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CEO David McLean says Westpac NZ is open for business but has not loosened its LVR lending limits since the Reserve Bank said it could

CEO David McLean says Westpac NZ is open for business but has not loosened its LVR lending limits since the Reserve Bank said it could

By Gareth Vaughan

Concern and debate in New Zealand about our hot housing market is a high quality problem and a bit of a luxury against the backdrop of a world where many countries are struggling against the Covid-19 pandemic, Westpac NZ CEO David McLean says.

Speaking to interest.co.nz after Westpac NZ posted a 43% fall in annual profit, McLean wouldn't be drawn on whether the Reserve Bank (RBNZ) should reintroduce restrictions on high loan-to-value ratio (LVR) home loans, which were removed in April. McLean said it wasn't a surprise the housing market's hot given interest rates are at an all time low.

"The RBNZ has a wide range of tools in their toolbox and I think that it's a good idea that they look at them all. The housing market being on fire at the moment is not a bad thing in the very short-term because it does boost confidence among people who own houses. So that's quite good to stimulate economic activity and help cushion any downwards effects from Covid," McLean said.

"But it is unhealthy in the long-term for house prices to get out of whack with incomes and New Zealand has one of the highest levels of disparity in the world. And it also tends to increase inequality between those who own property and those who don't yet, making it harder to get into homes. None of those are good in the long-term. So I think the Reserve Bank will be well aware of these factors and wrestling with them. I have a lot of confidence they will make the right decisions."

In terms of problems caused by rapidly rising house prices, McLean suggested most countries would be quite happy to have that problem at the moment.

"In the quality of your problems this is a relatively higher quality problem than having some economic collapse from Covid or deflation. So I think we're now in a position where it's actually a bit of a luxury to be able to have these debates," McLean said.

The Real Estate Institute of New Zealand's latest monthly figures showed the strongest September sales volumes in 14 years, and a record high national median price of $685,000. The Reserve Bank removed high LVR restrictions in April in the early days of the COVID-19 crisis.

However, NZ is not alone in having fast rising house prices. Average prices in Canada rose 17% in the September year to a record high. And average new home prices in major Chinese cities have reportedly recorded double digit growth.

'Open for business'

In terms of Westpac NZ itself, McLean said it is open for business but didn't loosen lending LVR limits despite the Reserve Bank removing its restrictions. The RBNZ had classified investor loans as high-LVR if they were equivalent to more than 70% of a property’s value, and restricted high-LVR lending to no more than 5% of a bank’s total new investor lending. Owner-occupier loans were classified as high-LVR if they were more than 80% of a property’s value, and restricted high-LVR lending to no more than 20% of a bank’s total new owner-occupier lending.

These restrictions, in place since October 2013 in various forms due to financial stability concerns over growing levels of high-LVR mortgage lending, were removed in April, with the RBNZ saying this would be for one year, until 1 May 2021. However, RBNZ Governor Adrian Orr recently warned the RBNZ is "looking at" potentially reinstating limits on high LVR lending.

"We have record high levels of capital, we have more liquidity than we've ever had before, we have access to wholesale funding but also basically deposits coming out our ears," McLean said.

"So we are open for business and you can see that in the market share stats where we grew, for example, business and agri lending last year where not all of our competitors did do that. We definitely have an appetite to continue to grow in the housing market. The only comment I'd say is that we all have to be cautious and particularly when you see asset prices increase rapidly. That's when as a bank one should be careful."

"So we did not loosen our lending LVR limits when the Reserve Bank loosened them. We are trying to keep cautious about it. If you want to apply for a mortgage with Westpac we will assume your servicing at an interest rate that's much higher than the current rates. If you come in for a mortgage now you'd be paying something with a two in front of it probably. But we would assess your servicing ability at a rate of 7.25%. So we are trying to be as cautious as we can, but subject to that we're happy to grow," McLean said.

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49 Comments

"We have record high levels of capital, we have more liquidity than we've ever had before, we have access to wholesale funding but also basically deposits coming out our ears,"

Like money growing on trees. Well, hypothetically, it is is and the great unwashed don't even know it. They also don't know that the value of money is being destroyed. The only money they primarily exchange their labour for.

What a wonderful world.

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Perhaps they do know their money is being destroyed, that's why they will plough any money earned from the work effort into .....property. The trouble is, most of that 'earned' money is future income receivable - debt, and therein lies the horror scenario for our Nation.
We should have de-risked the economy when we were given a practical warning in 2008 ( at the latest) but we didn't. I can't think of a scenario from here that ends well.....

