RBNZ makes near-record surplus off the back of falling NZD; pays Crown $510 million dividend; questions what if there's an Auckland housing market correction

The Governor of the Reserve Bank (RBNZ) is reiterating his fears over what would happen if the Auckland housing market suffered a big correction.

In the RBNZ’s 2014/15 annual report released today Graeme Wheeler says, “We are conscious of the impact that low interest rates and aggressive lending competition among banks can have on housing demand and its potential to feed into house price inflation.

“We remain concerned about the financial stability risks and risks to the broader economy that would be associated with a major correction in Auckland house prices.”

The RBNZ has cut the Official Cash Rate (OCR) by 25 basis points on three occasions this year, to 2.75%, in an attempt to prop inflation back up to its 2% target midpoint.

Wheeler has also signalled “some further easing in the OCR seems likely” depending on the emerging flow of economic data.

The RBNZ says, “While the Auckland housing market slowed immediately following the introduction of LVR [loan-to-value ratio] restrictions in October 2013, market activity and house price growth increased significantly from late 2014.

“An increase in leveraged investor activity in the Auckland market appears to be one factor contributing to this resurgence.

“A significant correction in the Auckland housing market could place strain on the banking system and broader economy. Such a scenario would exacerbate macroeconomic weakness, especially given the high levels of household indebtedness.”

The RBNZ recognises Auckland needs a boost in housing supply, but also highlights the role macro-prudential policy has to play.

In June it released a paper for public consultation, which proposes restrictions on lending to property investors in the Auckland region at LVRs above 70%. It also proposed easing restrictions on high LVR lending outside Auckland in light of more subdued housing market conditions since the LVR restrictions were first imposed. This package of measures is due to take effect from November.

The annual report also highlights how vocal the RBNZ’s been on Auckland housing issues over the year.

For example, the RBNZ’s Deputy Governor Grant Spencer turned heads when he called on the Government to reconsider potential policy measures to address the tax-favoured status of housing investment, said he wanted land bankers tackled and highlighted the need for more high density apartments built in Auckland, during a speech he delivered in April.

RBNZ pays Govt dividend of half a billion dollars

The RBNZ’s annual report also shows the Bank made its second highest surplus on record, of $624 million. This saw it pay the Crown its second highest dividend ever, of $510 million.

Put in context, the state-owned enterprise, Transpower, and the government department, Housing New Zealand, both only paid dividends of $90 million to the Crown last year.

The $568 million increase in this year’s surplus can largely be attributed to the falling New Zealand dollar generating a gain from the Bank holding of offshore currencies.

“A lower NZD resulted in a $379 million gain from foreign exchange rate changes on the Bank’s open foreign currency position as at 30 June 2015, compared with a $198 million loss in the June 2014 financial year,” it says.

“The open foreign currency position at 30 June 2015 was $3.5 billion, an increase of $1.0 billion on 2014, arising from a combination of foreign currency purchases and depreciation of the NZD.

“The open foreign currency position gives rise to revaluation gains and losses as foreign exchange rates change, resulting in volatility of reported profits.”

In 2009 the Bank paid its largest dividend to the Crown, of $630 million, when it adopted its new dividend policy, which essentially distributes gains realised in New Zealand dollars over and above those required to ensure that the Bank retains a sound equity position.