'We don't want to be financing people with no margin for error'

Business

Westpac NZ CEO David McLean 'not terribly concerned' about Auckland first home buyers' ability to service their mortgages if interest rates rise to 7.5%

10th May 17, 5:02am by Gareth Vaughan

By Gareth Vaughan

CEO David McLean says Westpac New Zealand's "not terribly concerned" about suggestions Auckland first home buyers could need 60% to 70% of their income to service their mortgage if interest rates rise to 7.5%.

Prime Minister Bill English said on Monday the government has been concerned “for some time” about the risks rising interest rates would have for mortgage holders already near debt-servicing limits.

His comments come after TVNZ reported on a Reserve Bank email to the Government the Green Party obtained under the Official Information Act. If mortgage interest rates rise to 7.5% a typical first home buyer in Auckland could be spending 60% to 70% of their income on housing costs, it said. The percentage for first home buyers elsewhere in New Zealand would be about 50%.

Interest.co.nz's latest Home Loan Affordability Reports show Auckland housing is now the most unaffordable it has been for first home buyers since we began collating house price and household income data for our Home Loan Affordability Reports in January 2004. A typical Auckland first home buying couple earning the median wage for their age group now need to set aside more than half their after-tax income to meet the mortgage payments on a lower quartile-priced home.

However McLean says his bank's "not terribly concerned."

"Because the interesting thing is that when you look into the data of our first home buyers a lot of the concerns are based on people's perceptions or myths and rumours that aren't necessarily true," McLean told interest.co.nz.

Westpac NZ's typical first home buyer is aged between 25 and 34, their average loan size is $330,000, their average deposit size is $120,000, only one on five have less than a 20% deposit, and 78% of them have a loan-to-value ratio of less than 80%, McLean says.

"That shows that despite potentially a lot of house price inflation, this group is still putting together a good deposit."

"[But] only 22% of our first home buyers are from Auckland so perhaps it's harder in Auckland," says McLean.

The average bank two-year mortgage rate, the most popular term, was 5.73% as of May 5. Westpac has a 5.19% standard two-year rate, and a 4.79% "special" available to borrowers with at least 20% equity. The country's biggest mortgage lender, ANZ, has just increased its standard two-year rate by six basis points to 5.35%. ANZ also has a "special" two-year rate of 4.85%, which has also been increased by six basis points. The latter requires at least 20% equity, an ANZ account into which salary is paid, and for new customers at least one other product with ANZ. See all banks' carded, or advertised, home loan interest rates here.

'We know interest rates can move around and we don't want to be financing people with no margin for error'

McLean says the assumption is often that first home buyers have hardly any deposit, have borrowed from mum and dad and are young and starting out.

"But in fact the data doesn't necessarily show that. The people have got bigger deposits than I think is generally realised," McLean says.

"The other factor to take into account is when assessing credit criteria and serviceability [is] we don't assume just the current interest rate in terms of whether they can afford to service the loan. We have a number [about 2% higher than current interest rates], which we build into our serviceability numbers, which is much higher than the current interest rate. Because we know interest rates can move around and we don't want to be financing people with no margin for error."

"Not only do we do that, I think people do that when they are making their budgets. There's quite a lot of resilience amongst home buyers when they are doing this themselves," McLean says.

Westpac NZ says it has seen a "steady increase" in withdrawals from its KiwiSaver scheme by first home buyers.

Metiria Turei's solutions

Meanwhile, Greens co-leader Metiria Turei said: “The Reserve Bank told the Government that an Auckland family earning $100,000 a year is potentially going to have to spend 60 to 70% of their income servicing the mortgage on their first home in the next year or two."

“If people have to spend 60 to 70% of their income servicing their mortgage, where is that money coming from? Turning the heater off this winter? Fewer school trips? The solution to the housing crisis is for the Government to build thousands of affordable homes, put in place a rent-to-buy programme, crack down on speculators with a capital gains tax (excluding the family home), and restrict overseas investors,” Turei said.

*This article was first published in our email for paying subscribers early on Tuesday morning. See here for more details and how to subscribe.

