ANZ's chief economist Cameron Bagrie is calling time on the practice of funding NZ investment with offshore borrowing and he says households need to start saving more.
In the ANZ's latest Property Focus publication, Bagrie says New Zealand has a considerable pipeline of investment needs, which largely reflects some catch-up and the necessities of catering for a rapidly growing population.
He says the Government and business sectors are doing their share - but households are not. And consumption will need to be reined in. He references the "housing-centric borrowing" of Kiwis, and says this has "hardly done much" to add to the country's productive base.
"Given a domestic saving shortfall, New Zealand’s typical modus operandi has been to fund its investment needs through offshore borrowing (running a large current account deficit). While that is still possible to a degree, it is facing far more challenges now given prudential restrictions, credit rating agency attention and financial stability considerations.
'Onus on saving'
"The onus is falling more on the saving side of the ledger to pull its weight to fund domestic investment needs. While a decent income growth backdrop will assist, there will still be trade-offs. In order for the investment wheels of the economy to continue to turn at the rate necessary, domestic saving will need to lift, and ultimately more saving equals less consumption, with the latter the sacrificial pawn to allow stronger investment.
"...The game looks to be up on the old 'fill-yerboots with borrowing offshore' modus operandi. While it is a lever that can be pulled, it can’t be yanked as enthusiastically as in the past. Sustaining New Zealand’s investment needs is going to require more domestic saving to finance it. The numbers don’t stack up otherwise."
Bagrie says there is nothing fundamentally wrong with borrowing. "It’s cheaper than equity!" Borrowing, he says, is also society expressing its preference to spend today (or buy a bigger, flasher house) as opposed to investing for tomorrow.
"Offshore capital (saving) is typically readily available, at a price. Now you can’t borrow indefinitely of course, but for a country with an open capital account and developed financial system like New Zealand, it does mean that you can make choices about the timing of spending, saving or investing.
Housing-centric borrowing
"Unfortunately in New Zealand’s case, the borrowing has been housing-centric. It might well have been a logical response to expectations of capital gain, and housing is a critical 'need', but it’s hardly done much to add to the economy’s productive base."
Bagrie says that the country has typically financed its investment needs through a mixture of domestic saving and borrowing overseas.
"In fact, since the GFC (and up until recently) we have been leaning more and more on the former. We have documented this extensively of late, but with deposit growth largely matching accelerating credit growth within the banking system for the majority of the post-GFC years, in many ways the system was self-financing. Banks didn’t have to tap international markets to the same extent as we have seen in the past, which is a key reason the economy’s net external debt position fell from 84% of GDP in 2008 to 55% of GDP now.
"However, that changed around 12 months ago when deposit growth started to slow sharply while the demand for credit remained strong. To keep the economy’s investment wheels turning, banks were forced to turn more to offshore sources for funding. In September 2016, offshore bank funding had increased by over $11bn compared with 12 months prior."
Bagrie says banks are attempting to mitigate this challenge (funding gap) through competing more aggressively for domestic funding and restricting credit. As such, deposit rates are rising (and with them, lending rates), and credit is increasingly being rationed.
"That is a logical response. However, credit rationing is hardly a factor that is going to assist with the likes of boosting housing supply or infrastructure more generally. Credit is the grease in the economy’s investment wheels.
"In many ways, the funding pressures that banks are currently facing can also be thought of as a current account constraint. If it is becoming harder, or we should be more wary about funding a saving shortfall through overseas borrowing, then simple maths would say that either national saving needs to lift or investment has to fall. Now admittedly, that’s probably a little too black and white; there is of course scope to fill the gap with a little more offshore capital. Our current account deficit is only 2.7% of GDP. We’ve run far larger deficits before. Perhaps something up to 4% of GDP would be manageable given the economy’s investment needs. But anything larger than that and the net external debt position relative to the size of the economy would start to rise again and that will get [negative] attention."
Bagrie says the "downstream implications" of the existing tension between national saving and investment are meaningful. Stronger saving across the business and government sectors can be seen already.
"We estimate that in the year to March 2016, the business sector’s net saving totalled over $13bn (which is close to twice the size of the current account deficit itself).
