By Gareth Vaughan
There's little point in ANZ Bank New Zealand slapping higher minimum deposit rules on residential property investors than the Reserve Bank is proposing because borrowers could just go to other banks, CEO David Hisco says, and the problem wouldn't be solved.
Hisco hit the headlines this week with a thoughtful article on challenges being posed by high Auckland house prices, the strong New Zealand dollar, record immigration and New Zealand's creaking infrastructure.
Coming hot on the heels of the Reserve Bank proposal to force residential property investors borrowing from banks to have a deposit of at least 40%, one of Hisco's key points was that this restriction ought to be even tougher. He proposed a minimum 60% deposit. Asked in a Double shot interview whether ANZ would just go ahead and set the 60% limit itself, Hisco said this wasn't a solution.
"The issue if we did it alone is you would find you wouldn't actually solve the problem, the business would go elsewhere. I'm not so worried about not doing the business. But when it's going elsewhere it means you haven't actually really solved the problem other than doing less business yourself," Hisco said.
"Part of me saying 60% is saying if we've decided we should be doing things to limit Auckland investors, well then let's do it and obviously implementing at 60% would be quite a heavy move. No doubt the Reserve Bank's probably not into drastic moves like that. So they've moved it 10% [up from 30%], and I guess if they don't see much action they've still got the ability to move it more," said Hisco.
The point, he added, is if you've decided you don't want residential property investors in the market, recent Reserve Bank figures show them accounting for almost half monthly mortgage money lent in Auckland, then get rid of them, - at least for now.
"Bad news for them, but in the long run you might be doing them a favour if you save them an issue later on," said Hisco.
In addition to the tougher loan-to-value ratio (LVR) restrictions, the Reserve Bank's also looking at potentially introducing limits to high debt-to-income ratio lending, and/or making banks hold more capital against housing loans (a counter-cyclical capital buffer or capital overlay). Asked about whether the Reserve Bank should push ahead with either or both these tools, Hisco was less forthcoming.
"I wouldn't want to be putting out there what I think the Reserve Bank should do. They make their own calls, we work with them, they consult. What I've always said to the Reserve Bank is banks, provided they get time to adjust and make changes, they can generally get their head around whatever changes are implemented provided there's time," Hisco said.
'We've watched this building'
Asked about the timing of his article given the issues canvassed have been bubbling away for the past few years, Hisco said it was about trying to encourage a number of people to work together to improve things.
"We've watched this building and part of what we see is different parties looking to blame other parties, saying 'well it's your fault you should fix it.' Other people pointing a finger at another party. And we believe that the answer actually lies in a number of people working together," said Hisco.
These groups, he said, include the Reserve Bank and both central and local government, none of whom he is criticising.
"What I was hoping to do was explain to people that not one of those people can fix it on their own, and that people should understand that it is a complex issue, and that the answer lies in a number of things. And even then whatever you do may have another consequence."
It's not the first time Hisco has questioned banking industry lending practices. Back in March 2012 he hit out at rivals' high LVR lending telling interest.co.nz: "At the end of the day you’d have to ask yourself really whether if somebody has only got a 5% deposit that it’s a good thing to actually put them into a home loan."
Nonetheless ANZ, the country's biggest bank, has been the dominant player in the home loan market over the past few years. Since announcing the end for its National Bank brand in September 2012, the bank has grown its residential mortgage book by a net $14.4 billion, or 27%, to just under $68 billion. ANZ has about a third of the market.
'This thing's going to come to an end somewhere'
Asked whether ANZ had now decided to consolidate and wanted its competitors to do the same, Hisco said it was not for ANZ to prescribe what its competitors should do.
"What we believe is that clearly wages have not risen in pace with Auckland house prices. And so there comes a point when if we're not already close to it or there, where kiwis can't afford to get a loan and pay it off," Hisco said.
"This thing's going to come to an end somewhere, it has to because you can only borrow so much."
Low interest rates have enabled people to borrow more money, but Hisco said this doesn't compensate for the rise in prices.
"And of course the more you borrow, the debt doesn't go away, you have to pay it back," Hisco said.
"And that was the other point I made in the article which I think surprised some people, which is that now is a time to pay your loans off. There is never a better time with low interest rates than to clear debt. We need to remind people that getting your personal balance sheet in order is a good thing."
'Johnny-come-lately mum and dads'
Additionally Hisco said that although ANZ is obviously a money lender, its primary interest is to ensure there's a stable banking system.
"The banking market's very competitive. And again this is a situation where we may have a view that we want to tighten our lending conditions and pull back. But unless there's a generally shared view that now's a time where we need to navigate more carefully, well then that business will just go elsewhere and it doesn't then actually solve the issue," Hisco said.
"And the issue that I think needs to be looked at is the amount of investor lending in Auckland right now. And for a lot of these people they are Johnny-come-lately mums and dads who have seen everybody else get on board and so they think they'll do it too. The point is if things went bad they could quickly see their equity in their own home erode, which was used to secure the investment property, and of course the investment property would also go backwards. So it was a warning to say property doesn't always go up."
