US expanding faster; London to lose to Frankfurt; German MMP negotiations collapse; RBA says mortgage rates lack transparency; Westpac glum on NZ; UST 10yr yield at 2.37%; oil down, gold unchanged; NZ$1 = 68.1 US¢, TWI-5 = 71.2

Here's my summary of the key events overnight that affect New Zealand with news the Brexit shift away from London to Frankfurt is gathering pace.

Firstly however, in the US a new report shows a much bigger than expected jump by its index of leading economic indicators in October. The Conference Board said the index surged up by +1.2% after inching up by a revised +0.1% in September. Economists had expected the index to climb by +0.6% compared to the -0.2% drop originally reported for the previous month.

And Goldman Sachs has been telling clients that the US economy is heading into 2018 with good momentum that's likely to boost wages and inflation more broadly. That will require the Fed to raise interest rates four times next year, they said overnight in a research note.

In London, they are about to lose two big EU agencies that employs thousands. The EU is expected to announce today that the European Banking Authority will shift to Frankfurt, and another agency, the EMA to Bratislava. Goldman Sachs announced that it is moving to Frankfurt and Paris.

In Germany, there has been a political shock, one that threatens Angela Merkel's position. Hardly anyone could have imagined that talks to form a new German government after their MMP elections would collapse. Anything's possible now, from minority rule to a re-run of the vote, which Merkel says is her preference. One thing's clear however: it's a blow for the German Chancellor.

In Australia, the RBA has called for more transparency on mortgage rates as the gap in mortgage rates between new and old borrowers widens. Their analysis apparently shows that competition for new loans was much stronger than for existing loans. Their claim is that this is caused by a "lack of transparency and availability of information."

In New Zealand, Westpac's economists are saying this morning we are in for an economic slowdown in 2018. They say that this will be a consequence of the new coalition Government's policy push.

In New York, the UST 10yr yield is at 2.37%.

The price of crude oil is lower today, now at US$56 / barrel, while the Brent benchmark is at US$62

The price of gold is basically unchanged at US$1,296 oz.

However, the Kiwi dollar will start today a little lower. We are now at 68.1 US¢. And on the cross rates we are at 90.2 AU¢, and against the euro at 58 euro cents. That keeps the TWI-5 index at 71.2. And bitcoin is now well over US$8,000 and now at US$8,260.

If you want to catch up with all the changes yesterday, we have an update here.

The easiest place to stay up with event risk today is by following our Economic Calendar here ».

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43 Comments

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15

Come on now, "Hardly anyone could have imagined that talks to form a new German government after their MMP elections would collapse". Surely Merkel's days were numbered when she let in 1 million or more refugees from a distinctly different culture. The media has turned a blind eye to the large number of people who disagree strongly with this policy. People vote for totalitarian parties (of the left or right) when they are angry and feel disenfranchised and ignored. This is no surprise.

What would you feel like if this happened here:
http://www.independent.co.uk/news/world/europe/cologne-attacks-what-happ...

We do know what it is like - letting 1m immigrants into Germany's population of 83m is 1.2%. Letting 70,00 into NZ's 4.5m population is 1.56%

A silly comparison, Germany is taking REFUGEES we are allowing immigrants to come into NZ

I was thinking more along the lines of bringing in large numbers of people from differing cultures

Going to https://www.immigration.govt.nz/about-us/research-and-statistics/statistics and looking at arrivals then taking out (warning: potentially controversial) US/Canada/Australia/Western Europe/Pacific Islands leaves 32,714 non-visitors in the last 12 months - roughly the population of Gisborne

And one hopes we will NOT continue to make the same mistakes here.

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10

A bit rich of Westpac's economists to blame our new Government for forecasting an economic down turn and giving no explanation as to why?
At a guess, I'm bet they're complaining about the foreign buyers ban?

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10

In May 2017, Westpac chief economist Dominick Stephens talked of a slowdown in 2018 from household borrow and spend burnout. Nowhere was election uncertainty mentioned: http://www.stuff.co.nz/business/industries/80066702/NZ-house-prices-to-d...

They didn't blame the new government. They said the new govt's policies will have some dampening effect, but they couple that with saying the economy was slowing anyhow.
They also said the new government's policies are likely to both dampen and stimulate the economy.
They also pick house price drops of 5% drop in the next few years.

