Economists have differing views on whether the cheap money lending programme for banks to be announced this week will be specifically aimed at lending for businesses or will be available for banks to lend wherever, including on houses

Economists have differing views on whether the cheap money lending programme for banks to be announced this week will be specifically aimed at lending for businesses or will be available for banks to lend wherever, including on houses

The FLP is coming. But will the cheap money available to banks from the Reserve Bank be given to them with a clearly stated preference they must lend it to businesses? Or will it be generally available and possibly for more housing lending? And could that add further fuel to an already blazing house market?

Well, economists have somewhat differing views on how the FLP - Funding for Lending Programme, the details of which are to be announced by the RBNZ this week (Wednesday, November 11) - may be applied and targeted.

We know that the RBNZ is going to give details of the new programme.

We don't know how much it will be for - though a size of $30 billion to $50 billion is being estimated by economists.

We know it will be 'cheap' money but we don't know what exactly the interest rates will be to the banks. Will the FLP targeted at around the level of the Official Cash Rate, IE 0.25%? Or will it be slightly higher? Or possibly, even, slightly lower?

We don't know whether the RBNZ will tell the banks what they can use the money for - IE will it intended for business lending or can it be used generally - which could well mean more housing lending. Well, let's face it - it WOULD mean more housing lending.

And we don't know when it will start. Probably soon. Certainly before the end of the year. A December 1 start date is being suggested by some.

Kiwibank chief economist Jarrod Kerr, senior economist Jeremy Couchman and economist Mary Jo Vergara say a guaranteed source of cheap funding (through the FLP) means banks would not have to compete as hard for term deposit money and wholesale funds. Lowering banks' cost of funding will help to lower lending rates households and businesses face.

"Lowering rates should boost asset prices and put downward pressure on our exchange rate. But lowering rates will hopefully boost the demand for credit which has been lacking, understandably. Uncertainty makes it difficult to plan ahead," the economists say.

"An approach to encourage greater business investment is to target the FLP toward business lending," they say.

"The facility for example could be accessed only if the funding is on-lent to business.

Keeping it simple

"The RBNZ, however, has expressed a preference to keep it simple, to ensure take-up.

"A blanket approach is expected, but a targeted approach is wanted," the Kiwibank economists say.

ANZ economists also think the brief to banks on usage of the FLP will be broad.

"The RBNZ will want to maximise effectiveness in terms of reducing retail lending rates," ANZ chief economist Sharon Zollner and senior strategist David Croy say.

"We therefore expect relatively few strings to be attached in terms of where the associated lending should be directed in order to encourage take up."

Where the impact will be

The ANZ economists also offer a view of where most of the impact of the FLP will be - at least initially.

"We expect the FLP will be successful in driving retail interest rates lower, but this will primarily fuel the housing market more than it will business investment, at least initially, given the stage of the business cycle we are at."

Westpac chief economist Dominick Stephens IS, however, expecting the FLP to have a business lending focus.

And he says a rapid rise in house prices is not a ‘good look’ during what is still a tough economic time for much of the New Zealand population.

"Perhaps banks will be able to borrow more under the FLP if they increase their loans to business, or small businesses," Stephens suggests.

"This is the approach that the Reserve Bank of Australia has taken.

Some strings attached

"Attaching strings to the FLP in this fashion is likely to reduce the total effectiveness of the programme, but it will direct more of the monetary stimulus at businesses rather than at house prices.

"Most importantly, tying the FLP to business lending will publicly show that the RBNZ is sensitive to the impact monetary policy can have on house prices," he says. 

ASB senior economist Mark Smith says the RBNZ will want to keep the FLP scheme simple so as to encourage strong take-up "and may offer incentives to promote more lending in some key pockets".

"The RBNZ will need to get the design details right and keep it simple so as to achieve a strong take-up of the programme, maximise its effectiveness and support business lending, whilst still ensuring that the FLP does not put a rocket under the housing market," Smith says.

"This may prove to be a tricky balancing act and may prompt the RBNZ to tweak other policy settings, rather than create a system that is too complex and unwieldy."

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35 Comments

In my opinion it should be targeted for businesses only but I think the RBNZ will let the banks lend for any purpose, including real estate, we shall find out soon

Seems like the decision will be telling. If they include RE the recent boom wasn't an accident.

Except housing is now a major part of the NZ economy. It shouldn't be IMO, as long term it may not be sustainable. Importing people to buy houses also needs significant infrastructure costs to deal with an increased population, which hasn't occurred.

Has here even been any 'conversations' on how large NZs population should be?