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John Key was probably the leader with the best chance to turn the NZ ship around toward productivity and export-driven economics - i.e. what he campaigned on and what many of us voted for him.

All this just makes him that much more of a disappointment in the end.

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Rubbish, Clark, Cullen et al could have included a proper CGT in the Income Tax Act when it was rewritten in the middle of the 2000s and this could have all been avoided. But once you've got power, keeping it is more important that doing something with it.

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Not rubbish.

Key clearly recognised the problem, called it out, and campaigned on it when Clark and Cullen were in charge. He was elected on that campaigning to address the problem.

He did nothing but make it worse, a giant missed opportunity.

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So if the problem was there to be called out, do you think the person who had been in charge for eight years at that point and whose government had presided over rewrites of the Income Tax Act may have been better placed earlier to do something about it than Key as leader of the opposition?

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Both sides are equally culpable.

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GFC and Christchurch earthquakes made it worse. Those were the triggers for interest rates dropping.
Then the initial implementation of LVRs was a real mess, first knee-capping FHB, and second spreading the problem from Auckland to the rest of the country. The eventual LVR solution was ok but a lot damage was already done.

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Correct, while Labour before Key was bad, what gave Key the ideal opportunity was he could do it at the bottom of a recession so the right policies would not cause any further fall, but all the polices had to do is not allow a boom in house prices to occur from there on.

Where the RBNZ is at, is any attempt to correct, to even stabilise at these high prices, could cause a collapse.

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Your argument has a certain familiarity to it.

Ardern clearly recognised the problem, called it out, and campaigned on it when Key and English were in charge. She was elected on that campaigning to address the problem.

She did nothing but make it worse, a giant missed opportunity.

Now she has a mandate, what do we think will happen? My bet, well that is safe as houses.

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Yes, but the difference is that Key did the wrong thing by doing nothing, ie knew what to do but did not do it, and Adern did the wrong thing by doing the wrong thing, ie did not know what they were doing but did it anyway.

Nationals sin was one of omission, and Labours sin was one of commission.

The key (excuse the pun) is to do the right thing, of which both Labour and National are incapable of doing.

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She doesn't have a mandate.

This talk of the electorate "having delivered a mandste" is nonsensical.

A mandate is saying you'll do something and you either do it or you don't and get held to account for it.

They got voted on on virtually no policy - not a mandate.

Anyway one thing I doagree with you about is her indifference to housing. She's done nothing to help.

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Absolutely, they campaigned on addressing housing affordability via KiwiBuild.

If they do nothing, the destruction of NZ's younger generations is on their heads too.

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Be in to win bw,,, get a home and stop complaining :((

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Fks sake, easier said than done for a great deal of people. PS: I hope you are not holding a million dollar stake when the shit hits the fan.

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Perhaps they do know their money is being destroyed, that's why they will plough any money earned from the work effort into .....property. The trouble is, most of that 'earned' money is future income receivable - debt, and therein lies the horror scenario for our Nation.

Well said. They might know intuitively, but I can guarantee you that most people do not know how money is being debased through mortgage lending. And it's not necessarily smart because their assumptions are still based on ephemeral ideas such as house prices behave independently of the consumer economy and income growth.

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In terms of problems caused by rapidly rising house prices, McLean suggested most countries would be quite happy to have that problem at the moment.

All good then.

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Not quite J.C, just a feel generalisation of it, you look at the recent Westpac world countries GDP vs. their printing money mechanism.. NZ is at the very extreme of it. Other countries? on the lower end of scale (including China) are all being prudent and willing to take the course of painful treatment as oppose to 'feel good' stimulus.

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The thing is that plenty of countries are starting to get the same asset price inflation, it's an inevitable response to nearly free money.

https://www.nytimes.com/2020/10/31/opinion/real-estate-home-prices-covi…

https://www.huffingtonpost.ca/entry/house-prices-quantitative-easing-go…

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I wonder if Ireland would be happy to be brought back to the days before their property market collapse.

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Housing is the once in life time dream for most people, and the more of those dreaming? the more people put their focus upon, specially the financiers. Housing carry those; security, intrinsic tingle thingy, to raise future productive tax payers, peace of mind, you can do whatever with it, hell burn it if you tidy enough to claim for insurance, then upgrade further. Remember this, which one would you rather be? a homeless cancer patient with $10grant/fortnight medication subsidy? or a mansion/palace owner cancer patient which also will receive the same grant but less worry about CGT being imposed upon you, the trust, family or offspring. Personally? I would recommend to support RBNZ & govt to keep any sort of roof for every Kiwis, regardless the cost behind it. We need assurances, here folks! - The higher the housing cost? the higher NZ economic being pull up to save by it. Consider it like a rescue in big flood, the higher of Helicopter pull up? the more secure those being pull up at the bottom, away from dangerous flood.

