudsters can’t meet their repayment obligations, our financial system risks being exposed.

    “If interest rates go up, which they probably will, it is going to have an impact on people for sure,” she says.

    “The FSF as a body is now looking at ways in which we can facilitates more information sharing amongst our members to try to prevent instances of identity fraud or the use of fraudulent account information to verify loan affordability.”

    She admits the Privacy Act makes it hard to share a lot of information, but says it would be good to share trend information within the industry at the very least.  

    Many of the personal loan fraud cases non-bank lenders encounter aren’t big enough to report to the Serious Fraud Office (SFO).

    “And when it’s reported to the police, it’s a bit like reporting your burglary at home,” McMorran says.

    “There are other issues that take priority when they haven’t got enough resources to be able to fully investigate all these things. It’s part of the cost of doing business unfortunately.”

    She admits that in an ideal world it would be great if the SFO was resourced to take a proactive approach towards cracking down on lower level fraud, because “ultimately it is the consumer that pays”.

    When there’s a boom, there will be fraud

    Commenting on higher level mortgage fraud in particular, the SFO’s chief executive Julie Read says: “We don’t do work that’s specifically preventative.

    “Obviously we hope that by means of both the publicity around the cases that we do - talking about the cases and consequences - we alert people to issues.”

    The SFO received five mortgage fraud complaints in the past year - up from one in 2015, two in 2014, none in 2013, one in 2012 and four in 2011.

    It made five mortgage fraud prosecutions in this time.

    While the numbers are small, Read acknowledges the scale of the problem is larger than it’s been in the past.

    “Where there are [property] booms, there’s likely to be fraud,” she says.

    Read also acknowledges that if loans are being repaid, it’s unlikely any fraud will be picked up.

    “Of course, that’s quite possible in a market such as the one we have in Auckland at the moment. It may be possible for someone to sell on a property at a considerable profit and therefore repay the mortgage. If that happens… any fraud may never come to light,” she says.

    Fraudsters taking advantage of hot property market but not driving up prices

    Asked whether she’s scared that in five or 10 years’ time, the tide will go out and a large number of mortgage fraudsters will be exposed, she says: “Potentially if the housing market loses significant value that might expose some fraud that we’re not presently aware of.

    “But I would be surprised if there is fraud at the moment, which is of itself driving high prices. I think people are definitely taking advantage of the heat in the market, but I’m not aware that there’s sufficient mortgage fraud to actually drive prices.”

    Read says tougher loan-to-value ratio restrictions have the potential to dampen mortgage fraud, as they require applicants to have higher deposits - IE 40% for an investment property.

    Once Phase 2 of the changes to the Anti-Money Laundering Act are implemented, this should help too.

    “The use of a false name is much harder when you’ve got to comply with AML provisions, and if the real estate agent, the bank and lawyer all have to comply with them, there’s a much greater chance of those falsehoods being found out,” Read says.

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

  • In 2016, having the lowest mortgage rates was no path to market share success. The big banks learned where the sweet spot was above their price-fighting rivals

    p>We are ending the year with fixed mortgage rates rising. Today, wholesale swap rates took yet another jump.

    So it is a good time to review what happened in 2016 with mortgage rates.

    One big question for many borrowers is whether it is wise to stay with a main bank. Are they competitive?

    It is a question that is more relevant these days as banks move to protect and raise margins and seem to be moving away from building market share.

    It is an especially relevant question for borrowers with our largest mortgage bank, ANZ. They seem to end the year with the highest carded rates and have had that position for some time. When fixed mortgages are a commodity, ,why do so many borrowers pay top market interest rates for their home loan?

    Is the 'premium' they pay a main bank immaterial, or worth it in some other way? Apparently it is, because ANZ was the only main bank to increase its mortgage lending exposure relative to all its other lending.

    Most New Zealand banks qualify for the label 'mortgage banks' - the exception being the BNZ. Most bank loans are mortgages, reflecting the dominance of residential property in the New Zealand economy. Here is the latest RBNZ data:

    Proportion of mortgage lending of all lending Mortgage Market
    as at June 2015 2016 Lending Share
    Main banks % % $ bln %
    - ANZ 53.0 55.4 63.009 29.6
    - ASB 66.8 66.0 47.791 22.4
    - BNZ 46.6 46.2 33.917 15.9
    - Kiwibank 93.4 92.3 15.454 7.3
    - Westpac 60.1 59.7 44.336 20.8
    Weighted average all main banks 57.9 58.2   96.0
    Second tier banks        
    - Co-operative Bank 92.0 92.7 1.742 0.8
    - HSBC 29.5 36.4 1.258 0.6
    - SBS Bank 76.6 76.8 2.288 1.1
    - TSB Bank 81.8 80.9 3.217 1.5
    Weighted average these 2nd tier banks 65.1 69.2   4.0
    Source: RBNZ G1        

    Looking at the popular 2 year fixed rates as a way to assess how things have changed, the main banks ended 2016 with rates higher than when they started, at 4.50% compared with 4.44% at the start.

    The challenger banks however became more rate competitive, ending almost exactly where they started and -6 bps lower on average than the main banks.

    But these averages mask some fairly substantial variations.

    The key feature was the two sub-4% offers from HSBC during 2016. We also had a brief 3.99% offer from Kiwibank in May.

    ANZ had carded rates an average of +26 bps more than the 'best rate' over the year. ASB had +22 bps higher carded rates on the same basis. For BNZ it was the same +22 bps premium. For Kiwibank it was +16 bps, and for Westpac it was a +20 bps premium.

    Second-tier banks have very low market shares, and low rate offers seems to move the market very little. (Having said that, it should also be noted that the challenger banks do not have the capital capacilty to handle any significant market share shift their way.)

    In terms of overall price competitiveness, here is how these banks positioned themselves on average over all of 2016, and at the end of the year.

    relative price competitiveness 2016 average year-end
    two year fixed only rate % premium %
    #9 ANZ 4.39 +0.20
    #8 Co-operative Bank 4.38 +0.16
    #7 ASB 4.35 +0.10
    #6 BNZ 4.35 +0.20
    #5 Westpac 4.33 +0.06
    #4 Kiwibank 4.30 lowest=
    #3 SBS Bank 4.25 lowest=
    #2 TSB Bank 4.24 +0.10
    #1 HSBC Premier 4.21 lowest=

    A mortgage may be a 'commodity' these days but price (as represented by carded rates) doesn't seem to change the borrower's choice of bank.

    We don't move for a 0.25% benefit.

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