Westpac's economists are saying this morning we are in for an economic slowdown in 2018. They say that this will be a consequence of the new coalition Government's policy push

Less government policy and more the end of the punch bowl at the property party.

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14

Germany is going the way of the USA, UK and perhaps NZ, voters voting against policy, voting against what they see as a corrupt cabal of elites, voting for parties they dislike the least. Taking back control, not that its' ever going to be allowed.

Haha, quite right Andrew. Things will only change when people realise they can't use the same system that got them to the point of disatisfaction to solve the issues that aggrieve them.

Ominous comment. We MUST try to use the system to correct it's failings, because the alternative is not pretty. A big part of the solution has to be the media, educating the public and the public voting with integrity, both of which are unlikely. But finally we must also have candidates with integrity to vote for, not the self-serving bunch the majority seem to be these days.

What should be, and what will be, is the failure in every political system. Try if you must, but you fight against the unstoppable tide of human behaviour going the other direction.

From my observations the most extraordinary minds best capable of leading us have little interest in doing so. I am sure this is because they understand they can't fight the tide.

When a person starts telling me how the place should be run, and what the government should do, they just tell me they are not equipped to be making those judgments.

"Big land sales suspended in OIO

Prime Minister Jacinda Ardern has confirmed that several big land sales in the South Island to foreign buyers have been suspended in the Overseas Investment Office process while the Government reviews the law for its proposed ban on foreign purchases of existing houses.

Ardern confirmed the suspension when asked about the proposed sale of several big South Island sheep stations, which appeared to have been put on hold.

"We have a few options -- legislative means," she told her weekly news conference when asked about how to lift the suspension.

I presume that the buyers had the best bid,so now the sellers will presumeably have to settle for a lesser offer.
Should go down well with the seller.

Dp

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14

A lot of these farms were high country leases that were freehold under the high country Tenure review. One of the biggest rorts on the people of NZ, we owned these places, farmers were in some cases paid to freehold and now sold to the worlds rich and powerful for millions, prices locals could never afford.

After freeholding, much of the land gets on-sold. In the Mackenzie, six of the new owners paid the Crown a total of $700,000 all up for the freehold, and have so far realised a total of $26 million by on-selling

http://www.stuff.co.nz/national/politics/91935035/ann-brower-for-the-sak...

Damn, it's even worse than that in aggregate - from your source:
"In 25 years, the Crown has purchased leasehold rights to more than 330,000 hectares for about $117 million; and leaseholders have purchased freehold rights to more than 370,000 hectares with higher production potential for about $62 million."

In Australia, the RBA has called for more transparency on mortgage rates as the gap in mortgage rates between new and old borrowers widens.

More importantly, in respect of mortgage securitisation (RMBS):

Self-securitisations are retained by the bank that created them and are used solely to access central bank liquidity. The Reserve Bank accepts self-securitised assets for this purpose for a number of reasons, most notably a shortage of securities considered to have sufficient credit quality and liquidity.

The first thing to note is that marketed securities have a lower share of investor and interest-only loans than the general population captured by the APRA data. For self-securitisations, these shares are more closely aligned to the composition of the banks' total mortgage portfolio. The second point of interest is the very recent large decline in interest-only loan shares in self-securitisations, which is consistent with changes in the broader stock of outstanding mortgages; these declines have occurred alongside measures by APRA to limit new interest-only lending. [emphasis added]

Exactly, third party securitisation promoters want no exposure to over leveraged ponzi schemes initiated by banks on behalf of investor clients.

The ponzi scheme:

THE Australian mortgage market has “ballooned” due to banks issuing new loans against unrealised capital gains of existing investment properties, creating a $1.7 trillion “house of cards”, a new report warns.

The report, “The Big Rort”, by LF Economics founder Lindsay David, argues Australian banks’ use of “combined loan to value ratio” — less common in other countries — makes it easy for investors to accumulate “multiple properties in a relatively short period of time despite high house prices relative to income”.

“The use of unrealised capital gain (equity) of one property to secure financing to purchase another property in Australia is extreme,” the report says.

“This approach allows lenders to report the cross-collateral security of one property which is then used as collateral against the total loan size to purchase another property. This approach substitutes as a cash deposit.

“This has exacerbated risks in the housing market as little to no cash deposits are used.” Read more

Are central bankers born and educated to neglect taxpayers interests or are they paid to do so?

