The decision of the Reserve Bank to give cheap funding directly to the banks possibly as soon as November means even lower mortgages may be fuelling the pre-Christmas housing market

The decision of the Reserve Bank to give cheap funding directly to the banks possibly as soon as November means even lower mortgages may be fuelling the pre-Christmas housing market

It could be just the pre-Christmas boost the housing market arguably didn't need.

The decision by the Reserve Bank to push ahead with introduction of a Funding for Lending Programme (FLP) for banks, which might be announced as early as the next RBNZ Monetary Policy Review on November 11, could see the banks offering even lower mortgages in the run up to Christmas.

The FLP's flipside may be that interest rates on bank term deposits might virtually disappear. And yes, you might have thought that had happened already. Well no. Maybe you ain't seen nothing yet.

We will know better what exactly will happen once we see the design of the FLP, but in essence it entails the banks borrowing directly from the RBNZ, at an interest rate possibly close to the Official Cash Rate (currently 0.25%). Very roughly bank funding costs are maybe in the region of 1%-1.2% at the moment.

Westpac chief economist Dominick Stephens, in a review of the latest RBNZ statement, suggested the impact of an FLP (depending on design) could trim about 65 basis points off current mortgage rates.

So, it's already real cheap on a historic basis to borrow eye-wateringly large sums of money. It's set to get even cheaper. And remember, the RBNZ removed the limits on how much high loan to value ratio (LVR) lending banks can do for at least a year starting from May 2020. 

Therefore banks will be able to access cheap funds directly from the RBNZ and then based on their own lending criteria (IE no external limits) be able to on-lend as much of that as they choose to their customers.

Directly sourcing funds from the RBNZ will put less pressure on the banks to have to source it from depositors. So, a direct likely consequence is that interest rates on term deposits will get even lower.

Go and buy a property

In my view, one interesting consequence of that will likely be that those who currently depend on deposits as a source of income may feel even more inclined to go out and buy an investment property instead.

For those feeling confident of their immediate employment prospects they may well see now as a good time to strike in the housing market while interest rates are so virtually non-existent.

As I've already said, there are increasing signs of our economy becoming very two-speed.  

Clearly the RBNZ is very worried about the state of our economy and what will happen. And clearly it expects once the impact of the wage subsidy has worn off that things will get worse.

But clearly also, it is to date being surprised by the way the housing market has so far responded.

It's worth noting these two paragraphs from the latest report of the RBNZ Monetary Policy Committee:

The Committee discussed the recent strength in the housing market. House prices had risen over recent months, in contrast to the Reserve Bank’s baseline scenario which had assumed a decline. Some members noted that economic activity in New Zealand has historically been closely correlated with changes in household wealth, and that a stronger housing market may indicate a stronger recovery in consumer spending and residential construction if sustained. However, other members noted that low population growth and rising unemployment are expected to constrain further house price increases.

Members agreed that the outlook for inflation and employment remained subdued. Members discussed the balance of risks, and agreed that they remained to the downside. There is substantial uncertainty about the future spread of COVID-19 both domestically and globally, and how economic, health, and social activity will adapt.

To me that text appears to recognise that there is some risk that the housing market takes off again - but that the downside risks to the economy in general outweigh that.

I think in terms of what happens in the housing market, it boils down to the numbers of 'comfortable' people, as I recently discussed, versus those who are not in a good situation. 

For the 'haves' now is potentially a golden time to engage in a bit of landbanking.

The upshot of the latest RBNZ pronouncements is that anybody who might have been of a mind to buy a property is unlikely (to say the least) to have been discouraged.

So, assuming we do see the FLP announced and introduced in November, then that's likely to be pretty supportive of the pre-Christmas housing market.

After that, and into the New Year it becomes a question of just how many people there are out there feeling comfortable enough to still want to buy a house, and the extent to which that demand is satisfied. It really boils down to the whole two-speed thing. 

How many people are in a 'good' situation versus those in a 'not-so-good' situation? I guess we will find out.

Housing strength to subside?

Depending on this good situation/bad situation balance, it could well be, and presumably this is what the RBNZ thinks, that the current strength in the housing market will subside as we get into next year.

Given the global economic outlook, the fact that the pandemic is still very much with us, and the fact we don't know how bad unemployment will get, that's probably a reasonable way to think.

For what it is worth, that's what I think as well, at the moment.

But, really, with the NZ love of housing, and with what our market has done before, you can never really tell. That it may yet defy logic is not beyond the bounds of possibility.

Either way, it looks like the onset of FLP will ensure a very buoyant housing market up till Christmas. 

A FLP fillip indeed.

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33 Comments

RBNZ gets a nod in this hard-drinking piece from Michael Every at Rabobank (via them goldbugs at ZH).

The money shot:

That [civilised drinking from Brits] was the plan. What actually happened in many locations was a get-‘em-in-let’s-have-another-I-love-you-you-know-did-you-spill-my-pint-vomit-and-blood-and-tears-and-half-a-kebab-down-the-shirt-broken-beer-bottle-in-the-face-where’s-my-taxi-here-come-the-rozzas nightly apocalypse that started at 7pm and went on well until dawn. Good job there wasn’t a war on.

When factoring the very real perhaps likely possibility there had been too much credit before GFC1, even then you still don’t end up with a baseline down this far, with financial therefore economic growth persistently dragged so much below potential for this long....The net result is simply this: a world that won’t take much more of it. And that was before 2020. The (Central Banks) collective response to 2020 has been more of the same. Same puppet show.

https://alhambrapartners.com/2020/09/22/taking-you-the-feds-bank-reserve...

