David Hargreaves says the new wave of competition between banks for mortgage business may prove to be short lived but it should certainly provide some life for the housing market leading up to Christmas

By David Hargreaves

There would be more than a touch of irony if the massive falls in business confidence we've seen over the course of the past year lead - indirectly - to a new lease of life for the housing market. But, strangely, that's what might happen.

A lot of things would have to happen for such a scenario to come to pass - but certainly the banks offering incentives for people to take up cheap mortgage money as they are at the moment would be one way to fire up a currently cool housing market. And the current behaviour of the banks is in some way related back to that falling business confidence.

It is easy to forget and to underplay how much of a part easy access to cheap money played in the explosion of the Auckland housing market in the earlier part of this decade - and the subsequent flow-on of rising prices in the provinces. 

Now the banks are at it again. And it's worth taking a moment to consider just why that would be the case.

The Reserve Bank's most recent monthly sector credit figures detailing what the banks and other financial institutions were lending across business, agriculture, housing and consumer credit as of September were very notable in that they showed a declining rate of growth across all sectors. 

The confidence effect

Defining cause and effect in lending and deposit patterns is not necessarily straight forward, but we can say with great certainty that since the Coalition Government came in last year everybody has been bombarded with news of plummeting levels of business confidence. Confidence has fallen even as the underlying economy has continued to buzz along pretty well.

Obviously though the thing about falling levels of confidence is that they can become self-fulfilling. If businesses lose the confidence to invest and to take on staff...well, everything starts to grind to a halt.

There's been no obvious sign at all of things grinding to a halt based on recent economic stats - indeed the most recent labour, GDP and inflation stats have all come in much hotter than expected.

However, we have seen volatility in business borrowing. Agricultural borrowing has been at subdued levels really since the price of milk tanked a few years ago. Personal and housing borrowing have remained generally remarkably robust. But these two have slumped in recent months too - as possibly consumers get infected with the general loss of confidence too.

It's worth looking as at September on what the annual borrowing growth rates were for the various sectors. As I indicated higher up this article, ALL of the annual growth rates were down in the past month. The total outstanding for mortgages grew by 6%, personal consumer borrowing grew 4.7%, business borrowing grew 4.9% and agricultural borrowing rose just 2.6%. So, those falling levels of business confidence seem to be having some effect.

Dealing in deposits

If we examine the other side of the ledger though it's a different story in terms of households and term deposits. If we look at the RBNZ's monthly series on bank deposits by sector, we can see that term deposits held by NZ residents as of September were nearly $163 billion, which was up over 10% on the figure a year ago. Give or take a million dollars the term deposit figure was up $15 billion. Is that possibly related to falling confidence as well? Stick the money in a safe place while all around is uncertainty?

The total of bank mortgages outstanding actually rose by less than $14 billion over the same period. So, yes, banks took in over $1 billion more in term deposits from customers than they loaned to customers for mortgages in the same period.

This is quite a marked reversal from the situation we saw early last year, when deposits were slowing markedly. Then, because the banks were struggling to attract new funds, they started pulling back on lending and putting more restrictive terms on lending.

But now, relatively, the banks are flush with deposits - but the lending figures have been, again relatively, stagnating.

What do the banks do if confronted with such a situation? Well, time to fire up the mortgage market again. So, very indirectly, a fall in business confidence = banks going head to head to lend more money. Good news for customers. Potential ramifications for the housing market.

The fight for a shrinking pool

Early last week before we saw the serious re-ignition of hostilities between the banks, Westpac New Zealand's Chief Executive David McLean noted that he was seeing things "hotting up" between the banks in the mortgage market and he observed that: “If people think that the volume might be down a little bit some lenders might be trying to keep their existing dollar value of volume the same – in other words supplying an increased share – so we see early signs of a bit more increased competition around mortgage lending, which as I say, would be quite normal for this time of the year. It is definitely hotting up."

Essentially then we have a situation where the banks, facing a situation where their levels of lending may start to fall, are looking to grab market share from the competition. And when that happens it's great for the consumer, people get great deals on mortgages ...and the housing market? Well...

The key question in all this perhaps is to what extent this heightened activity between the banks will lead to new mortgages (which would fuel the housing market) and to what extent we will simply see existing mortgage business moved - so, in other words a shuffling of existing business between the banks. The hot rates are not being offered on high LVR mortgages, which suggests this is more driven by retaining existing business or getting existing mortgages shifted. Either way though if people are getting better deals on mortgages they will probably feel better off financially and this may encourage spending and it may even encourage some people who hadn't thought of moving house to make a move.

