BNZ offers Christchurch red zone home owners 2% off floating rate mortgages and 2% extra on deposits

Here's S&P on the govt red zone package:

Standard & Poor's Ratings Services said today that the New Zealand Government’s announced support package for residential home owners who have been most affected by the Christchurch earthquakes has broadly no rating impact across the banking, insurance, infrastructure, and government sectors. This is because the estimated cost of between NZ$485 million and NZ$635 million to the New Zealand government to purchase the circa 5,000 properties currently in the residential red zone appears to be met from the government’s already fully provisioned NZ$5.5 billion Canterbury Earthquake Recovery Fund.

For financial institutions, we view the package as being supportive to affected borrowers, as it mitigates the adverse financial impact of property-value decline and the more limited prospects that badly affected Christchurch home owners faced in recouping value from their properties (see below).

For insurers, the result is close to neutral, with the government assuming the existing ability of policyholders to claim on property insurance. However, uncertainty remains around the ultimate cost to the insurance sector, given continued seismic activity, a lack of access to and capacity for claims assessment, and the division of exposures between insurers, reinsurers, and the Earthquake Commission (see below).

With this fluidity in exposure and ongoing incidence of natural disasters, Standard & Poor’s continues to actively monitor all sectors in the region.

Background

On June 23, 2011, the New Zealand Government announced a package for domestic property holders in the most earthquake-affected areas of greater Christchurch. The government has, with the assistance of geotechnical engineers, divided the Christchurch area into four residential zones: red, orange, green, and white. People who owned property with insurance in the residential red zones (the most affected by the Christchurch earthquakes, totalling about 5,000 properties) on Sept. 3, 2010, have been offered two options: 1) the Crown makes an offer of purchase for the entire property at current rating value (less any built property insurance payments already made), and assumes all the insurance claims other than contents; or 2) the Crown makes an offer of purchase for the land only, and homeowners can continue to deal with their own insurer about their homes.

Financial Institutions

We expect that the announced support package for the red zone qualifiers will, on balance, mitigate the financial impact of this natural disaster on financial institutions, with lending exposures to borrowers covered by the assistance package. Critical to the support package is news that the offers will be based on council rate valuations set in 2007. The downward pressure on property prices in the past few years suggests that people taking up the government’s offer should be reasonably placed to settle borrowing obligations that are tied to the purchase of these properties.

This said, Standard & Poor’s expects that credit losses could, nonetheless, be realized by some borrowers even if they are covered by the support package. New Zealand’s financial institutions continue to be supportive of affected borrowers with respect to repayment holidays and subsidized funding with regard to affected homeowners wanting to relocate. This support is, however, not expected to materially detract from the financial performance of individual financial institutions.

The Christchurch earthquake itself has not, to this point, resulted in any specific rating action on any rated financial intuitions in New Zealand. Standard & Poor’s continues to monitor financial institutions with lending exposures in the Christchurch area, particularly those with exposures in areas not covered by the announced package.

Insurance

The announcement will provide some comfort to policy holders, with many able to realize value in their property insurance earlier. This will not likely pose any greater liability or exposure on the insurance sector, with the government effectively assuming the existing claiming rights of policyholders. We would, however, expect that some mediation and negotiation is available, which could possibly reduce the ultimate claims and expense cost for insurers. The environment for the primary insurance sector and the New Zealand Earthquake Commission (EQC; AAA/Stable) remains uncertain, however, due to the complexity involved in claims assessment and processing as a result of the continued high level of seismic activity in the region. Issues contributing to the uncertainty of determining the financial impact of each event include a lack of access to the site to assess damage, the division between new and existing damage, and the application of EQC cover for additional events in some circumstances.

The EQC and insurers, via the Insurance Council of New Zealand (ICNZ), have agreed to approach the Wellington High Court to make a ruling on the complex question of under what circumstances the EQC insurance is restated back to its full limits after natural disaster damage. Neither the EQC or the ICNZ have disclosed the number of claims that fall under the case, although the EQC has stated that there is only a small number of situations whereby it is uncertain as to whether the EQC will provide a further NZ$100,000 to cover a second event. The impact on individual insurers is likely to be determined by specific policy reinstatement terms that will vary across providers. There is some noise from market participants suggesting the decision will impact a larger number of cases than the “small number” indicated by the EQC.