Hisco said there was no pressure coming from ANZ NZ's parent in Australia, where there's ongoing pressure for banks to hold more capital, to dial back in New Zealand. Shayne Elliott succeeded Mike Smith as ANZ's group CEO at the start of the year and has pulled back from his predecessor's Asian growth push, and is looking to squeeze better returns out of the group's capital.
"No, Shayne has come on board and with the new management team we've announced a change in our strategy somewhat. But people are generally happy with the direction we've taken New Zealand. Obviously we've merged the two brands, we've grown the business since then and we've got cost out of the business, which was part of the reason for doing that. That has made us more competitive. So we've got a pretty clear business model here with a good share of business across all the different parts of the market. And they're quite happy with us keeping our focus on just keeping the steady ship and growing the business slowly. So there's no pressure coming from them," said Hisco.
'We try and limit what we borrow from offshore'
As reported by interest.co.nz last December, a new rule implemented by the Australian Prudential Regulation Authority means ANZ NZ must repay its Australian parent NZ$8 billion over five years. In May Hisco told interest.co.nz that ANZ NZ had plenty of time to pay back the NZ$8 billion, various funding sources and thus a strategy for this requirement. However, he also said the repayment meant ANZ NZ would: "Review our [lending] book and if we've got loans that are really mis-priced or priced at a time that was historical and not appropriate for today, we would reprice those loans. And if they [borrower-customers] thought they could do better elsewhere, maybe they could go. [We're] making sure if we've got money out the door it's worth having out the door."
Interest.co.nz recently noted the growth of household debt is now outstripping the growth in household deposits by the most in more than six years. And Hisco acknowledged sourcing overseas funding to meet strong domestic lending demand is part of the problem.
"Yes it is. All of the big banks would go offshore and top up. I would be suggesting most of the banks would top up roughly the same amount every year. And if you go offshore and decide you want to top up for double that, you're going to pay a lot more for it," said Hisco.
"We get a sense for what we can borrow offshore at around competitive rates. And if we were to go offshore and ask for a lot more, obviously the spread goes up and then that has to be passed through as an input cost. So we try and limit what we borrow from offshore. And obviously New Zealand has a limited amount of savings so savings are important, which is why I said in the article I doubt that we could continue to go on lending at heightened levels for a period of time because we'd have to borrow more from offshore to top up."
'If our currency's out of step with the rest of the world people will look elsewhere to trade'
In terms of the New Zealand dollar, Hisco said there was a limited number of things the Reserve Bank could do to try and weaken it. (The Reserve Bank of Australia has had a look at some unconventional tools it could use to weaken the Australian dollar).
"I wouldn't be sure that quantitative easing would be something that they [the Reserve Bank] would be thinking about. The comment was just generally one which is New Zealand has benefited from export trade. It has helped us build our industries here and if our currency's sort of out of step with the rest of the world, well then people will look elsewhere to actually trade. And being a long way from other countries, if we're looking to sell things, particularly if it's export product, we've got to ship it further. So we need to be competitive. And historically the Kiwi [dollar] has been lower. So it's running at a heightened level and a return to more historic levels would, I think, be helpful in the long run," Hisco said.
'Immigration's good for New Zealand'
Of immigration, which with a net gain of 69,090 in the June year, is running at record highs, Hisco said New Zealand benefits from it and acknowledged ANZ does too. ANZ NZ last year told analysts and fund managers that immigrants make the bank revenue from day one and are 10% more profitable than the average New Zealand consumer.
"I think people need to understand that. Immigration's good for New Zealand," Hisco said.
If you look at the immigration statistics the thing that has probably been a bit of a surprise...is this is the longest period where we've seen kiwis not going to Australia and kiwis coming home. And that has really put some pressure on the system," said Hisco.
"As much as people would like to turn that debate into other topics, the main numbers in terms of immigration is trans-Tasman flow. And that has been a bit of a surprise, which is why it's taking a while for the various people that need to adjust to actually pick that up and deal with it."
"The point is we need to adjust for that, and so again that means building more houses which the government is ramping up in consultation with the Auckland Council. That takes time," he added.
There probably aren't many options in terms of actually "tweaking" immigration policy, Hisco suggested.
"We still need trades here. And again what I was saying [in the article] is that everybody needs to look at everything. And if you can make a contribution, any type of contribution, that may help us let the air out of the balloon slowly rather than burst the balloon...."
With this population growth comes pressure on infrastructure, including schools, hospitals and roads.
"It takes time and needs thought around where's the right place to put it, and what should the design be and then get that approved and consult with the right people," said Hisco. "And that's why we need a number of parties right now to fly in formation together to navigate our way through a time where New Zealand's under pressure on a number of fronts. It's partly we're a victim of our own success," Hisco said.
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