One very interested party to all this will be the Reserve Bank. It has its latest Financial Stability Report coming out on November 28 and this will address the housing market and the question of whether the RBNZ will decide to further relax the limits on high loan to value ratio (LVR) lending. If you recall, when releasing the FSR in November last year the RBNZ did then announce a loosening of the restrictions, which took effect at the beginning of this year.

Plenty to ponder

So, the current hotting up of competition in the mortgage market along with the latest monthly Real Estate Institute figures for October out this week will be two key considerations for the RBNZ in deciding whether now would be a good time or not for further relaxation.

I would have said absolutely not, given the current signs, but this is an RBNZ that's looking more relaxed about the prospect of the economy running a little hot than the RBNZ we've seen in recent years. Only last week we saw the RBNZ put out new forecasts that showed future inflation going above its explicitly targeted 2% level and yet the bank remained seemingly very relaxed about the prospect of no interest rate rises for now.

All in all then the run-up to Christmas is going to be very interesting indeed. How long this burst of mortgage competition between the banks will last is anybody's guess. 

As far as I can see though, it all points to a summer for the housing market that will be more buoyant than many people expected. 

Clearly that could prove to be short-lived, but if KiwiBuild continues to struggle to gain traction then the supply-demand situation, particularly in Auckland, is going to continue to be out of line. And that just might underpin house prices over the next year.

The good news from the Government perspective is that a more buoyant house market would certainly do great things for consumer confidence. And that would probably, ultimately, give a boost to business confidence too. Going full circle, I think they call it.

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

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61 Comments

When a place like Phil's (ex-AC/DC) goes on the market; a person with as much financial advice as you can shake a stick at, you know he's following John Key and getting out while there is still a buyer about!

https://www.trademe.co.nz/property/residential-property-for-sale/auction...

I think the resigning of the Harcourts CEO yesterday speaks volumes.

The thing is, he ain't retiring...

What's going on now is all part of an adjustment process following the pronounced market upswing of 2014-2016.

It's a "soft-landing" scenario - in the form of a flat/steady housing market (particularly in Auckland) continuing over an extended period.

There's been no major drama.

Business as usual......

TTP

I hope you're right. Because if that's not the case, it's going to be shocking - in all senses of the word.

"I hope you're right."

Very happy if you base your judgement of me on my (housing market) track-record since April 2017 - when I formed my current position.

That position has been well-articulated to everyone here.

TTP

Well, not in all senses of the word. Nobody would bet electrocuted as a result of a property crash.

Properties crash; distressed owner takes a hairdryer to bath? ( It used to be 'stick their head in the gas oven' way back) But point taken!

Have you ever had a group of alcoholics invite you to join their drinking sessions and thought, given the state they're in its not a good idea to join in, regardless of how much fun they tell you they're having?

Sounds like my very early twenties. Difference is most of us seem to grow out of drinking so much but we haven’t grown out of our love of leverage just yet.

Hi Independent_Observer,

Anyone serious about business/property and making high-quality decisions doesn't get involved in baldy drinking sessions.

I think your post is rather odd.

TTP

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17

Ever been in the eye of a storm and noticed how calm it is?

I'm calling for a round of applause for that!!

Well played sir.

Hi Mick Twatta,

You'd be better off calling for the facts - rather than a meaningless round of applause.......

TTP

Don't bother - Pointy seems to fail at analogies.

Comment officially stolen! I will be using this description a lot at work coming up.

Pure gold description of the degrading world markets/environment at the moment.

https://www.forbes.com/sites/andrewdepietro/2018/11/12/cheaper-own-vs-re...

Despite the Yankee dollar, despite the numbers counted, despite the way this looks.....be calm.........our prices are only a tad.....ridiculous.

See if this adds up....to your way of thinking....see if leverage works in America....or is it just here.?

Guess this assumes no significant rises in interest rates nor recessions/job slumps over the period of mortgage servicing?

We all like to talk about what we know best, for a few on this site it's property, for others it's alcoholism

Surprised we don't have worse alcoholism figures given the pressure were putting on each other to simply get by (caused perhaps by the few who want to much)...