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Housing is the once in life time dream for most people, and the more of those dreaming?

Therein lies the irony. The comfortable life in the suburbs with family, boat, and dog is incongruous with the entrepreneurial, risk-taking warriors that NZ seems to be crying out for.

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Counterpoint; there's nothing wrong with people aspiring to be comfortable in life. We shouldn't aspire to become a miniature USA where people need six different side hustles to pay the bills.

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Counterpoint; there's nothing wrong with people aspiring to be comfortable in life. We shouldn't aspire to become a miniature USA where people need six different side hustles to pay the bills

Well yes. The majority are partial to 'safe jobs' working for the govt or the council trotting off to lunchtime yoga (to relieve the stress) and clocking off at 5 pm.

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Is there something wrong with that, J.C? The trade off is clearly that safe jobs are unlikely to make you a fortune. Some people prefer to take big risks and spend all the hours god sends working for potentially big rewards, others prefer to have jobs that won't make them millionaires but will allow them to focus on other things that matter, like friends and family. Each to their own. We also need people to do both - we need entrepreneurs, but we also need teachers and nurses and policeman and council workers and people to run treasury and immigration and so on.

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Is there something wrong with that, J.C? The trade off is clearly that safe jobs are unlikely to make you a fortune.

Yet people want million-dollar homes in the suburbs. It's all about trade offs.

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No, they want an ordinary home in the suburbs not to cost a million dollars. Its not the same thing.

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Wow. Dude... just not really following you there my friend.

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More debt being accrued today just means lower future interest rates. Add into that a productivity recession, population age structure...I wouldn't describe high property prices as an "embarrassment of riches" but the hangover caused by successive governments and uncreative fiscal policy.

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What was going to happend if RBNZ did opposite ? Increase the OCR and does not provide any home loan repayment relief

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Much needed reality.

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Deflation as borrowers stop buying goods and services to pay higher interest costs. Businesses and employment would tank.

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housing price would tank, depends on how much OCR they are going to increase. People who bought houses right before OCR hike have higher chance to lose their houses. The economy would be reset too. To avoid this hard reset, slowly increasing OCR in a controllable manner would be more beneficial. That's why I always support that Government and RBNZ really need to face the issues and start to tackle down this assets inflation madness before it's too late.

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What if they just did nothing? House prices should flatline, and people would still have more money, as they are not going overseas. Plus the government handed out billions in wage subsides which people just saved.

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We need lower interest rates just to stand still economically.

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But we are gonna live for at least another 10 years, aren't we? The way how we throw money into housing market is like literally living with no future. If you think it is a good idea to continue to boost this crazy housing inflation, please explain it to the young generations and people who lost their houses after 10 years. Otherwise please hold responsibilities for their loss.

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Who wants to be in debt for a million dollars, just to buy a house. Maybe if people understood how much work someone needs to do, and how much tax on those earnings people need to pay, to make a million dollars.

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'High quality problem'.
Wow.

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Right: even if that were true, it's still a problem, and it still needs fixing. If you live in a house and your roof starts to leak, you don't shrug your shoulders because your neighbour lives in a tent and comparatively speaking yours is a good problem to have. You fix the damn roof.

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It's just a variation of Key's 'Sign of Success' theme.
Stale.

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yes agreed, the 'rock star economy,' if the rock star is Ozzie Osbourne.

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Shhhhhaaaaaarrrrrroonnnn

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Not coming from the PM however

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Well after that stupid comment from the Property Investors Federation about how FHBs are ruining the market, landlords should now never have to die wondering why they are so hated

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That stupid comment is indicative of the mental mindset, "integrity" and personal character of many of the so called "investors" that they represent.

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They certainly manage to make themselves look like parasites, yes.

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PA.. Ashley Church would just tell you if hate him you are just anti-semitic.

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"In terms of problems caused by rapidly rising house prices, McLean suggested most countries would be quite happy to have that problem at the moment."
What a flippant comment. Sounds like something John Key would say.

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People's savings, incomes are getting so weak. Costs are so high. This is not good for the economy. This banker is talking from his lofty perspective.

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