"However, household net saving has been a clear laggard. In fact, households were dissaving to the tune of over $15bn over the same period."
Strong business sector saving is "thus unlikely to be enough".
"Households will need to pick up the baton as well. Higher deposit rates will of course help in this regard. But ultimately more saving equals less consumption, and consumption is a big part of the economy (around 60% in fact – for private consumption at least). Within our forecasts, one of the key overriding themes is that investment’s share of GDP continues to rise, while consumption’s share continues to fall off highs."
86 Comments
Or at least they should stop dropping the interest rates. The oncall bonus saver rates with these banks are still being dropped, and TD rates aren't really much better than they were last year. No wonder people are putting their money into shares and houses, or anything which they can get a return on that is much better than inflation
All banks had rates like that in 2014. Mortgage rates were circa 6% for 2 years, so no surprise.
http://www.rbnz.govt.nz/statistics/key-graphs/key-graph-mortgage-rates
Kiwibank 5yr td is now only 4.3, same as ANZ, ASB et al, but only lets interest at maturity, no compounding, so their rate is much worse actually.
Actually, Heartland only do compounding interest when the term 6 months+
https://www.heartland.co.nz/interest-rates
And their rates look lower than main banks, despite their lower credit rating.
Anyone that thinks that a land tax is a good idea is only jealous of people that own property.
If they owned an asset would they appreciate an additional tax put on it? Nah.
How about putting a tax on overweight people that are a drain on our health system?
Let's concentrate on other things that are a drain on the country and produce nothing of any economical benefit.
Let's get rid of the welfare system and make sure that everyone that is able bodied has to work and there is no unemployment benefit at all.
It gets rather tedious with all of this property investor bashing and wanting to punish people who are prepared to work and provide a service to others!
Land tax has a history in New Zealand, where it was once used to get land into the hands of more regular "mum and dad" Kiwis. It may well be time to again consider shifting some of the burden off income and on to the unearned windfalls that have gone into property.
Why should Kiwis simply take it as given that tax should be applied mostly to income, and that wealth created by land should be almost tax free? Especially when land benefits (in services and value) from infrastructure that income taxes pay for. (Rates aren't keeping up, that's for sure...and neither do they pay for roads.)
It's natural for those born at the right time to benefit from both the presence of land tax and the absence of land tax to want it to stay in history, rather than affect them. Of course.
Very simplistic indeed. I'd go further and claim that your analogy is wrong. A better analogy is that the TOP taxation is equivalent to renting the land from the govt. One of the aspects that annoys me about the TOP land tax is that it taxes only the net equity, rather than the full value of the property. This encourages leverage, which is precisely wrong IMO. People would do far better in the long term via reducing leverage. I know of far too many people that lost a lot of their wealth via the inappropriate use of leverage.
What happens if capital gains tax gets introduced and leads to a decrease in property prices. Will the sellers then be able to claim loss of capital from their taxable income when they sell the house for less then what they bought it for? I wander what that will do to NZ's tax revenue in the short term (before house prices actually have any gains on them). In theory, if you have to pay taxes on the gains then you should be able to make claims on the losses. I am no tax expert but it seems logical.
Apparently yes the reverse of a capital gain tax also applies to a loss of capital gain, which is why the Nats are so opposed to the idea. Technically speaking, after a massive property bubble collapses, the country could be left in financial ruin by the same rules that were trying to fix the issue which have now reversed and magnified the losses claimed. A really bad idea all around!
thus spake a property investor. Now some questions; just what service are you providing? Taking houses out of the market so that poor young people will not be burdened with a mortgage, while they pay for their own home? Providing rental homes at extortionate rents that trap people into a perpetual cycle of poverty? Relieving the Government of unwanted taxpayer funds through forcing tenants to get accommodation supplements to pay for aforesaid extortionate rents?
Anyone that thinks that income tax is a good idea is only jealous of people that have jobs.
Anyone that thinks that GST is a good idea is only jealous of people that buy stuff.
Anyone that thinks that inheritance tax is a good idea is only jealous of people with rich parents.