“This approach allows lenders to report the cross-collateral security of one property which is then used as collateral against the total loan size to purchase another property. This approach substitutes as a cash deposit.

“This has exacerbated risks in the housing market as little to no cash deposits are used.”

Isn't this exactly what New Zealand property investors have also been doing?

And if banks lending is 80% mortgages.... how much of the banks porfolio is exposed to this house of cards?

gingerninja - And if banks lending is 80% mortgages.... how much of the bank's portfolio is exposed to this house of cards?

Loads, It will all bubble to the surface as bad lending on the way down. Its reminiscent of 1987 when it was easy to borrow against shares to buy more shares, pyramid schemes were rife and there were share buying syndicates popping up everywhere.

Banks are pulling back - expecting proceeds from any sales within a portfolio to be used to pay down debt on the balance of properties;

https://www.stuff.co.nz/business/property/98994461/lvr-restrictions-cont...

Interesting.. i wonder how many negatively geared investors are going to get caught out when they ask to borrow more to bring their rentals up the the required insulation standard?

"Some banks are literally putting them through the application process again to see if they can still afford the level of debt they've taken on already.""

The nerve of those bankers! How dare they check whether the landlords can service their loans!

The nerve of those bankers!. In times of tighter lending criteria, the speculator discovers they are merely the caretaker of an asset. The bank is really the Landlord who pulls all the strings. It's all been driven along that extra mile by cheap property seminars and home improvement shows. I recall a vivid experience as a bank worker in 1990 when a tearful homeowner rung me. He was up to date with his mortgage payments and had received a letter to say his mortgage was being recalled and requesting he refinance using another bank. This proved a near death experience because of the dire lending environment. Because his house price tanked, his bank lacked sufficient security. You are what you are worth minus what you owe. There is no inflating our way out of the coming slump and the debt will not devalue.

The bank pulls ALL the strings and your asset is really theirs until the mortgage is discharged.

The other perspective is that the banks are acting in the best interests of their clients by forcing them to be responsible with their finances. They aren't slaves to the bank the bank is providing them with what they need. More like parents than slave masters (just ignore the irresponsible lending by banks in the first place).

Banks also operate in the best interest of their shareholders, spend loads on window dressing so they appear good responsible corporate citizens - especially in tough times. If it all turns to custard, it's the shareholders that moan first (it's a good leading indicator of an approaching tsunami of toxic loans)

Liked the part (just ignore the irresponsible lending by banks in the first place), it's so true!

Retired-Poppy,

"I recall a vivid experience as a bank worker in 1990 when a tearful homeowner rung me. He was up to date with his mortgage payments and had received a letter to say his mortgage was being recalled and requesting he refinance using another bank. This proved a near death experience because of the dire lending environment. Because his house price tanked, his bank lacked sufficient security."

Did they get the loan called because
1) the collateral value fell below the loan value (regardless of it being a P&I loan or interest only loan)? or
2) was it an interest only loan and they didn't extend the loan at maturity?
3) or other reason?

Wondering why the bank were able to call in the loan.

Hi CN, at the time a lot of mortgages were being bundled together and sold. In this instance the institution issued a letter instead. The mortgage value was deemed to be higher than the property value. I believe that refinancing was not an option as it was already a long dated loan. I cannot recall the status of the loan re interest only. This well known institution were getting out of mortgage financing altogether. At least they did so for a very short time.

the next potential financial pressure point on many property investors may be maturing of the interest only loans. The borrower may find that they are unable to meet the more stringent income based debt servicing criteria, and are forced to start P&I payments. Many borrowers are trying to avoid this situation by refinancing with non bank lenders, but they have a limited lending capacity and are becoming more selective. The P&I payments could increase borrower payments by up to 50% and force many leveraged property investors who were previously positively geared to become negative cashflow. If many leveraged property investors look to sell at the same time, then they could put downward pressure on property prices. Banks will then potentially be reassessing their large credit exposures (i.e borrowers) - if Auckland property prices fall 26%, the interest only loan could exceed the property's market value (as the property was purchased on an 80% LVR in August 2015 when there was a fear of missing out, just before the 70% LVR was implemented), the banks may request additional collateral. The banks may demand more collateral even before property prices start to fall significantly to ensure that their loans are fully covered. For many property investors who are unable to meet additional collateral calls, they may start selling. This is even before you have a rise in interest rates or a rise in unemployment rates which puts more property owners under financial pressure. In times of tighter lending criteria, many credit limits will be reduced, put less access to financial resources, and forcing household deleveraging.

