By Gareth Vaughan
The Auckland housing market is not an area of significant risk concern for banks at the moment, but it would be if the current high price rises continue, says Westpac NZ CEO David McLean.
Speaking to interest.co.nz after Westpac posted its interim results yesterday, McLean said if Auckland house price growth continued at current levels and didn't moderate, eventually it would get risky from a bank risk perspective.
"It's not an issue of real risk concern for the banks at the moment and so therefore we're happy to leave it to the policy makers (such as the Reserve Bank and government) to come up with a solution," McLean said.
Last Friday government valuer Quotable Value said the average Auckland residential property value hit $809,200 in April, up 14.6% compared to April last year. When adjusted for inflation Auckland values are 14.5% higher over the past year and 27% above the 2007 peak, QV says.
Of Westpac's $40.7 billion home loan portfolio, 43% is in Auckland.
Although expressing a reluctance to weigh into the debate on how the Auckland housing market could be cooled, McLean said it was fundamentally an issue of supply and demand.
"You've got to address one or both of those things (supply and demand). (But) public policy's something I'm reluctant to get into debating."
In terms of a capital gains tax or some other form of property tax, McLean said any solution wasn't merely one of those measures on its own.
"Sydney has capital gains tax and stamp duty and their house prices have been rising at the same rate as ours," said McLean.
Stress testing 'doesn't show alarming levels of loses'
Nonetheless he would like to see price rises moderate.
"We would be concerned if the growth kept on going and didn't moderate and eventually things would get risky from a (bank) risk point of view," said McLean.
"In terms of our own lending book, we do stress test it regularly. We do it ourselves and we do it with the Reserve Bank. They apply very, very severe hypothetical assumptions."
"Some of these scenarios are very, very extreme and all the testing we do doesn't show alarming levels of loses," McLean added.
LVR speed limits derisking banks
The Reserve Bank's restrictions on trading banks' high loan-to-value ratio residential mortgage lending have helped derisk banks, he added.
"The Reserve Bank's over 80% LVR restriction has meant that the actual risk in our book has come down because we've got a lower level now of over 80% mortgages. It was 21%, nearly 22% (of Westpac's home loan book) before the restrictions came in. It's now 17%. And of course every month we're writing over 80% loans at about 6% or 7% (of total new mortgage lending), so every month it's coming down again so the level of risk in the book is lower," said McLean.
Westpac says it uses a servicing assessment approach to determine borrowers' capacity to repay mortgages. This includes an adequate surplus test and discounts to "certain forms" of non-salary income. Also included is an interest rate buffer, which in the current interest rate environment is in the range of 2% higher than the standard lending rate.
"When things are going well like now you've got to look at everything and say 'are we writing business today where the risks are hidden?' And everything we're testing seems to indicate that we're not," McLean said.
Auckland the global city
Meanwhile, he said there were a range of ways to look at Auckland house prices.
"One way that somebody has come out with recently is if you look at global cities (such as) Auckland, Sydney, Melbourne, New York, Hong Kong, we're not out of whack. And if you think of Auckland as a global city, on those sort of metrics, we're not out of alignment with that," said McLean.
He was referring to a Core Logic report commissioned by Westpac for internal consumption.
This article was first published in our email for paying subscribers early on Tuesday morning. See here for more details and how to subscribe.
21 Comments
given whats happened at the headstock, mums the word.
http://www.smh.com.au/business/banking-and-finance/westpac-profit-spark…
Westpac triggered a heavy sell-off in bank shares after unveiling a disappointing dividend and profit at the same time as announcing it would raise $2 billion to bolster its balance sheet.
Shares in the country's biggest banks slumped on Monday after Westpac said half-year profits were flat compared with a year ago, at $3.78 billion, and shareholders would reap their smallest dividend increase in five years.
After the financial system inquiry called for banks to become better capitalised, which could erode returns, Westpac said it would raise $2 billion from shareholders through a partially underwritten dividend investment plan.
