ANZ CEO David Hisco argues several levers must be pulled to take heat out of the property market and put the NZ economy on a firmer footing

ANZ CEO David Hisco argues several levers must be pulled to take heat out of the property market and put the NZ economy on a firmer footing
Pull more of them, and harder, ANZ's David Hisco says

By David Hisco*

Auckland house prices and the New Zealand dollar are over-cooked.  

Having been in banking since 1980 I have seen this movie before. The ending is pretty much the same - sometimes a little plot twist, but usually messy. 

This one has some different characters involved. Record low interest rates in New Zealand, 40 houses being built a day in Auckland yet the city needing 60, deflation in some of our trading partners, political turmoil in Britain, Australia and the US, some banks in Europe in trouble; the list goes on. 

In the quick snack media world we live, sadly many are making decisions based on the last headline or quote rather than research and facts. Here is a fact: property markets can and do go backwards. 

Reserve Bank Deputy Governor Grant Spencer says the solution to Auckland's housing problem is a team game and that not all the heavy lifting can be done by them. He's right. Spencer has also suggested immigration policy needs to be looked at. 

Our creaking infrastructure might do with a period of catch up. 

The Leader of the Opposition says we need to build more homes faster. That makes sense, too, if we have the resources and approvals to do it. 

The Auckland Council says we need a unitary plan that allows us to build up and out. That's logical but unpalatable to a vocal few. 

The Prime Minister recently told the Reserve Bank to get on with tightening loan to value ratio (LVR) rules. Part of the delay in it happening may be the Reserve Bank demonstrating that it won't be told what to do by politicians. 

Record low interest rates have played their part in this problem. But, because New Zealanders aren't good savers banks have had to borrow from offshore to fund this rapid expansion in housing lending. And this funding supply is not endless unless banks want to pay higher prices for it. I doubt banks can keep lending at the current huge volumes anyway. 

So how do we solve this problem?

At ANZ it's not uncommon to find ourselves in complicated situations where different parts of the business have a solution to a problem. Breaking the impasse requires collaboration, leaving egos at the door, and a willingness to move from your previously held position and try something different. Most of all, it requires the fortitude to make a recommendation that everyone can live with (versus 100 percent agrees with). Then, like with all good strategies, it requires military like precision in its implementation.

Finance Minister Bill English recently told an ANZ post-Budget breakfast that the Auckland housing market was overheated and that some investors would end up losing money. 

Salaries and wages have hardly changed whilst house prices have risen - this can't continue so it's a matter of when, not if, the market adjusts.

That may be true but New Zealand's issues go beyond housing. The strong Kiwi dollar, while great if you're heading overseas on holiday, is impacting our exporters. It's not helping with the recovery of the dairy industry. It also makes NZ tourism, one of our largest industries, far less attractive for overseas tourists.

The softness in the Australian economy, coupled with the fundamental changes they are going through with the end of the mining boom, makes our largest trading partner vulnerable. With the possibility of parity between the New Zealand and Australian dollars how long before they start buying their goods from cheaper sources? 

There are storm clouds on the horizon for sure and when they break who knows what will happen. 

One thing is certain, if employers start laying off staff because exports to an uncertain world are dropping, those people won't be able to afford their mortgages and when that happens they will sell their houses. If unemployment rises and the dollar drops, overseas investors will cash in their chips and sell, most probably in a stampede. 

The Baby Boomers who have become property investors in recent years based on shallow deposits will soon realise what I'm already seeing - more and more rental properties where owners either can't find a tenant, or the rent can't cover the mortgage. Salaries and wages have hardly changed whilst house prices have risen - this can't continue so it's a matter of when, not if, the market adjusts. 

New Zealand is a great country and we've come out of the Global Financial Crisis well compared with many. But logic tells me things cannot continue to run this hot.

Eventually, landlords will realise that getting a measly yield is not worth it, nor is leaving a property empty, and they will try to sell and take any possible capital gain. Nobody knows where the top of the market is but, as they say, nobody ever went broke taking a profit. 

The solution probably lies in pulling many levers which will no doubt trigger other consequences. But things we can do right now include: 

Heavily increase LVR limits for property investors. The Reserve Bank wants most property investors around the country to have 40 percent deposits in future. We think they should go harder and ask for 60 percent. Almost half of house sales in Auckland are to property investors. Taking them out of the market will be unpopular amongst investors but it may end up doing them a favour. Of course this would mean less business for us banks but right now the solution calls for everyone to adjust. 