Also large property price falls will deter some potential property buyers as they look to buy property at lower price levels so there are potentially fewer property buyers in the market - that is assuming that they can get financed with tighter lending restrictions.

There's a lot of interest only loans out there. I know people with LVR's of 60%+ that won't have any issue. The ones riding the debt and lifestyle at or over the limit will be in a different position. How many "investors" are going to end up in trouble. If they are neutrally or negatively geared and have to pay P&I that's going to be one massive leap in payment size. Even switching to the 30 year mortgage is brutal (banks may carefully consider these mortgages if they are aged 35 or over).

As at September 2017, for the registered banks (i.e. excluding non bank lenders) there are 25.8bn interest only loans for owner occupiers, 28.6bn interest only loans for property investors. That totals 54.4bn of interest only loans. Also I heard that some small businesses had also gone into property investment, not sure how much of the 38.3bn in interest only loans to businesses has been invested into real estate as opposed to being invested in the operating activities of the business. Link to RBNZ data - https://www.rbnz.govt.nz/statistics/s32-banks-assets-loans-by-product

Holy crap. And that's 42% of all investor mortgages.

Its sobering reading and potentially one hell of a mess. With the absence of capital gains, a lot of these loans would be reclassified as non performing as time passes, it's a ticking time bomb - principle must be repaid. Unlike the states, NZ homeowners can't just mail keys back to the bank and head to the beach!

When you say “request additional collateral”, I think you are really referring to a loan prepayment to reduce the loan to value ratio to the banks required level. But otherwise, yes that will be the approach taken by banks with investors in a falling market. Of course nearly all investors won’t be able to make this prepayment without selling a property, so that’s what they will have do. Banks won’t take this approach with owner occupiers.

Laminar, note this thread.

A fall of 26% you say? I'm irresistibly reminded of 'Margin Call'

"Well sir, if those assets decrease by just 25% and remain on our books that loss would be greater than the current market capitalisation of this entire company."

https://youtu.be/Hhy7JUinlu0?t=3m43s

Great clip. However in a real life situation, there is a lot less emotional restraint and a lot more foul language involved ...

I did say IF Auckland property prices fall 26%. This may not happen for the following reasons:

1) the maturing interest only loans are expected to mature over the next 60 months. So sales may be spread evenly over the next 60 months (and remain orderly) and prices remain stable or fall a lot less than that in a fire sale situation where many properties come onto the market at the same time. Most of the aggressive borrowing was probably made up to October 2015 where there was a fear of missing out due to rapidly rising prices, and these loans might be 5 years interest only, which would make October 2020 as the interest only maturity date. It is difficult to determine whether the property owners will try to sell en masse or in a calm manner - rapid falling prices make sellers more desperate, whilst flat or slow declining property prices make sellers more patient. Short time constraints and leverage does tend to make sellers more desperate.

2) the lending capacity of the non bank lenders is important - the borrowers who refinance early will be able to take advantage of the lending capacity and stay on interest only loans. The borrowers who refinance later (due to the maturity date of their interest only period, or lack of recognition that they no longer meet bank servicing criteria) may find that the non bank lenders don't have any lending capacity at that time and then are required to go on P&I terms.

Having said that, the property price risk is certainly weighted more towards the downside rather than upside for property investors.

Yes, its very reminiscent of 1987. I bet there has been lots of poor quality lending. People like SBS have come to town nd no doubt cut their own throats to get market share.

Maybe Merkel should get a crash course on MMP by Winston...lol

New trend: There is No Such Thing As ‘Free Trade’
http://www.theamericanconservative.com/articles/there-is-no-such-thing-a...

I may have accidentally reported this comment by being inept with the mouse and too quick with the clicking finger - apologies for that, to stp and the moderators.

What a silly headline. Of course there is no such thing as free trade, any more than there is such a thing as a safe activity, or a risk-free investment, or a perfect market, or an omniscient Government.

There is, however, trade that is more free and trade that is less free, just as some activities are safer than others, some investments are less risky than others, some markets function better than others, some Governments are more competent than others.

What the article is actually saying is that some of America's trading partners don't practise free trade as much as they preach it. That's certainly true. But when the other guy is shooting himself in the foot, is the best response really to shoot yourself in your own foot so as to level the playing field?