16
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This is a step too far. Where do the politicians stand on this? It can’t end well.

Why would anybody buy a house now if you can fix an even cheaper rate by Christmas?

Because the price will be higher by Christmas

Christmas? I think you mean "breakfast".

Let's bookmark this and talk by Christmas.

FHB who were hoping for some softness are screwed.

May be vote for Green - the new mantra, if want roof of your head.

Agreed. We might discourage buying if there is the real prospect of wealth taxes.

Yes, I'm sure most people would prefer the instability, personal restrictions and ever increasing costs of renting.

Like the one we got during the past three terms?

Are you implying that people will decide to be less wealthy if wealth taxes are introduced?

But if the housing market tanks, there won't be anyone to tax

Bananas. Surely they can see the effects? Inflation is up, house prices through the roof. So what does this achieve? Unless the banks are in trouble....

26
up

Effectively the RBNZ are happy to destroy our society, purely on the basis that their models tell them that more house price growth will bolster GDP numbers towards their target.

History will judge Orr unkindly, if not with outright hatred.

11
up

He's the enemy of the state.

10
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Someone here described him once as the anti-Robin Hood - steals from the young and poor to give to the rich.

It's called a ' doom loop'

where banks have built up extremely large exposures to sovereign debt,” or farms houses etc

https://www.ft.com/content/0696b32b-936d-4d96-81db-c131d5bd8d9d

11
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Depositors and FHB’s should be up in arms, however the RBNZ is aware that your average punter doesn’t understand the impact of their monetary policy, anyone who does likely owns property assets or shares. When we have a system that encourages and protects those who excessively speculate and over-extend themselves, we know it is broken.

Exactly. The risk-free rate in NZ is the 2yr mortgage rate because there's no default risk in mortgages. The central bank will just bail you out (via cheap bank funding).

10
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Got to laugh at the RBNZ still thinking that lower mortgage payments will translate into consumer spending. I speak to mortgage holders regularly and homeowners are only responding to lower mortgage rates in two ways. 1. Some are using the lower interest charges to pay down their home loans faster. 2) The others (majority) are just buying rental properties. Now which of these exactly generates inflation?

Why is the tax payer indirectly subsidising the banks to put more fuel on an already burning hot housing market ?

I cant only guess the banks need help.

We will go the way of the UK, I talked to my brother in law this morning, he was very gloomy about the future and battening down the hatches. If people stop spending then we will contract, loss of jobs loss of decent income, fear of losing job and income will make people defer spending, contracting the money supply as they pay down debt. We have started on that 'loop'.
https://www.telegraph.co.uk/news/2020/08/19/britain-sucked-catastrophic-...

Listened to a guy called Steve Van Metre on Real Vision Finance talking about this today. He is convinced that even though the central bankers want inflation they can’t produce it. It’s consumer activity that produces inflation. They are scaremongering by saying they will let inflation play out so that people will rush out and buy stuff now - which they are doing! His theory is there will be a bit of inflation as we see people doing this then we’ll get deflation as consumer spending will slow down significantly once the knock on effects of covid are felt. So borrowing from the future to buy stuff now will just suddenly stop.

I wonder if the move by the RBNZ relates more to meeting their employment (as opposed to inflation) target. Seems to me they made this decision once it looked pretty certain a LAB-led government would return, and the wage subsidy was certain to come off. That puts who knows how many more people on the Jobseeker benefit. Perhaps the RBNZ wants these new Jobseekers who have unrealised capital gains to borrow against them and set up new small businesses. They (the newly unemployed) then come off the Jobseeker benefit and effectively become self-employed.

There must be a great deal of unrealised capital gains just sitting in the overall housing market.

Time for more LVR restrictions and Directed Lending to SMEs/Businesses supervised by an Independent authority to see that this largesse is distributed wisely for boosting economic recovery. Any takers ?

Reserve bank comming out now and speaking indicate that fear of major downfall strongly possible in near future and are so worried that had to speak out now but if unemployment rise or people don't spend as expected by RBNZ things may not be as expected by reserve bank OR what if go into another lockdown......

So who here will be taking on some mortgage debt to cheaply fund some more looming sharemarket discounts?

The share market doesn't seem to be benefit as much from falling rates because banks prefer to take security over houses to any other class of assets. It does strike me as odd though because there are all sorts of additional risks to mortgage lending (e.g. a bank cant make a margin call on a home loan as you can securities, houses are notoriously difficult to value whereas securities are typically very easy.)

When you go to other countries you realise that one of the reasons that they have more advanced economies is because there are specialist banks that support different industries. So one bank might provide capital to agriculture, another specialises in manufacturing, another in shipping etc. etc.

Its a narrow sliver at the upper end, but prices in Herne Bay, Grey Lynn, Remuera etc are definitely on the move in the last month or so. Agents are busy and homes are selling 10-20%, even as much as 30%, above the 2017 CV.

Agree market is too high. Standard is 10% to 20% above CV

Hi Nizzy, I agree with your comment and came to the same conclusion after viewing the August sales data for the Eastern Suburbs today. The rest is selling at around CV. You’ve definitely got to be granular with house prices. Looking at all sales on all houses sold in your area. On this point we are lucky that our agents provide this information.

You don't need to get it from an agent - go to: www.homes.co.nz - all past sales prices are in there.