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53 Comments

by THE MAN 2 | 10th May 17, 7:37am 1494358631

We hear all the time of these politicians and people saying the solution is to build thousands of affordable homes!
What value do we consider as being affordable?
Please also explain how we can build houses that are so much cheaper than all the other ones being built?
If group houses are going to be built on cheaper land it is probably going to be many miles out from Auckland then you have the added cost of transport and time and therefore not saving people very much.
To be able to service the mortgage debt on these affordable houses people would still need to be earning a reasonably high wage, which most,of,these people,probably aren't!
Why can't we just face the fact that everyone won't be able to own a home in Auckland and that if they want to own then move from Auckland.

by kane02 | 10th May 17, 7:49am 1494359358

It is an issue the man 2, when just across the ditch you can buy quality homes just outside Melbourne for under $550k.

by THE MAN 2 | 10th May 17, 8:41am 1494362492

You can buy new homes in Christchurch itself 5 minutes from the CBD for under that 500k.
NZ is not unaffordable.
AUckland is, and we all know why!

by Wildcard | 10th May 17, 9:13am 1494364410

$500k is still unaffordable for FHBs. Try $100k to $300k.

by Carlos67 | 11th May 17, 9:30am 1494451838

Thats a joke mate, maybe if the couple didn't spend $100K on their cars I would believe you. There are apartments being built opposite the Albany bus terminal from $169K, but I would expect any Kiwi FHB couple would turn their noses up at them, not quite the million dollar lifestyle they are accustomed too living at home. Its all about expectations and compromise and this is the main problem.

by RickStrauss | 11th May 17, 9:43am 1494452628

I dunno mate...you seem completely disconnected from the evolving desires of young Kiwis if you think they're not interested in apartments, or that they spend $100k on cars.

Young buyers make up a very small percentage of buyers in the luxury car market. Unless you're thinking of foreign students in Maseratis.

by mvgsmf | 10th May 17, 9:23am 1494365024

Are we seriously comparing Melbourne...one of the most desirable and vibrant cities in Australasia with CHCH?

Yeah...not even close in any way (as is no where in NZ) least alone the earning capacity in Melbourne.

by bgballz | 10th May 17, 10:17am 1494368258

Australia has much more land mass.... You would expect suburbs to be cheaper than in NZ

by M.Aurelius | 10th May 17, 11:13am 1494371604

That's really not how that works, or at least a very oversimplified why of looking at it one component of the cost of construction.

by THE MAN 2 | 10th May 17, 10:56am 1494370585

What I am saying is that you can build homes in major cities like Chch for under 500k where the 550k is outside of Melbourne.
I would say the 550k would be well on the outskirts of Melbourne with a long commute in.

by Wildcard | 10th May 17, 11:07am 1494371267

You would also have a higher quality house and a higher salary to compensate. Good luck earning upwards of $70k AUD in Christchurch.

by Zachary Smith | 10th May 17, 8:44am 1494362687

Things look expensive there too:

https://www.realestateview.com.au/real-estate/27-charlotte-street-richm…

1.2m+ - no parking!

by Wildcard | 10th May 17, 9:43am 1494366198

'Affordable' housing is priced in the vicinity of $100k to $300k; 2 to 6 times the median full-time income (as FHBs tend to be Gen Yers that have been in the workforce for a lesser amount of time compared to FHB Boomers or Gen Xers, that price should actually be lower to reflect the lower salaries said Gen Yers would be earning).

'Affordable' housing is difficult to build in NZ in places where large job pools exist because of the high price of land, high costs of compliance/planning/RMA bullshyte, high cost of labour, the fact that each person involved in the build has to make a profit from it, a lack of economies of scale increasing building material prices and also due to managers disliking telecommuting or working remotely (meaning employees have to live in a reasonable physical commuting distance from their workplace).