Weaken the New Zealand dollar. The Reserve Bank should look to weaken the dollar, making our export industries more competitive. That's good for employment and our balance of trade in the long run. The Reserve Bank in Australia are already examining unconventional measures to do this. The longer our dollar is out of step with the rest of the world we will slowly drift towards being uncompetitive. Rising unemployment and rising house prices can't co-exist.

Voluntary tightening of lending criteria by banks. Since the GFC banks have been more conservative than ever on lending. But the current situation will see ANZ implement even tougher criteria for investment loans as house price inflation spreads from Auckland to other regions. 

Review immigration policies. Immigration has been great for New Zealand. We are a harmonious, diverse and inclusive society. But Auckland's housing, roads, public transport and schools are struggling to cope. Let's have an honest and sensible debate about immigration using facts rather than prejudice to see if we should push the pause button. 

Have a strong focus on infrastructure build, particularly in the growth regions. We always seem to play catch up in this country relying on bureaucratic formula to work out demand. There are smart ways to fund infrastructure that can spread cost across the generations if we choose to go that way. 

New Zealand is a great country and we've come out of the Global Financial Crisis well compared with many. But logic tells me things cannot continue to run this hot. 

Low interest rates give borrowers the best chance to repay their debt and that is what they should do, not use them as a chance to borrow to the max. 

Now is the time for New Zealand to navigate carefully if it wants to remain as one of the world's better performing economies.

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*David Hisco is the CEO of ANZ New Zealand, the country's biggest bank.

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Thanks David. It's interesting timing for you to come out and say this. Have you only just noticed the risks? Is there any reason you haven't put your opinion forward earlier? It looks to me as if you are just covering your backside at this very late stage in the game. Had your article been presented a couple of years ago I would have been more impressed.

Time to start selling down a bit Machiavelli? Lock in those hard earned gains....

Too late... I expect a downturn and decreasing capital values. I always have. Fortunately the positive cash flows will stop me from crying at night when it happens it's all the FHB'ers and new investors that have piled into the market in the past year or two I worry for.

It's one thing to see your property value decline 10% after years of big increases. $500k up / $100k down... whow cares!?. It's another thing entirely to end up with negative equity!

$100k down might be a little optimistic. No guarantees in markets. Its all about the numbers of sellers and buyers. If far more sellers than buyers then their is no limit any market can go down.

Ah...Yes, good public relations exercise. If only they realized it far too late for that!

Yes the Big banks have got a lot to answer for. they have made hay while the sun shone. Now they are gettting a bit scared that they may have taken on too much risk. They are looking to the Govt and the Reserve Bank to get them out of the Preverbiale. Why did they not instigate the rukles that they are looking to the Reserve Bank to introduce.

I recently commented on here saying that being CEO of one of the major banks was an all care no responsibility type of job - I certainly didn't expect this from the CEO of ANZ. I applaud you! V. impressed to see the honesty and integrity (still think the salary is a bit excessive though!...)

Don't be fooled. This is just good PR. They now pretend to all be "responsible lenders". BS!

They really fear mass deposit withdrawal, and with every drop in the OCR that becomes more of a reality

What about JK whose leadership is Teflon John, nothing sticks, not responsible for nothing ever, nothing to see here...So confused..

Are you best to call a spade a spade - or call it shovel. Knowing that either way it's digging the deep pit you find yourself in and getting deeper by the day. I'd rather just acknowledge it for what it really is. At least then, you find yourself dealing with reality and not some fictional dream that is all for self-benefit.

IO, IMHO .....he's a narcissist I believe so that won't really compute. Many politicians are narcissists at heart. This has been proven & published in the Personality and Social Psychology Bulletin.

I thought the Herald headline was totally misleading 'It's all about to burst'.
We know tabloids like sensationalism but....
David did not say it's all about to burst. He did, however, highlight some significant risks, and alluded to a growing risk of a burst.

I recall saying the following at least once before on this site. Wheeler has limited shelf life as governor of the Reserve Bank and probably in his working career. He will not want to be remembered as the RB Governor who let housing inflation get out of control and put the banks at risk. If the 40% deposit requirement does not work he will implement more measures. Landlords who have houses with regular turnover of tenants or major location or maintenance issues should take some money off the market. Look for more listings to hit the market over the next month or two.

....and a Capital Gains Tax and Stamp Duty and IRD enforce the 2yr buying and selling CGT rule. That'll keep House Priced Inflation in check for years to come.