There we go, now we've ruined any sensible or nuanced discussion about how the country should raise revenue. I do own land and still think land tax is a good idea as it's hard to escape, encourages good use of land, discourages land banking, and may even discourage high asset prices which are a drain on the economy at the moment.
So what of the millions of hectares in "Run" and "Station" holdings across NZ? Why increase the costs of those people who are already using the land in a productive manner? This is the trouble with NZ and many of those who post on this site they see nothing other than the cities and have not a clue as to what is going on in the real world of those who earn export income for this country. The drain on the economy is that the government and all its services are too expensive.......Councils with their hands out at every moment clipping the ticket on anything housing and controlling land use all the way. Council charging rates which was always intended to run the adminstrative side were very fast to organise themselves into taking a second bite.
A lot in your comments there!
The problem as identified in the article is that too much of our economy is tied up in housing which is not productive - i.e. once built it doesn't grow the economy. Unlike a business that can make new things, export, employ etc.
I can't see the difference between taxing income and taxing assets. 150 years ago there was no income tax and it is only post-WWII that most people actually started paying it. The ideal tax system is broad base (i.e. tax everything) at low rates.
A "fat" and "sugar" tax (like cigarette tax) have all been proposed so nothing novel there and perhaps will happen in NZ as it has in other countries. Unemployment is at 4.9% and the number of people on benefits is falling dramatically in the last few years and I can't really see how that has anything to do with taxing land.
It's interesting you said "work hard" but I am taxed on my work - income tax - and then taxed when I spend it - GST. There is a place for property investors, developers, landlords etc in our economy but the current tax system is geared too much towards housing.
There are countless reasons why land tax is the best method of taxation. Even Milton Friedman was a fan. https://www.youtube.com/watch?v=yS7Jb58hcsc
I recommend you start here. https://en.wikipedia.org/wiki/Progress_and_Poverty
I tried reading this but after a short bit I realised if I carried on I'd fly into a rage and start smashing the computer in lue of being able to reach this git.
I've been trying to save and deliberately not borrowing for a while now. How's that worked out for me.
It's been a waste of f$&@kn time, I'm over it, I've lost out big time, it's bloody depressing.
I know - how about we drop the tax on interest earned in deposits....! Given we provide tax breaks to the greedy who borrow too much, why don't we reverse the policy and drop the tax on interest earned?
We say to FHB, save a deposit for your house, but we'll tax you for it! Oh but the Darklord, here, have a tax break and feel free to put up the rent on the FHB who is attempting to save for a house..
You hit the nail on the head, redcows. We're entering an age of artificially low wages, robotic workers and rapid casualisation of the workforce, where working for wages isn't enough to survive, let alone live. Working hard, saving and being frugal gets you nowhere in 2017. Being born to wealthy parents, living rent free at your folk's place, speculating on property, being a landlord and just generally shafting people gets you places.
Some of this is a bit evasive. Saying credit tightening won't help infrastructure and house construction. You know banks could lend for both purposes and restrict credit to existing housing. It's dishonest to claim that one must impact the other.
In relation to saving if people didn't have to spend so much on a house they could easily save more. If people don't buy houses they will be more likely to have savings. Although with our overextended banks why would you want to put your money at risk? Of course by leaving savings in the bank you're also encouraging them to lend more and increase house prices.
Totally agree Dictator. Cameron Bagrie is conveying some very mixed messages here.
And he is being unfair. When housing and tax policy incentivises debt, negative gearing, and speculation why would anyone save? Especially in the face of record low savings interest.
If Cameron Bagrie, heavy weight economist foresees a serious economic problem for NZ, he needs to put pressure on the government to change policy. People have put all their eggs in the housing basket because government policy has set that up. This mess has nothing to do with the spending or saving habits of every day people and everything to do with Nationals lack of action.
This article is rich. Banks have led the way into the situation we are in today. Commentary on this site in the past has identified that while it has been ridiculously easy to borrow to buy property, it has been insanely difficult for other types of business. My own experience confirms this.
something they might appear to be just beginning to do now. But nah, they can foreclose on property lending far easier than they can on borrowing to support other types of business. when you want to borrow for a business, they want your home as collateral. BS really as they accept little or no risk at all, while calling for others to do so.
