Bank bosses air concerns about foreigners pushing NZ asset prices too high, and they're also worried about house price inflation

Bank bosses air concerns about foreigners pushing NZ asset prices too high, and they're also worried about house price inflation

Bank bosses have, perhaps inadvertently, waded into the debates about foreigners buying up New Zealand assets and Auckland's surging house prices.

KPMG’s annual Financial Institutions Performance Survey says bank executives spoken to are concerned about foreign investors paying big prices to buy up the likes of New Zealand homes, commercial property, farms and businesses. However, some of their comments suggest banks frustrated at being shut out of deals by cash buyers.

KPMG head of financial services John Kensington said; “They [banks] are seeing significant deals done at ridiculous pricing across all asset classes and in many cases without the bank providing funding.

“Executives commented that there is a lot of money flooding into the New Zealand market from overseas investors who are able to buy assets with cash, thereby avoiding the need to borrow, which is distorting asset prices and yields.”

Kensington told foreign investors are often willing to pay 10% to 15% more than New Zealanders, decreasing the yield on invested assets.

He said you don’t have to look far to see examples of foreign investors fronting up with the cash.

A private company owned by Chinese investors bought New Zealand’s pioneering sheep milk processing plant and brand earlier this year. Blueriver (HK) Nutrition Company Ltd bought Blue River Dairy in Invercargill, and plans to spend $40 million expanding it.

The Chinese company that bought the Crafer farms, Shanghai Pengxin, is awaiting approval from the Overseas Investment Office to buy the $70 million Lochinver Station near Taupo through its subsidiary. The sheep and beef farm would be the second-largest acquisition of farmland by a foreign buyer in terms of value. 

China's Shanghai CRED Real Estate bought Peppers Carrington – one of Northland's most luxurious resorts – in late 2013. It plans to do major upgrades to the property, which overlooks a golf course and the sea. 

Furthermore, Kensington said New Zealand’s high interest rates are attracting cash from overseas.  While most of the investment is coming from Asia, Kensington said it’s also coming from Europe. He said a small upswing in Europe could produce a sum of money that’s proportionately large in New Zealand’s market.

New Zealanders left to pick up the pieces

“The risk for New Zealand is that, while all this money comes flooding in and creates over-inflated prices, New Zealanders are forced to buy at these over inflated prices,” Kensington said.

“If at some stage in the future the money is needed back offshore, due to some event, or the rest of the world becoming more attractive, there could be a lot of assets dumped in the New Zealand market.

“The offshore investor may be willing to accept a haircut to get the money back offshore, but the impact on the New Zealand economy for everyday borrowers could be significant as very small percentages of international money allocated to New Zealand are comparatively equal to very large amounts in the local monetary system and can thereby have a significant impact.”

Kensington said banks are refusing to fund clients keen to keep up with foreign investors, if it means borrowing beyond their means.

Bank executives concerned about surging house prices

Bank executives also told KPMG they’re also worried about house price inflation and see signs of a continued pick up in prices and competition, particularly in Auckland.

While Official Cash Rate rises and loan-to-value ratio restrictions can change things at the margin, they agreed a lack of supply is the real issue.

Kensington said bank executives maintain, “With inflation continuing to be weaker than expected, falling oil prices, interest rate cuts and a strong economy, there could potentially be a significant upwards impact on house prices inflation.

“The consequences of an abrupt sharp price correction, were it to occur, could be devastating for the banking sector (which has 53% of its loan exposure in residential property).”

Kensington said banks are reining in risks such as lending to people without enough cash or adequate security.

He said there’s a risk exceptionally low mortgage rates will see people sucked into buying houses, only to be left in a tight spot when interest rates bounce back up.

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There is certainly a lot of open honesty and frank admission going about this week. 
An admission from KPMG and the banks survey that - Yes, a significant proportion of property and housing in NZ is being purchased by nonresident foreigners, and/or financed by associated parties with access to very cheap finance offshore.  Who would have thought such a thing?  The  standard line previously was: 'nothing to see here' 
JK is going to be very annoyed at these bankers.  
And this final honesty is on top of the grudging admission that, yes, low interest rates are very likely to stay for the medium term.   
Whats next?  An admission that bank margins are too large in the context of a global recession?  
An admission that floating rates are very high?    That NZ households are spending over a third of their tax paid income to Australian banks for housing and this a net negative for the general economy?  