A point many common taters have missed is that, irrespective of the yapping of the RBNZ, banks are free agents, as long as they stay within their regulatory envelope.

They are free to move harder, faster or in different directions. Period.

true, and they have done. But the environment and public opinion is changing waymad. People are becoming self aware of all the risks now. Banks can't be seen doing the wrong thing anymore.

Too late, nevertheless good write up. Only problem is there's no one at the other end listening...

I can't see Auckland's house prices dropping that much or at all. Since nothing has been done here to curb the influence of Non-resident Investors. And now that Australia has imposted new property tax restriction on foreign buyers (Non-resident Investors). Well they don't have to look too far across the pond to capitalise on little old NZ.

https://www.claytonutz.com/knowledge/2016/june/new-duty-and-land-tax-sur...

For any act on that you will have to wait until around or after the next election. To unravel all this BS will take some time as it's been going on for nearly 2 decades.

The banker states "The Auckland Council says we need a unitary plan that allows us to build up and out. That's logical but unpalatable to a vocal few."

We have a solution right here with us, have had it since the last 3-4 yrs. A lot of time and resources went into the AUP. I remember going down to the initial public presentation of the AUP at the Wynyard wharf few years ago. AUP might not have it all, but I believe if its "intensified a lot more", we will only look back in a few years time and not be able to continue wasting time and effort in talking about hse price inflation as there will be none as developers will get on with fixing the supply side and let exporters get on without worrying about the height of our dollar.

If it ends up costing more to build a house than you can sell it for won't construction stop and increase the undersupply?

Perhaps when pushed the bankers favour LVR limits over restrictive capital requirements for home loans, so they're firing off a few pre-emptive shots to muddy the waters (much in the same way the Wall Street big boys misbehave like sugar-fuelled spoilt brats every time the Fed hints that it might move the punch bowl from the floor to a very low footstool).

A proactive case of getting what you want instead of liking what you get.

But he does make some good (if not original) points.

Self serving piffle:
"Record low interest rates have played their part in this problem. But, because New Zealanders aren't good savers banks have had to borrow from offshore to fund this rapid expansion in housing lending."

The relentless flood of underpriced capital from overseas, caused by the excessive and destabilising trade surpluses of China, Germany and Japan, is the cause of the problem. Just read anything the Bank of International Settlements has put out in the last few years.

ANZ and the other Aussie banks are a major intermediate cause of the problem as they facilitate the inflow of dosh based on currency manipulation by China, Germany and Japan, and other legal and illegal money laundering scams. Do not look to them for insight and advice.
http://www.rbnz.govt.nz/statistics/s7

We are just rather pathetic in inventing defences against this flood tide of hot money looking for a home. It helps to identify the cause of the problem rather than just blaming the effects.

Well said. In the current paradigm more money in means a higher exchange rate, which means more money spent on foreign goods and services, and less on our own. And therefore less saving at a national level. This is a vicious circle.
The one nugget I was nevertheless very pleased to see in the article was the following:
"The Reserve Bank in Australia are already examining unconventional measures to do this" i.e. lower the exchange rate.
That would certainly leave the door open for the RBNZ to do the same, and the fact the ANZ are suggesting it means the commercial banks are unlikely to kick up a stink and lobby hard against it.
The only non conventional means I can think of involves printing presses, and direct funding of infrastructure, government spending or tax cuts. Maybe there is some other means.
But no matter, it is only this step that it seems to me can break the current vicious cycle.

The BIS have a paper about how China and Germany cheat their way to a current account surplus. I cannot see why we cannot come up with our own scheme. We are just the stupid honest fool at a corrupt high stakes game.
http://www.bis.org/publ/work424.pdf

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David says to decrease the value of the currency, but surely ratcheting up the costs of living for consumers at the same time a price correction rolls out in real estate is an economic minefield. Growth of any kind would come to a total standstill. The other issue is that we run the risk of ending up like other Central Banks, with near-zero or even negative interest rates, no room to move and an economy that is going nowhere.

The Reserve Bank is doing the Government's dirty work
John Key does not want to tackle the reason every man and his dog is investing in rental houses. It is not for the rent but a tax free capital gain with all your expenses, including interest on the mortgage paid for by hard working tax payers who cannot claim tax against their expenses.
It is only the tax system that will fix the housing problem but neither National or Labour have the balls to go there and will leave the reserve bank to bring in ineffective measures.