Do we have alcoholism figures? These stats could be representative though:

• The number of New Zealanders aged 15 and over prescribed antidepressants has surged by 21 per cent in seven years, from 10.4 per cent in 2008 to 12.6 per cent in 2015.

• Pākehā women aged 65 and older were the highest users with 22.8 per cent nation-wide prescribed antidepressants in 2015.

• Mental health experts say these figures have increased dramatically in the past three years.

• Researchers say there's no evidence the increased use of the drugs has curbed New Zealand's alarming suicide rates.

https://www.nzherald.co.nz/health-wellbeing/news/article.cfm?c_id=150123...

It surprises me that Pakeha women 65 and older are the highest users of antidepressants. Is owning expensive houses, driving Audis, and going to book clubs that depressing?

In saying that, I've got know the behaviour of some (not all..) of their stale, pale, male husbands who are holding on far to tight and seem to have forgotten what humility looks like, so guess I might be able to understand where they are coming from...

Wonder what the mix is of married vs. widowed / divorced. Loneliness could be a factor.

Other than being married to grumpy old men...

Grumpy old men with property portfolios...loved by the banks, less so by their wives...

Look at the stats re elderly financial security and you may find part of the answer. Many females of that age are in dire financial positions usually from a divorce in their 50s, then add the social aspects of possibly being estranged from family, health issues from childbearing years etc. I'd say as many are partial alcoholics as well with four or more bottles of wine per week.

Is our society broken in some respects or just me?

From my admittedly conservative point of view, society is broken in some respects and I see the socialist agenda accelerating that. No amount of financial assistance from the State can repair what broken relationships do to people past their prime.

Basically 'I've turned into a grumpy old man because of capitalism (I'm lead by Adam Smiths invisible hand where self interest is supposed to benefit all but it really just appears to corrupt the soul), but by hell I'm not going to support any social policy because my character is too broken to be concerned about the welfare of others? Is that the case? (I've taken this to the extreme to try and make a point..)

I am very concerned about the welfare of those who depend on me. It's at the centre of every major decision I make. If others acted the same, I suspect the State wouldn't be taking nearly as much tax as it does.

Not just you and in many respects yes.

What is society? A sum of individuals? "It is a sad measure of health to be adjusted to a profoundly sick society"

How does one heal at an individual level (necessary to have any wider influence) if 1) they don't want to or don't believe they are ill? 2) if the environment (society, system within which they live) is a major cause of their illness?

Catch 22? Damned if I do, damned if I don't!

The market stalled in Sydney and then Melbourne before starting to plummet. It's way too early to call it a soft-landing, as it's still going up in parts outside Auckland. These things take time to play out. If people are thinking of buying, what's the rush? FOMO is gone in Auckland, and may still turn to FONGT (Fear of not getting out). It's about 8% down now in Sydney, and AMP & Macquarie are now forecasting up to -20% down there, after saying it will only be -4-6% a while ago. Watch out I say!

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NZ's already saturated banking sector signing more up to debt already priced at 70 year lows. What could possibly go wrong after the adrenaline rush wears off. The patient is still sick.

Indeed, and the property spruikers will make a big deal about the REINZ figures (I expect Auckland to be flat ±1%, volume up on this time last year, rest of country up 2-4 of % yoy) and conveniently overlook that it was the last minute rush before the FBB.

Signing up more debt or trying to capture market share with a large number of exisiting loans due to roll over? Or trying to soften the burden for those whose debt is rolling over as it definately isn’t good for banks if borrowers start defaulting? My guess is a mix of the above.

The banks all want the same tier one mortgages on their books, with moderate LVR, owner occupier and income to support. You can shop around. Those customers on interest only, high LVR , and recently acquired investor mortgages will struggle to switch banks , or alternatively will be unlikely to obtain better terms with their existing banks. REINZ sales volumes will provide further indication that real estate sales volumes have not reached their bottom yet They are still trending down .

RBNZ has just come out saying they are looking at the LVR's (reduce) that is not a sign of confidence in the housing market

Makes you wonder what is being said in meetings behind closed doors between the banks and the RBNZ.

Look at the supply levels on the Auckland market. Its up massively! Servicing still requires levels at 7% which many new buyers can't meet. These lower rates will mainly attract existing home loans coming to fruition and looking for a new lender. They will attract new buyers as well, but possibly not many. Banks scrambling to win borrowers in a shrinking pool.