Murray86 the RBNZ dictated where banks should lend when they introduced asset risk weightings favoring property post gfc. Banks yield for the amount of capital held is best served by financing property. This is fundamentally why we have a ponzi, and you cannot get working capital funding for your business, or pay through the nose for it.
It is banks who chose to do the overseas borrowing, not savers. This is not actually a message directed to savers or borrowers but a call to coordinate with other banks to curtail their lending. Given that ANZ wants to maintain its market share, the ANZ can only curtail its reckless lending if other banks do the same. Coordination via economic pronouncements looks better than having the bank CEOs agreeing how to manage the market at some local pub.
Another factor is that with Kiwisaver, many people will be channeling funds in there rather than having spare money for term deposits. And the banks want people to put their funds in the higher fee: aggressive funds ie not cash fund (term deposits) with that bank. So this is one reason why the banks have less money in term deposits now.
"He says the Government and business sectors are doing their share - but households are not."
Cobblers. the Government has sat on its hands and refused to do anything that would encourage savings in productive enterprises. They've left the subsidy system for property in place, so naturally people do the rational thing, borrow and "invest" in housing. You can't blame the thousands of citizens who make individual choices based on the flawed system that rewards ploughing everything into the one asset class.
It's amazing that an experienced and qualified Chief Economist can't see the glaring flaw in his argument.
From where will potential savers seek new money to offer the banks to intermediate loans to credit worthy borrowers? All ledger based deposits (banks' liabilities) are currently offsetting outstanding bank customer debts (banks' assets) Owners of these bank liabilities can only ever exchange them between each other's accounts when they trade goods and services and buy and sell non-banks assets. The graphic reduction in deposits is offset by foreign borrowing which is conveniently not accounted for due to the fact off-balance foreign debt hedging arrangements (Cross CCY basis swaps) are not revealed.
Its a fair cop, but society is to blame.
Bagrie says there is nothing fundamentally wrong with borrowing. "It’s cheaper than equity!" Borrowing, he says, is also society expressing its preference to spend today (or buy a bigger, flasher house) as opposed to investing for tomorrow.
What the!
Classic case of victims bashing more like. Hey the
Non NZ owned banks didn't have to lend!
Nor lend at the do nothing end of the economy
"Unfortunately in New Zealand’s case, the borrowing has been housing-centric. It might well have been a logical response to expectations of capital gain, and housing is a critical 'need', but it’s hardly done much to add to the economy’s productive base."
Or
"Unfortunately in New Zealand’s case, the lending has been housing-centric. It might well have been a logical response to expectations of easy banking profits as inter national capital regs made home lending cost almost no bank equity.
However, and housing is a critical 'need', was conflated with house speculating as bank equity regs were gamed to apply owner occupier home loans to aggrigating asset speculators. Fun for some but it’s hardly done much to add to the economy’s productive base."
Jobs & income!
Got there in the end!
It's great to say everyone needs to save, please tell me where is the incentive to save. You have PAYE deducted from income, if you them want to take some of the net income and save it to earn income on the savings, there is more tax deducted. Add to that over 30% tax before saving for Kiwisaver, tax deducted again when you get returns on Kiwisaver etc. Why bother because the measly returns made from TD and Kiwsaver are too small to create a saving culture. NZ is probably the only country in the world that has double taxation ie tax deducted on already taxed income.What the government needs to do is create a rule, income that has already been taxed, if used for saving/investments must not have tax deducted again. It's a change in mindset for the IRD and may make a very small reduction on the tax collected but will encourage saving vs spending. There is no reason for banks to borrow from offshore sources, there is plenty of money in NZ which could make its way into banks with the right incentives.
On one hand property investments are safe because it is land that you buy (the value might crash but will never be zero), add no capital gains tax, its income-generating ability (rent) and ease of borrowing to it and you get the perfect investment.
On the other, bank savings are not guaranteed by either the bank or the government (in case the bank fails, your account balance reduces to zero) and a meager interest earned taxed on your top rate makes it a poor choice.