Finally, stop beating the 'move out of Auckland drum.' It's a total strawman argument and it's old and tired.

by Hardly | 10th May 17, 9:47am 1494366451

When I visited London I was struck by the lines of identical terrace houses in luxury areas. At some point someone must have built whole streets and suburbs if the things. That is what New Zealand needs. If the government goes to a firm and says "we want to buy 2000 semi identical houses in Auckland every year for the next ten years give us your best price", they are going to get a damn good deal, particularly because the building company will be able to make long term investments in the capability to deliver those houses efficiently. Plus if a building company sets up an industrial scale home building operation for the government, they will be able to sell additional houses at cost competitive prices to other people.

If I was the govt I would buy (compulsorily acquire) some land between Auckland and Hamilton in a suitable rural area(s). I'd augment the train line so that it ran through those area(s). Then I'd build a green fields towns from scratch with dense housing/commercial close in around the train station and gradually less intense housing further out. They'd make money on it because of the low land price and the efficiencies of working at massive scale. It would deliver massive increases in housing supply and wouldn't stress infrastructure as much because transport would be built into the model from conception. Plus it would provide a rail connection from hamilton to Auckland (ideally faster than 100kmh). The economic benefits and growth from such a project would be massive.

by bgballz | 10th May 17, 10:21am 1494368489

Right with you there. We need existing and future towns and commercial sectors all connected via a high speed train network. That would spread the housing affordability across the country and ease Aucklands dense traffic..

by Zachary Smith | 10th May 17, 10:24am 1494368661

Hardly this is an excellent idea. I actually suggested the same thing some time ago. The key would be rapid and frequent trains to Auckland and Hamilton.

by gingerninja | 10th May 17, 2:35pm 1494383709

Agree. And lets not stop there. Auckland needs a major transport infrastructure investment. It could use an effective rail network connecting all the suburbs. Stop spending on bloody roads and encouraging more and more people into cars. Get Aucklanders using rail like most other major cities.

by THE MAN 2 | 10th May 17, 10:58am 1494370714

Those identical houses or terraced housing is still not CHEAP to build!
You would be looking at around 300k minimum plus the land on the outskirts.

by Small Kev | 10th May 17, 4:04pm 1494389066

That's because they have their "Auckland pride" and they are willing to pay for it. Which is is a waste of life to me...

by Hardly | 10th May 17, 8:23am 1494361399

His response seems to focus on the issue of equity fallback rather than income which is the issue he is actually pretending to respond to. If a family has 20%-30% equity this might be sufficient for the bank (I'd dispute that) but it doesn't help the family.

Say a family borrowed at 4.5% and the payments were 50% of their income. Interest rates rise and their repayments rise to 70% of their income. Their options are now to starve or default on their payments. The bank repossess their house and sells it for 70% of the previous value, the family is homeless and has lost their equity. The bank is fine in this scenario but the family is ruined.

They may do scenarios on a 2% rise, is that enough? Based on fixed or floating rates? But the assumptions of that may not be realistic and may neglect other income changes such as dropping to a single income.

Finally, banks may be able to foreclose at present prices with 20-30% equity and not take a loss but if there is lots of foreclosure activity going on prices will drop like a rock and they are going to wish they had 40-50% equity.

by M.Aurelius | 10th May 17, 9:10am 1494364209

I think you hit the nail on the head there, well put.

by Wildcard | 10th May 17, 9:37am 1494365865

"That shows that despite potentially a lot of house price inflation, this group is still putting together a good deposit."

He's doing a Shonkey and deliberately strawmanning. $120,000 as a deposit in what form? It sure as sh!t isn't wholly in cash, so it must be mummy and daddies equity. One in five with a 20% deposit simply means that 'their' FHBs are simply throwing more of someone else's equity at the property they want to secure it.

by middleman1 | 10th May 17, 10:12am 1494367959

Wildcard - you assert that most deposits come from mummy and daddy. Where is your evidence for that?

Hardly's well thought through response identifies the real risk for those with large mortgages and correctly calls out McLeans sleight of hand in using average LVR's to divert attention from the group of mortgagors most at risk.

But the point McLean indirectly makes - that the average FHB loan size of $330K means only a minority are exposed to stress risk - remains a reasonable one.

by Hardly | 10th May 17, 1:59pm 1494381569

Averages are tricky in situations where the extremes cause the biggest problem. It's the most exposed 20% who will get soaked so saying that the mean is at a safe level is misleading.