In our view, the EQC is likely to continue to have capacity to meet potential obligations. Total estimated net costs of the September and February earthquakes are around the NZ$3 billion mark, compared to a fund balance of NZ$6.5 billion prior to September. Net costs have been capped by the NZ$1.5 billion Maximum Event Retention (MER) under relevant reinsurance policies, although some risk of exposure in excess of reinsurance protection remains. In the event of exhausting the current fund, the ECQ has the legislated ability to call on government resources. We believe the primary insurance sector was mindful in reinstating reinsurance protection of subsequent events after the February earthquakes, with the most recent events expected to be covered under those programs.

Sovereign

While there are no estimates of additional costs to the sovereign (including on the central government’s share of local government infrastructure, roads, insurance excesses on schools and hospitals, temporary housing, and other policy responses) from the latest earthquake, we do not expect them to be significant. This reflects our understanding that the additional damage was mostly to households and structures already affected by the earlier quakes, and that repair costs are likely to be met by the government’s already fully provisioned NZ$5.5 billion Canterbury Earthquake Recovery Fund.

New Zealand's ‘AA+’ foreign currency rating is currently on a negative outlook, reflecting the possibility of a downgrade if New Zealand's external position does not improve.

Local Council

The ratings on Christchurch City Council (Christchurch) continue to be supported by our expectation of on-going support in the recovery and rebuilding process from the New Zealand government. Christchurch is forecasting an operating deficit in fiscal 2010-2011 and the subsequent three financial years. This is primarily due to lower revenue from rates, parking, and dividends from its subsidiaries. We remain of the view that Christchurch has some flexibility to take on additional debt at the current rating level, and consider that it remains too early to assess the impact of the recurring earthquakes on the local economy and any permanent impact on the council’s finances.

Infrastructure

We view the medium-term impact of the tremors on international passenger demand into Christchurch International Airport (CIAL) as remaining uncertain. This is particularly so as historically around 60% of passengers in and out of the airport have been related to the leisure market, which in our view, is more susceptible to changes in demand patterns  Specifically, until aftershock frequency reduces, we believe that leisure group travellers--who tend to plan their travel arrangements well in advance--are likely to redirect their travel from the region, which could potentially result in a lagged recovery. The negative outlook continues to reflect the uncertainty surrounding:

·         The attractiveness of Christchurch as a travel destination and the consequent impact on international passenger numbers through the airport;

·         The ability of CIAL to continue to support domestic passenger levels over the medium term; and

·         The airport's ability to retain and attract key airline partners in the medium term to support its route development. (see Bulletin dated March 16, 2011.)  

The 'A-' long-term corporate credit rating on CIAL continues to reflect our opinion that there is a "moderately high" likelihood that the New Zealand airport's 75% shareholder, Christchurch City Holdings Ltd. (CCHL; AA+/Negative/A-1+)--a wholly owned subsidiary of Christchurch City Council --would provide timely and sufficient extraordinary support to the airport in the event of financial distress to ensure the timely repayment of the group's financial obligations. Going forward, our analysis will continue to focus on not only CIAL's medium-term competitive position and financial profile, but also the level of ongoing support from its owners.

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Hmm.  Time to recycle once more the oldie but goodie Rees-Mogg article from the Times:

“If one asked a competent graduate of a business school to design a business plan for a national cartel to raise house prices to the maximum, it would have four elements, all of which exist in our present system. It would license housebuilding, so that no one could build a new house without a licence, or even rebuild an old house or a redundant barn. It would encourage developers to maintain large land banks in order to benefit from rising prices. It would leak out new permissions only after long periods of delay. It would combine this with an unlimited flow of mortgage credit and relatively low rates of interest. If you restrict supply below the market clearing level and increase funding, you will inevitably create a bubble and you will lock people out of the market.”

 

One hopes against hope that this will not not taken as a price signal to push the Start button on yet anotjher round of house price inflation....

But the good thing, if that Did happen, is that this time around, the culprits would be perfectly clear.  Clueless Councils.

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