Which part of houses in NZ arent unaffordable do people not understand??????
People are still able to buy a first home in ChCh quite easily and repayments less than renting, but don't tell my tenants!
A land tax will only put up the price of property around the country!
I beleive that there will be many more ex New Zealanders will be heading back to NZ in the next year or so due to yesterday's terrorist action and Ozzies suggestion to tax Kieis homes with a 50 per cent CGT.
even if Labour/Greens brought in a CGT it won't be retrospective so it won't have any effect in bringing prices down!
OK, where to start.
1. Houses in many parts of NZ are either completely unaffordable, or heading that way. Sitting on our hands will not change that.
2. Land tax will reduce not only property prices but also rents. Here's a good ELI5 for you:
https://www.reddit.com/r/newzealand/comments/6b6qy5/landlords_threaten_…
3. CGT doesn't need to be retrospective to affect speculative value based on expected future returns on properties. This would have an immediate effect of reducing property prices as the expected yield including cap gains falls. I still don't think it's an ideal solution though.
I recommend doing some more reading before preaching any more of your "economics".
Yes some people can afford houses, but ownership rates are falling which correlates to prices rising faster than incomes. This makes them more difficult to afford, and is well documented, including on this site, if you care to look.
I don't see how a land tax will increase property prices, it should act as a disincentive to holding unproductive land which acts to increase supply (a significant part of property prices is the price of the land). Knowing that there is an additional tax to pay on owning property acts as a disincentive on owning 'too much' house, i.e. people are less likely to buy a house with an extra bedroom, or to buy a second house, and perhaps more likely to improve/extend their own property if the land tax paid is fixed. This leads to more efficient use of housing/land which helps to reduce prices.
edit: remember when claiming owning is cheaper than renting, the vast majority of renters do not have access to the deposit needed to buy a house. Owning is simply not an option for many at the moment.
What ANZ Bank have stated obviously incorrect as others have noted, it should be self evident that if banks where squeezed deposits would be earning a much higher rate of interest. Also thanks to the "Open Bank Resolution" (OBR) deposit risk is tied to bank risk and bank risk is tied to mortgages with the net result being that money deposited to a "savings account" may be just as at risk in a bank account as invested in the property market itself.
You know when the game is up, when you lose money on a 3 bed rental in Glen Eden , when you have to put 40 percent down, take an interest only loan at historically low mortgage rates, falsify mathematics , expenses and outgoings in your mind and end up paying a bank and a tenant to live there. Imagine if that money was put towards developing a business/enterprise.
WTF - I am dumbfounded!
The banks have been falling over themselves to lend into the non-productive residential housing ponzi. The fall in bank term deposits could have something to do with OBR and savers realising the banks are "as safe as houses" which right now in NZ means "not very safe at all".
Stump up with a decent risk premium Mr Bagrie and stop blaming.
WTF - I am dumbfounded!
The banks have been falling over themselves to lend into the non-productive residential housing ponzi. The fall in bank term deposits could have something to do with OBR and savers realising the banks are "as safe as houses" which right now in NZ means "not very safe at all".
Stump up with a decent risk premium Mr Bagrie and stop blaming.
Property rates, taxes and mortgage rates are all heading north in the next few years, so where he thinks these "savings" are going to come from is beyond me. Savings require a surplus, and most people aren't managing that now, and the chances of that situation improving in the years ahead is virtually zero. One positive under a new government - a perfect combination of developments:
1) Elimination of negative gearing;
2) Higher interest rates:
3) Higher taxes;
4) Lower immigration
... all of which combined will solve the housing shortage/affordability issue in no time.
Who do you think wants to borrow the money KH ?.....Nzers do in case you're not sure! So what you're saying is, please let someone else do the hard savings work, and let us NZers continue to borrow beyond our means to keep the party going (ie. 160% personal debt to income maybe one of the highest in the western world but we can get it even higher.
Sorry KH, the brick wall has arrived, and the ANZ is only pointing out the obvious to the uninformed, especially those that think rates are going down because banks are going to "cut rates to stimulate lending". Lending is slowing, and that's all the banks decision, and rates are going higher irrespective as to what the RBNZ does.
