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Roger J Kerr applauds the introduction of new tools such as the core funding ratio and LVR limits, chides critics

Roger J Kerr applauds the introduction of new tools such as the core funding ratio and LVR limits, chides critics

 By Roger J Kerr

An old adage in the world of central bankers managing monetary policy is that if all sectors of the economy are equally grumpy, then the monetary authorities are probably on the right track with policy settings and conditions.

Some manufacturers and exporters are always unhappy with the elevated level of the exchange rate, while others see the exchange rate as a share price on NZ Inc and understand why it is so strong.

Now we have house builders and those in the residential property market complaining about the negative impact the LVR speed limits on the banks will have on the property market.

Of course the credit controls are designed to deflate an overly-leveraged housing bubble that caused the sub-prime mortgage crisis and the GFC in the first place.

Some sectors of the economy have very short memories.

The RBNZ should be applauded for its introduction of macro-prudential tools such as the core funding ratio and the LVR limits on the banks to ensure we do not have cavalier bank lending causing a property crash here.

The collateral damage on the wider economy from a property bubble busting is always more severe in New Zealand as many SME’s use residential property security to finance their business expansion.

For many years politicians and business groups have been calling for monetary policy to have some mates to take the heat of the export sector when interest rates are increased and the dollar goes up.

Now that we have other policy mechanisms to prudently control bank credit, lending and property cycles there are complaints that it is all too tough.

What has to be remembered is that short-term market interest rates will ultimately be set at a much lower level around 4.50% to 5.00%  than what would have been the case had we not had the macro-prudential policies alongside monetary policy.

Generally the local banks (with one blatant and surprising exception) have positioned their lending books and policies well ahead of the LVR controls that come into force tomorrow.

While the media focus on the housing market is understandable at this time, the reality of the NZ economy is that agriculture drives our destiny and record milk solid payouts in the dairy industry will be increasing dairy farming incomes by $5 billion this year compared to last.

Add on the increased construction and retail activity and there is no argument against interest rates increasing to contain inflation that comes with strong economic growth.

Borrowers, who were too slow or unwilling to fix interest rate prior to the increases in term swap rates over recent months, now have another opportunity to fix with US 10-year Treasury Bond yields pulling back 30 basis points over the last week.

An increase in US jobs during September by more than the forecast 180,000 on Friday will propel US bond yields higher again, so the window of lower NZ swaps rates may not be open for too long.

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Roger J Kerr is a partner at PwC. He specialises in fixed interest securities and is a commentator on economics and markets. More commentary and useful information on fixed interest investing can be found at rogeradvice.com

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6 Comments

 

"the credit controls are designed to deflate an overly-leveraged housing bubble"

No they are not. They are designed to provide financial market stability by stopping the banks getting any more exposed to the housing market.

New Zealand's housing bubble is underlevaged compared to other countries. If we had been leveraged to the same degree as U.S. or Ireland (in a household debt to house prices way), and house prices had gone up by the same amount, there would be an extra 311 billion dollars in total household debt in the period 1979 to 2012 with almost all of it coming after 2002 (in inflation adjusted 2006 dollars [technically, it is 310922 million, but lets call it 311 billion]).

Now, if whatever is adding liquidity to NZ houseprices was to be replaced by NZ household debt, it would completely crash the economy as household debt would increase by a factor of around 2.5 (though house prices dropping is also possible) giving a household debt to income ratio of 3.5 to 4 [I haven't inflation adjusted this so it will be out by a little, this is just some quick lunchtime calculations]. I can see why the reserve bank wants a firewall, or two, or three, between the sectors.

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"the credit controls are designed to deflate an overly-leveraged housing bubble"
No they are not. They are designed to provide financial market stability by stopping the banks getting any more exposed to the housing market.
 
Second that - or we wouldn't have second tier lenders such as non- RBNZ regulated Resimac and Liberty Financial legally able to fill the gap.
 
Some would-be home buyers unable to borrow from the banks as a result of low-deposit lending restrictions won't need to adopt underhanded tactics to achieve their goals.
 
Instead, they will find an increasingly long list of Australian second-tier lenders cashing in on New Zealand's regulatory changes and willing to fund their home purchases. Several are already lending in New Zealand, while several others are rumoured to be planning an entry as a result of the LVR restrictions.
 
Australian non-bank lenders Resimac and Liberty Financial are not covered by the Reserve Bank loan-to-value ratio (LVR) restrictions, and are anticipating a significant lift in business.
 
Resimac will lend up to 90 per cent of a property's value, and the cost is not massively higher than the lending costs of the main banks with a floating rate of 5.79 per cent for buyers with deposits of 15 per cent to 99.99 per cent of the house's value, and 6.09 per cent for those with deposits of 10.01 per cent to 14.99 per cent of the value. That compares to ANZ's floating rate of 5.74 per cent.
 
"People don't have to get sneaky about it," Resimac's Adrienne Church said. Read more

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"the credit controls are designed to deflate an overly-leveraged housing bubble"
 

"No they are not. They are designed to provide financial market stability by stopping the banks getting any more exposed to the housing market."

 

Why would you say that? the RBNZ isn't just focused on the financial stability of the banks they also want inflation contained and a lower dollar.  These tools achieve those things without having to hike rates and squash the economy. 

 

As Roger says they absolutely do want to deflate the overly-leveraged housing bubble in addition to limiting the exposure of the banks. 

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Why would you say that? the RBNZ isn't just focused on the financial stability of the banks they also want inflation contained and a lower dollar.

 

House sale prices are not included in the CPI release - only the building costs and given our duopoly supply structure strict regulatory controls are in urgent need of implementation, just to get down to Aussie levels of pricing.

 

The NZDUSD pair remains the prerogative of the US authorities - recent events confirm as much. While the annualised O/N carry gain may favour the KIWI, sharper and larger reversals of fortune reveal themselves upon a change of forward guidance from the jaws of the Fed chairman.

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That is fair enough. I'll just say that in terms of the NZ strangness of the debt to house price realtionship, and it's seeming massive under-leveraging, my impression from communications is that their primary concern is financial market stability. I expect they would be happy if the rate of increase in prices was slowed, but I've seen a lot more comments based around a concern for the potential levels of debt.

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The Reserve Bank seems to be ...between a rock and a hard place..

In their paradigm of the Inflation targeting framework... all seems well..    The CPI is lower than they forecast and the OCR has been at 2.5% for ages....   

BUT.... As a result of these record low interest rates...  Money supply growth is running at over 6% ( M3)...while nominal GDP growth is only 3%....

Commonsense says that excess credit growth ends up chasing speculative returns...

How much is the sharemkt up...??

How much is Real Estate up....???

With record low interest rates....  it kinda feels like using macro prudential policy tools is a bit like pissing in the wind....

If Auckland Real Estate keeps going up at double digit rates...  ( and it could).... what will the Reserve Bank do..????

What will they do if secondary lenders start cropping up..????   ( this might be one of the unintended consequence of LVRs' )

Will they end up being reactive to events..????

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