Yeah I agree. Limited impact

It does sort of look like the tide has turned. The article looks at domestic issues, but it may be driven by what's happening in China. No one seems to be looking at this, too naughty to question immigration rights perhaps? China could be on the verge of an implosion, just like the collapse of the USSR, and more importantly, the Japanese bubble. Are we having a replay of world events 30 years later? Hopefully the Chinese dragon will be tamed without another Tiananamen Square.

Is there a rush of money back to China to repay debt? How would we know?

I agree. Globally things are not looking good, especially in China. I have been telling people for a while now that we could see the next crisis come from the Australasian region as China, Australia and NZ are all in vulnerable positions compared to when the last Global downturn hit.

Yeah seen it all before. Anyone else remember the outflux of Japanese money from the Gold Coast when their bubble popped? Well, we could see a similar thing happen in cities like Auckland with Chinese money.
Oops I nearly forgot, China will never have a downturn and we will never have a property crash

Question - The chicken or the egg? Are the banks responding to lower business confidence and demand for funding by trying to push more money into housing or has the the bank's recent drive to improve their lending books caused in part the lower business confidence?

It shouldnt make any difference what the promotional rate is - banks are supposed to assess borrowers based on a stress level of around 7%. So its not like people who wouldnt qualify for a mortgage at 4.2% can suddenly qualify for one at 3.9%. They are simply shuffling the deckchairs on the Titanic.

Auctions are failing - left right and center and only those properties are selling where Vendor has to sell and is selling much below RV (With few Exception) and anyone who bought on or after 2015 is most probably bound to make a lose.

20% to 30% properties that are being sold are those properties where vendor has to sell for one reason or the other.

So all FHB should not rush but try to strike a deal and in current market scenario will be luck atleast in 1 out of 10. Buy sensibly as now will be buying in falling market. So going forward earlier if the property was worth 800s was going for 900s (based on future) - similarly now if the property is worth 800s should offer 700s (based on future) to be safe as one thing is definite that the current boom is over and now whatever one buys will have to hold for quite some time.

Have a flick through the residential auction results page on here, there are some high end properties that are selling for silly amounts, but anything remotely speculative or less than desirable is just not selling unless its heavily discounted.

richard1965, do some research before writing nonsense

"only those properties are selling where Vendor has to sell and is selling much below RV"

This is quite simply NOT true

I agree Yvil, prices are not all going down but we are starting to see more fluctuation around the RV value.

Core Logic estimate update - My home moved from 97.4% of 2017 CV on 4/11/18 to 100.4% on 11/11/18. There must have been some local sales.

On another note. If your Kiwi relative was killed in WW1, they should have a cross on the field of Remembrance at the Auckland Museum. As of 15/11/18, you can collect that cross. There are no formalities. Posted just as I'd like to see as many crosses collected as possible. My family has three to collect.

And with a thud our relatively light hearted meanderings on the housing market are brought back into perspective.
One hundred years and still remembered.

If you can see Peter Jackson's "They Shall not Grow Old" in the cinema or *somewhere* online, it's absolutely stunning, powerful and poignant. A must watch for everyone.

I'd missed that. Thanks for the info. I'll watch that tonight at the cinema.

Only available at a couple of cinemas in Auckland as far as I can make out. Northcote, Epsom and Howick according to Flicks, I wasn't aware it was even being released here so that's a positive, shame it's not more widely available though.

It's a heartbreaking display, eh. My wife is in tears every time we go there.

Makes you feel incredibly lucky and privileged to get to live out a normal life, because those guys didn't. Also makes you want to respect their legacy by preserving the good things about our society and working to make it better.

Very humbling.

Hi Ex Expat,

Thanks for that information - much appreciated.

Condolences to your family.

Sincerely,

TTP

Wonderful news for those who have had the courage to stick with their convictions and not sell

If you're in a position where you don't have to sell and can weather a down turn - good on you as far as I'm concerned.

Something tells me TTP and THEM AN might be a tad exposed.

Yvil as well.

Big hat, no cattle.

You know nothing about my hat or my cattle.

You know nothing about my hat or my lack of cattle. - FTFY

Hi saving4AUhouse,

Indeed - I'd be devastated if my Hillman Hunter was repossessed.......

TTP

Will be interested to see if the volume of houses on the market continue to rise or if there is a fall.

Rise = the banks are stealing mortgage owners from each other
Fall = new buyers are jumping in on lower rates.

Not a perfect statistical analysis, but will spark conversation.