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

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. 

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Does the RB pay tax on the income from their speculative foreign exchange dealings prior to paying a dividend. ? Or Is it exempt ? If so, why?

The dividend itself amounts to effectively an 82% tax.

So all other S.O.E's etc should just say" take our tax out of our dividend. - if there is one"

Interesting. But not as interesting as a mention of the parallel marked to market off balance sheet NZD collateral provisions for the outstanding FX swaps. View section 10

Do you mean item 10. Outstanding liquidity management operations as at end of month on the spreadsheet?

Yes. FX swaps and basis swaps ~ $18.056 bn for the period ending 30th June.

Indeed. The mind boggles.

I sometimes wonder whether the plan of the keepers of the reserve currency was to inflate numbers such that they in fact became totally incomprehensible by the masses. Hence, our own place in the world becomes utterly unquantifiable.

And, the RBNZ has made it's half a billion in this year not from just a "falling NZ dollar" but from a rigged NZD - that it debased. If anyone else tried it they would be in handcuffs.

What exactly are these? and what is the reserve bank using them for?

Doesn't all or most of the profit end up in the Govt coffers as it owns the RB any way, so isn't the distinction a bit meaningless?

So, as above, just say to all other govt owned entities, " don't worry about paying any tax - just throw us a dividend if you make a windfall.

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

“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.”

Shoulda coulda woulda - too late for remorse. The narrow redefinition of inflation has come back to bite it's devotees at great potential cost to the unsecured, under rewarded bank deposit bank capital underwriting class.

Inflation is a general increase in the price level. A reckless speculative bubble in house values which is confined primarily to Auckland doesn't constitute as inflation. Why should the wider public suffer, because of a small minority of idiots in Auckland who want a free windfall courtesy of the next reliable fool willing to pay exorbitant prices for housing?

Well said SH!

Auckland = Too big to fail.

Or too big to save?

If we save the fools from the consequences we will never learn a lesson that we desperately need to learn.
Also it is morally indefensible for the responsible citizens to underwrite the rampant speculative greed .

What was '87 then or do we need to be taught about "return to the mean" every ten years?

Auckland, too big (headed) to fail??? The rest of NZ would be better off without it! What does it produce to sell and earn the countrys way? Face it we are totally reliant on production of primary product from the provinces and Auckland is just a parasitic add-on, totally absorbed in just selling houses to each other and overseas. Auckland produces nothing that the rest of NZ couldn't source cheaper elsewhere.

Don't forget that Len Brown is exacerbating the Auckland Ratepayers debt position via rates with his 100% ratepayer funded advanced raid tunnel commencement.

A good spring clean makes the market work better!!!
I hope the whole lot goes belly up!! There is no fun or freedom in a highly controlled market!!

No fun or freedom when you lose your job, lose your investments, and/or go bankrupt either. I know which I'd choose.

Do I smell fear??

Would it excite you if you did?

Indeed, better to destroy everything other ppl have as she has nothing of what she wants which is to inflict her will on others.

or Auckland to big to save
easier and cheaper to let it crash and pick up the pieces

Auckland won't crash. Everything will be done to prop it up. But it may correct, a touch

Sounds awfully like wishful thinking.

not at all. I don't own property. I'd love it to crash 15%, so I can get in. Don't want 20% plus crash as that would have really nasty consequences for many people, whether property owning or not. The thing is, I don't think it will. There's far too many vested interests at play for it to crash.

If the sky will fall in because property "values" simply revert to what they were less than twelve months ago, it only highlights that the Auckland property market is a debt ponzi. Indeed, it's best to not be on the bottom rung of the pyramid if it goes tits up.

However, at the end of the day, it is what is. But with fairyland valuations even for run down fibro shacks in the arse end of Ranui I wouldn't downplay the size of the possible falls when the music stops.

Sorry team, there is never going to be a correction in Auckland. If you think prices are high now, wait till the squillions of RMB seeking shelter from a faultering China land at Auckland International. This is only the bottom of the market now, the top is way way off (read never). Why does no one acknowledge its foreign money inflating house prices? If you're a kiwi, you're either in or out of the property game. If you're out you'll never get in, because someone from overseas is going to outbid ya big time.
Carry on buying if you can. You'll be double your cash in three years.
That is all.
The General

But John Key said foreign buyers were having no impact.

Well if john key said it, it must be true... because now that I think about it, median Auckland salary can easily buy a median prices house of $850k.
All calculations on this inevitable property crash are all calculated on kiwis over borrowing... Hot money coming out of China et al, is for PC reasons not mentioned, when in actuality, as we all know, is the driving force behind this New Zealand disaster... So I repeat, there will be no property crash....

John Key would never lie to us.

I totally agree with you that foreign capital has played a big part in distorting values in recent years, along with the local money grubbing speculators, but I wouldn't bet the house on it staying that way forever.

Lots of factors could totally change the game.

Off the top of my head...

A change in government (or threat of it going into election) with foreigners getting the banstick.
A big crackdown on corruption / capital flight from China (already underway).
Changes in FX rates.
Inflation shock (oil reverses?) and rate rises to counter.
Taxation and LVR changes.
Increases in supply.
Reversal in migration.
Recession in New Zealand and unemployment rise.
Economic crisis overseas.
Perceived capital gains dry up and rental yields aren't looking hot.
The Fed raises rates and lending becomes more expensive.

Any of the above (and plenty of other things) could easily tip sentiment in the other direction, and nobody in their right mind is going to catch that falling knife until it hits the floor.

Okay, all fair comments Mr X. But a rebuttal if I may?
JK and the boys in blue will be in power for at least another 8 years... Probably eleven. By then who knows what the immigrant structure will be? John Key told me personally he'd like to see a million immigrants into NZ.
Chinese citizens are only legally allowed to take out US$50k a year, yet somehow are able to pay $1.5 million for my neighbours property yesterday. The Chinese government will never stop this wholesale purchase of NZ. Why invade if you can just buy (ref to Silver Fern Farms)? It's a bunch cheaper and you don't have to explain to parents of the single child policy that their son has been killed invading NZ. That said the way the Nats are going, they'd see us without a Defence Force.
Who cares about LVRs and taxes when you are getting your money out of dodge? In reality we will never see them, no government will ever have the guts to implement them properly...
An increase in supply? More to buy! Woohoo!
I've addressed immigration earlier...
Recession in NZ... It'snot NZ money man... you know that..
It's economic crisis overseas and NZs lacks/soft foreign ownership policy that will ensure the upward trend... read the comments by Church Ridicules English - http://www.interest.co.nz/property/77873/property-institute-ceo-says-eng...
If it were Kiwi investors losing on rental yields, sure, but they will go to the wall and capital flight to safe havens (Auckland property) will see prices rise and rise!
There is NOTHING that can stop this tsunami of foreign cash buying up large... see what Presidnt Xi said to President Obama about Chinese investment. it's spilling to the regions and soon you'll see two beddie hovel boxes in Rotorua going for over $400k... Do you think the Chinese $300 Billion to be invested in Christchurch is a nice to do? This is called buying up large... China has built its cities, now it needs to feed the masses in the cities... why not take a bit of petty cash and buy that land under the big white cloud? They have water and food aplenty... and they're just giving it away for a gun and a blanket...

Sorry Sir, if you were hoping for a down turn it aint never gonna happen... As I said,this is the bottom of the rise

Has any NZ party won a 5th term?

hmm...has New Zealand ever seen such insane house prices? Let's just wait and see Mr S....

dp