If he wanted to be honest about the risks he would say our most precarious 20% of borrowers look like this in income to repayment terms. If interest rates appreciate to 7.5%, then they'll look like this.

by middleman1 | 10th May 17, 5:41pm 1494394903

If the thus adjusted high risk cohort is 20%, or even 30%, is this significantly worse than previous generations?

I recall when many of my peers were loaded up to the gills with housing debt and lived in constant mortgage misery. The bare floors and old sheets for curtains while they got on their feet, are clear memories. Inflation came along later and rescued us but we had no inkling of that at the time.

by ACB | 10th May 17, 2:48pm 1494384528

Agree with this observation. The banks crudely put a lot more emphasis on security value rather than actual servicing ability with retail lending. They don't really think too much about whether you're eating cat food to pay the mortgage just so long as the value of the house exceeds the loan value. The problem of course with that approach is that residential property borrowers get into trouble, they tend to do so together (correlated) and so they might all start selling at the same time . What happens to property prices in those scenarios? Particularly when we've had rapid house price escalation in recent years related very little to fundamentals and a lot to do with speculation and low interest rates. A 30% buffer doesn't seem a sufficient stress case to me. McLean talks about averages but it is never the average borrower that gets into trouble (unless we have another great depression). How many borrowers are already up to their eyeballs in debt now? That is a more accurate indication of how bad things can get and how quickly.

by Hardly | 10th May 17, 3:51pm 1494388261

That was the problem they had in the US. They thought their housing markets were diversified when they were actually connected. When the s**t hit the fan the whole market went down. The same could happen here. Plus the economic downturn would be more severe since people can't walk away from their mortgage like you could in some states.

by Rob | 10th May 17, 4:08pm 1494389316

The PM has basically said a few days ago, that anyone buying a house, and borrowing big amounts, has gone into it with their eyes wide open. So they knew the risks, and should have budgeted for rates to go up to 7+%. But many are relying on big capital gains to take away the risk, so f they were forced to sell, the capital gain would provide a big buffer against any actual loss. But NZers do have quite short memories. We have had sharemarket and GFCs, and finance company collapses in the past, when things have be bubbling.

All we need is for interest rates to go up 1-2 percent, and house prices to fall a bit, and it will create additional stress on some households.

If the housing market does collapse, in a way it will be a bit like the finance company collapses in reverse.

by Zachary Smith | 10th May 17, 8:58am 1494363504

a lot of the concerns are based on people's perceptions or myths and rumours that aren't necessarily true

Commenters take note!

by PocketAces | 10th May 17, 9:11am 1494364296

And a lot are not, so what did you just prove?

by nymad | 10th May 17, 9:14am 1494364498

You should be the first commentator to take note of this.

by Zachary Smith | 10th May 17, 9:38am 1494365891

Well, myths are powerful.

by BadRobot | 10th May 17, 10:39am 1494369588

Myths are only powerful if they are believed - once a myth is busted it becomes more of a liability and source of recrimination.

by bgballz | 10th May 17, 10:24am 1494368675

Amen

by THE MAN 2 | 10th May 17, 9:22am 1494364942

Wildcard, you are in cuckoo land if you think that affordable housing for people should be 100 to 300k.

by nymad | 10th May 17, 9:34am 1494365648

Rubbish.
Look at the majority of countries - typical entry level housing is well within that Wildcard's ratio bracket.

by Zachary Smith | 10th May 17, 9:45am 1494366319

Yes, even many places in New Zealand...like Tokoroa and Wanganui.

http://www.trademe.co.nz/property/residential-property-for-sale/auction…

by Wildcard | 10th May 17, 9:45am 1494366348

And only a two and a half hour commute to work! What a bargain. I'll buy five, please.

by linklater01 | 11th May 17, 3:42pm 1494474146

Zachary,

I will say this for you,reading your posts gives me a laugh even on a dull wet day. When were you last in Tokoroa? Now,i have nothing against the town and it does have at least one decent cafe. We were in it just a few weeks ago on our way to tramp in the Pureora Forest,but as for living and working there? Perhaps not so good.