This is why I call BS behind the excuse of ‘supply constraints’ driving prices. We could never supply enough real-estate to quench a global demand without restrictions and awash with money.
Arguing that these investments will take a huge haircut when they all suddenly want to repatriate their money is just an excuse to placate the public.  In reality it is just as likely that some of this foreign money is just finding a home other than zeros in a Bank Account.

Completely agree. It's only going to get worse as 'funny money' is used to purchase hard assets around the world.

LOL, poor bank officers, not getting as big bonuses.

So "when"  interest rates bounce back up.
Still thinking the future is like the past.

Sorry but I am missing your context?

One of the principles I have read about in investing is that the trend is your friend. The 30 year trend is firmly down. So when people talk about raising interest rates they should be outlining what significant factors are going to change that major trend.

Hold on a minute - the banks, economists and Mr John Key were flatly denying their was a foreign house buyer problem so are they know coming to the realisation they had the blinkers on? The government started the asset inflation problem when they changed the immigration rules to allow anyone from overseas who purchases property for rental investment to get automatic residency so long as they spend $1m or more. This single move lifted asset prices in the real estate sector for both commercial and residential property and farms. 

These poor banks - now that around 40% of Auckland house sales are to foreign buyers (Asian, French, German, American etc) with cash or cheap offshore money they are having to slash their interest rates to try and tempt the local kiwis into borrowing as the banks have a mountain of cheap cash that the foreign buyers don't want or need. Someone from should spend the afternoon in the Barfoots auction room today and approach each buyer and ask if they plan to live in the new purchase or head back overseas.

when you say 'foreign' do you mean resident or non-resident?
40% of the auckland population is foreign, so it wouldnt surprise me that 40% of buyers are foreign, more like 50% when you add in all the non-residents

No hard data available on the proportion of those based offshore as government not interested in collecting it. Property Management companies have had to employ entire teams of Mandarin speaking employees over the last 12 months so they can handle all of the stock for the new owners who are based overseas. This is all being kept under the radar as there are too many vested interests involved.
Was I having a day-dream whist watching the 'news' on tv last night? My nightmare involves a rich Chinese man on a property buying trip in his little private jet.  Right here in NZ  
This so much reminded me of my Japanese friend who did a similar trip around NZ - in a helicopter - in 1990! Twelve months later everything he bought was back on the market. 

If you are a resident, paying tax to the NZ IRD, I have no problem with you owning 1 or more houses.   If you are not a resident and/or not paying tax to NZ IDR then I take issue.  If you are a NZ citizen living abroad, whether paying tax or not I have no issue.
On top of that however if you are a NZ citizen but not paying tax in the country you work in (eg say Saudi) then a) you should not be allowed to own property, IRD should be allowed to tax you. ie at some stage  you come back and expect OAP etc.

The way property is valued (marked to market, i.e a few actual sales effectively revalue the entire 1.5 million properties in NZ) means the influence of a few cashed up foreigners is further magnified.

absolutely correct .. the last one in sets the price for all .. but don't tell Matthew Gilligan that

Well blow me down , where have these bank executives been for the past five  years ?
Now they are suddenly "concerned" when they have been adding  petrol to the bonfire
Lest we forget ,  they ( the Banks themselves  ) are a major contributor to the problem by failing to value their security properly , before advancing obsecene sums against assets which are hopelessly overpriced in relation to NZ's economic fundamentals.
Foreigners are being fingered , but there are numerous factors , and even the RBNZ should take some stick for this with their prudential lending rules favourig fixed property
This  asset price phenomenon is something that has been evident to just about everyone with a passing interest in the matter, the banks execs cannot claim to be in a state of  all - of- a - sudden -surprise
Emperical evidence has been there for anyone to see , and anecdotal evidence can be found everywhere from the Birkenhead RSA on Sundays  to the pissed-off punters  trying to buy thier first home  at auctions .
Even some of the more honest  stockbrokers are openly saying some property -based NZX counters are overpriced .
They ( the banks ) continue to throw money around like drunken sailors , often without doing even a remotely proper valuation on their security ( the property ) .
They focus on affordability , and even then they stretch the rules to breaking point .
Frankly , it would not be a bad thing if property prices did fall and the tide went out leaving the bank executives who have been swimming naked ,  exposed .

yes, a-mazing.
I still am not sure if they are p*ssed because they are not getting a cut (very probable), see it as a genuine problem that exposes them to loss of bonuses/jobs (probable) or really do care about NZ.
oh wait that's obvious really.
I dont think they give a flying f***
Global view of nz property as 'robust' with very high yields (they use apartments in Auck and Welly to justify this).
They compare it to last cycle where prices more than doubled, showing we are very much in mid phase. 
Immigration graphs showing lag between peak immigration and price rises.
No wonder foreign $ is still flowing in at an outrageous pace

In amongst the debris is this obscure gem

The banks see significant deals done at ridiculous pricing across all asset classes and in many cases without the bank providing funding

This is potentially dangerous territory - this is "inside" information - banks can and do see what is passing through their systems and accross their desks. They know exactly what is happening and where it is going. They are required to.