In another move to conserve capital, it is increasing dividends more slowly than in the past, raising its fully franked interim dividend by 1¢ from the previous half to 93¢ a share.
and later, there out to help
http://www.smh.com.au/business/the-economy/reserve-bank-of-australia-cu…
It's a bit worrying that he makes some of the statements that he does.
Auckland house prices are up 59% from the previous market peak (REINZ strat index). Sydney's are up 33% (core logic). Auckland house prices are higher than every city in Australia except for Sydney, and is likely to overtake Sydney in a month or two in actual dollar values.
Auckland has risen more from its pre GFC peak than any other city in the OECD.
People talk about population growth and supply etc. Well that should be reflected in rents. Auckland rent has increased by a CAGR of 3.96% from Q1 2012 to Q 2015 (Tenancy Bond Services Auck 3 bedroom house Q1 average). Over that time Auckland house prices increased by a CAGR of 13.7% (REINZ auckland stratified index). Well where did that extra 10% come from?
Assuming house prices only grew at the natural rate of supply & demand - 4% as reflected in rents - it would imply auckland is at risk of a 23.5% fall in house prices to reflect a level inline with natural population growth since 2012. It is still higher than 2012, but a massive fall is likely at some point. People can argue if 2012 is even the right base as on every fundamental basis Auckland housing was already overvalued.
This whole argument house prices should be growing by 20% per annum is frankly stupid.
Great link - read this one by any chance?
http://www.newyorker.com/magazine/2013/08/12/taken
I had to take a break - twice - while reading - as having grown up in what was a great country once, it was too much to bear all in a single sitting.
"The Reserve Bank's over 80% LVR restriction has meant that the actual risk in our book has come down because we've got a lower level now of over 80% mortgages. It was 21%, nearly 22% (of Westpac's home loan book) before the restrictions came in. It's now 17%. "
So what he's saying here is that Banks are completely incapable of controlling their urges and without RB overview have no intention of reining themselves in even to the detriment of the country. I thought it was just my pessimism and Bank hatred that made me think that.
I think we have lost touch to with reality on house prices and continue to pay more and more for a house. We can clearly see that many assets around the world are substantially over valued including housing, stocks, fine arts. If we look at the New Zealand economy we can see that the main drivers for the economy are the Christchurch rebuild and Auckland House Prices. The economy need something else to keep us afloat as these to things will not go forever. I guess one plan is once the Christchurch rebuild comes to an end we can turn to Auckland for the Auckland build to keep the economy going while Christchurch build comes to an end. We can keep the NZ economy growing by building thousands of homes and schools and infrasture in Auckland to prevent a slow down in the economy taking place. Is this the plan?
TM ...... you have hit the nail on the head ....ultimately NZ is the "last port of call" and the countries the Chinese buyers really want are in this order: 1. USA 2. Canada (closer to USA) 3. UK 4. Australia and finally 5. NZ ...or should I say Auckland ...... nee how all :)
China recorded 2,378,000 millionaires in 2013, compared to the USA 7,135,000 millionaires, according to Boston Consulting Group’s 2014 Global Wealth Report. China’s millionaire growth skyrocketed last year, shooting up 82% from 2012
That's only counting the ones still in China and it's enough to clean up NZ altogether
Maybe there is little concern amongst the banksters for high prices.
However I would rather be paying 8% on a 300k loan than 6%on a 400k loan.
The interest payment is the same but the commitment of the extra 100k capital before ownership is a significant burden over your future
https://twitter.com/UtopianFireman/status/595682190412906497/photo/1
Explains everything in easy to understand language
So whats the justification for $800k in Auckland?....wait for it...its a "Global City"... please. Auckland is not a patch on Sydney etc. in every attribute. Its not even close. My parents have a few Auckland properties which have reached their peak and its time that they realise the cash. Big collapse on the way we all know its going to happen.
In today's NPR website:
"London's Dominance Becomes A British Election Issue
London completely dominates the political, cultural and economic life of the U.K. to an extent rarely seen elsewhere. That imbalance has been an issue in the runup to Thursday's election."
Ha, they don't know what dominance is until they look at Auckland.
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