by THE MAN 2 | 10th May 17, 11:01am 1494370908

Nymad, we are talking about BUILDING affordable homes!
To my mind that means that they would be NEW and itmis impossible to build new homes that aren't shoe boxes for under 300k plus the land cost
,

by nymad | 10th May 17, 11:08am 1494371281

Really?
Houston, Atlanta, Phoenix all do it very well.
So do the Europeans, albeit with apartments.

by RickStrauss | 11th May 17, 9:45am 1494452716

Funnily enough, many Americans and other foreigners also are amazed at the low quality of many NZ houses and apartments. So we seem to be paying a lot for a little in more ways than one.

by Wildcard | 10th May 17, 9:42am 1494366129

Where did I say it should be? I simply said that is what is considered affordable for FHBs. As a FHB I'm a lot more qualified to comment on what young Kiwis such as myself can afford than you are.

by dictator | 10th May 17, 9:44am 1494366289

Those were the house prices a matter of 4-6 years ago around Wellington. The only reason why there are such high prices on the low end of the market is all the money sloshing around that's been created by the banks.

Developers would build more housing if all the stupid red tape during building consent and resource consent were eliminated. A lot do not want to risk financing large projects just to be deliberately f'd around by their local Council.

by mfd | 10th May 17, 2:01pm 1494381699

My first house in the UK was the equivalent of ~$230k. Brick built 2 bed, central heating, huge garden, 10 minute walk from work. Not out of the ordinary over there.

edit: this was about 5 years ago, I don't believe prices in that area have moved significantly since then

by Boatman | 10th May 17, 10:06am 1494367599

LOL Not concerned ?

He would say that , wouldn't he ?

Its not the increases in rates that are the problem , the real issue is that the FHB's have paid way too much for the properties and they will be under water in the event of Mortgagee sales in a property slump .

I have said it before and repeat it now , the Banks have been lending on the fringe of recklessness, and have fueled the fire by lending too much on unrealistic valuations

by Independent_Observer | 10th May 17, 10:38am 1494369496

Question for the commentators - do Australasian banks ever make a loss or operate at zero economic profit?

Or are they simply colluding to make profits regarless of market conditions and their poor performance? (are they simply a rougue oligopoly?)

by Ralph | 10th May 17, 4:48pm 1494391697

Banking is not an open market, there is almost no "free" in that market at all. Banks exist entirely on the largesse of a license the government grants and that grant comes with a vast mountain of regulation.

This situation exists because governments want tax. And they want it right now. In cash.

Anyone who lives in the business world doesn't always have what the government wants all of the time. If you ignore reality and go around bankrupting private enterprise eventually you aren't in government anymore. Possibly your country is now bankrupt.

Governments solution to their demand was given to them by banks. If you grant me a license into a protected market I will loan the money to the business so they can pay in you in cash when you want it.

by Independent_Observer | 10th May 17, 7:57pm 1494403025

If it's for the public sector, why is it privatised? And why is it so inefficient, risky and why do management get paid so much?

by head_down_bum_up | 10th May 17, 12:27pm 1494376045

He talks about their LVR but not about their DTI.

Would he be able to say of our FHBs in Auckland (or all of NZ) with loans of 300k or more, their average income is $X and their average rate is X% so an increase in rates would require X% of their income to meet repayment costs.

That's what we're talking about right, DTI repayment costs as rates increase, not LVR.

by Gareth Vaughan | 10th May 17, 1:10pm 1494378611

I reported some comments from David McLean on DTIs earlier in the year here - http://www.interest.co.nz/opinion/85902/rbnz-was-late-debt-income-limit-party-which-why-tool-wont-be-added-its-macro

by head_down_bum_up | 10th May 17, 3:41pm 1494387668

And he didn't seem to be a fan then. But he hasn;t said anything in regards to their mortgage book and where their customers DTIs are sitting. Not that he has to by any means, but that certainly is the data that should be focused on.

by Yvil | 10th May 17, 9:33pm 1494408802

"not terribly concerned"
yeah right, the banks surely will be "terribly concerned" after a certain number of bad loans