Last Friday night a colleague transacted an online foreign exchange transfer of a nominal amount between AU and NZ, not large, but above the reportable threshhold $10,000

Within 10 minutes the Foreign exchange dealer was on the phone wanting confirmation of ID and the purpose of the transfer. The following morning, Saturday, the source Bank rang wanting to confirm that the owner of the bank account had in fact authorised the transfer of funds to the forex dealer, and it's purpose.

Yes they know, and have known for a long time what is going on. They don't have to be a participant in the end transaction to know. It's their business to know

Yip so the whole ponzi scheme is being propped up by cheap and dirty money from overseas...but as people have pointed out above we've been told 'there is no issue' and foreigners are not pushing up Auckland prices - well this article condradicts this ah??
Baby boomers and those with multiple houses love it of course and are making heaps - even if their kids and grandkids may never by able to buy a house in Auckland - awesome!

At least at the moment we have regional options (job dependant of course).  I'd be really concerned if this craziness spread to the provinces - leaving no bolt holes at all.  Time will tell.

Anyone remember back in the 80s when Japanese bought almost everything they can in Australia, QLD in particular and they were off loaded cheapy when things turned custard? Kind of deja vu here

Remember it well. Refer my post higher up the string. 
The Japanese believed all would be better in 12 months - 23 years later - they are still waiting. 
This time it is not just one economy - this is global

It's happening
Application fees will now apply to foreign investors seeking to buy AU residential real estate.
A register will be set up for all residential and agricultural property bought by foreign investors.

Any foreign investor that wants to buy a residential property under $1 million will face a $5,000 application fee. For properties over $1 million it will be $10,000 for every extra $1 million in the purchase price.

Civil penalties of up to 25 per cent of the value of the property, plus the enforced sale of the property, will also be imposed for breaches of foreign investment rules.

"We need to make sure that all foreign investors are following the rules, and that those foreign investors who break the rules are not able to profit from breaking the law," Mr Abbott said in Sydney on Wednesday

Bill English  in Parliament Question Time today showed his total and absolute incompetence in addressing specific questions raised by Phil Twyford.
Yes the NZ government led by Key and English is the only one in step, it would appear.
Steps taken in Australia will only exacerbate the already critical situation.

And drug dealers are worried about the heath of their customers too..?

Lets add another 25% to house prices this year?  That is how our ecconomy works isn't it, especially Auckland?  It can only be good for us, that is what all the property experts say, isn't it? 
Given the way that successive governments have almost gone out of there way to do everything that they can to encourage house price inflation and the fact that they have done nothing of any substance so far, the price rises are not going to stop any time soon.
However we can all look forward to one hell of a crash when reality does arrive.  Generally speaking the country deserves it and the bigger the crash the better because that way we will learn a lesson that we will not forget for a while.

New Zealanders left to pick up the pieces
“The risk for New Zealand is that, while all this money comes flooding in and creates over-inflated prices, New Zealanders are forced to buy at these over inflated prices,” Kensington said.
Act's Jamie Whyte said: "we need all the capital we can get "
Immigratiom  policy would be down the road by lunch time if it stopped  benefitting vested interests. 

Yeah , we think we are a rock-star economy , more like a one-hit wonder

Why worry about it. Do something and let the market correct itself. RBNZ/ bank execs are raise risk weighing on property, ie force banks to hold more capital. This by default will force up interest rates. The rest will sort itself over time.

I love the way home ownership achieved from cash buyers "distorts" asset prices and yields, according to the banks.    What they mean is that they are not getting enough lending action.  
The banks are really grumpy about this, so that's the main reason why the rules will change.    However, watch for no. 8 wire, good as gold, vote winning political spin when foreign ownership restrictions are announced.

The assumption is its cash and not foreign borrowing, not sure how they determine this.

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