The quickest way to know what is really going on is to read these. And also read the government books.
https://www.anz.co.nz/resources/c/6/c6f089c1-6260-47ce-bc37-06f1d2d0cc8…
In other words the banks are now worried that all this Ponzi debt is making things a bit unstable.
What is needed is everyone to magically INCREASE THEIR WAGES so that we can put some savings back into the system. This will put things right without destroying aggregate demand.
Quite straight forward really.
From today's "what happened today" by David Chaston:
Lending for new mortgages in April was just NZ$4.6 bln, down an staggering -30% from $6.5 bln in April 2016. Maybe Easter had something to do with it, but that doesn't answer such a steep drop. New lending to investors fell -48%. There is now virtually no new lending to investors at 70%+ LVRs. The drops for lending to owner-occupiers and First Home Buyers were much less, but still steep at -20%.
That should help
We are a Debtor Nation..
Foreign direct investment was supposed to have been good for us ...BUT.... when it simply results in Foreigners buying productive assets, the end result is that the income from those assets go offshore.
NZ has a permanent -ve invisibles outflow.
http://www.stats.govt.nz/browse_for_stats/economic_indicators/balance_o…
If NZ started to truly save surplus income by consuming less , ... then we would fall into a depression.
What we define as "savings" may not be quite what it seems , in a macro sense.
If Joe borrows $500,000 to buy a house off Fred and Fred puts that money into the bank as "savings".. ( we call it an increase in savings ) in a macro sense , this is not "saving"
( This is akin to ones wife taking out a $10,000 loan and giving it to the husband who puts in in the Bank, thinking it is "savings"...and that they are richer.. )
This is still Credit growth... and this is the ONLY way NZ can continue growing.
ie.. When politicians and economists talk about "growth"... this is what they are talking about.... GDP growth thru CREDIT growth... ( I call this paradigm .." Debt Capitalism" ).
If we , as a Nation , started paying down debt we would fall into a depression.
It is even more impossible to turn the tide because NZ has slowly been selling off its "silverware".. in the alluring promise of the amazing benefits of foreign direct investment.... for you and I.. for NZ.. ( fooled me )
We have a PERMANENT current acct deficit which we will NEVER trade our way out of..
SO... The illusion of growth thru debt will continue.
In NZ household sector is where the debt enters the economy, and from there it flows thruout the economy..
Like heroin coursing thru the veins..
One Mans debt is another Mans asset.
One mans spending is another Mans income...
David Hargreaves... Is this you..?? ( author of linked RBNZ article..?? )
http://www.rbnz.govt.nz/-/media/ReserveBank/Files/Publications/Bulletin…
In fact no, but I don't mind people thinking that I also moonlight writing such scholarly pieces! It's the RBNZ's Mr Hargreaves I feel sorry for - no doubt fielding questions about why HE's moonlighting writing stories about interest rates and houses on interest.co.nz! And no, RBNZ David Hargreaves is no relation. The Hargreaves name is more common than you might imagine, particularly in the English county of Lancashire, which is where my family originates from. The secondary school I attended in Nelson NZ had two David Hargreaves, two Paul Hargreaves and a Philip Hargreaves. And that caused confusion.
lets make it fun!
negatively gear our term deposits
and
Anytime someone pays a fee or tax (Jail, Income, Luxury, etc.), put the money in the middle of the board. When someone lands on Free Parking, they get that money. If there is no money, they receive $100.
its just rule change.
Sorry Mr Bagrie, but everything about the chart raises alarm bells for me. I won't be investing savings into the banks to keep house prices inflated. I am spending it before it is confiscated in a bank run. So you can go with your cap in hand to the US Fed and ask for more loans at an even higher interest rate and then pass those higher interest rates onto all of your "interest only" mortgage customers who are already starting to struggle to meet their repayments. Mr Bagrie, if all else fails, you can always call back some of those loans and sell them off to Hedge Fund Managers, just like what happened in the US.
We welcome your comments below. If you are not already registered, please register to comment.
Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.