Yvil,

I agree. This money should only go to businesses. But, no matter what the interest rate is, the banks will only lend based on their normal criteria-Unless they are given an RB safety net. Sadly, I can see most of the money going to add fuel to the already overheated property market. Not that it will achieve anything, but I have told the RB what I think and just why negative rates would be both economically and morally wrong.

Is Grant Robertson meeting with Adrian Orr today to discuss exactly what is debated in David's article above?

13
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How do you want your FLP, sir? Targeted? Or Untargeted?

Obiviously Tareget it to Housing Market as that is the only Business is NZ and our (Mr Orr's) focus and agenda

13
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Just think of any way the housing market can be curtailed and take the opposite approach when trying to forecast the RBNZ actions.

LOL so true. Sometimes it seems that the NZ Property Investor Federation is at the helm of the RBNZ. Who cares about the real economy and the structural stability of the NZ financial system, for as long as we can keep selling houses to each other with a profit.

It has been said before - a key criteria will be the term the loan the borrowing will be for
If you can borrow at 0.25% for 30 years go for it
If it's only for one or two years, forget it
Can you find one business that is on its knees, in debt up to its ears, and willing to borrow more
Find one, or two or three for me please

12
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Ha why do we need the commercial banks?

RBNZ could limit credit supply and bring down home prices without the rest of the economy imploding.

We've really got to get over this betting the house mentality and expecting our unborn to pay the gambling debts.

Noriel Roubini's consulting company has done a paper a paper on FLP.

https://content.rosa-roubini-associates.com/rbnz-preview-nov20/

Password?

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Where are the businesses with great plans to expand who aren’t doing so because interest rates are .25% too high? Maybe this program should be put on hold until they can find at least one.

Except business interest rates are high, relatively speaking: see Interest.co.nz's own summary page: https://www.interest.co.nz/borrowing/business-base-rates. 8-12% p.a. is very common for anything not secured by property.

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Q. Why did the Reserve bank governor spend $15k repairing a $10k car?

A. He knew the car was an asset, and that the $15k wasn't.

Keep chasing those waterfalls Adrian.

Saw that car last Xmas day at a restaurant. The governor and my family were in attendance at separate tables.

Ouh C'mon.. any govt at the helm the past 15 years Never stating that the car need repair, all the car passengers though do complain about the rough ride, but the current lead lady driver, just calmly acknowledge.. that is 'only' tyres need to be replaced (tyres supply she meant), and by the way the car was old, antique, classic, no airbags, no seatbelts, no abs, no ebd, no vsc, a rare gems by world standard? Hence, very high $$$ value, in all honesty you don't wanna let our OZ cousins to find out that the claim $10k car is just worth much less than that.

Please correct me if I am wrong, but the FLP is like other programs around the world?

Those being protecting the net interest margin of commercial banks when the central bank drives interest rates into the ground for the `understood reasons`, using the country (via tax-payer, or local value of money) against the rates they would have to pay offshore or to savers, so they can in some sense, ensure executive bonuses and shareholder dividends?

I'm really not sure the FLP will help the banks with their NIM's, they'll borrow cheaper and lend cheaper, will the NIM's really change? I think the NIM's are more a factor of lending competition

Not sure I agree, offshore is extremely risk competitive, and otherwise the saving rate that wont result in outflow.
Also why would it not help net interest margin, lost on that bit. That is the goal obviously, cheaper rho from the country bank?

Say ANZ London is issuing eurodollars and the World Bank is issuing NZD monetised by our local banks and they engage in a xccy basis swap to land hedged domestic NZD funding? - The RBNZ lifted restrictions in this area of financing, but it is prohibited by the basis rate the USD/eurodollar lender pays to the USD borrower and rollover risk.

And.. A complicate confluence of FX vs. Simple NIM bump, local govts everywhere head to the inevitable, whose name we do not speak?
Do you really think the NZD is that powerful? Occam's razor and all.

$50 Billion / $350,000 = 142,857 Houses?

$350,000 might seem low for a house and land package .. but is surely a reasonable figure when buying in bulk?

Will we even get 100 Thousand Homes for this $50 Billion? Or will house prices go up and maybe 393 additional houses get built from this stimulus.

Just sounds like Interest Rate Apartheid to me. If you have a business or mortgage, you can borrow money at near zero percent. Otherwise you're looking between 10-1000%. This is totally stifling to entrepreneurs/innovators .. and a disaster for our economy.

It would be one thing if this cheap money went to foster productive businesses and housing initiatives/developments. Unfortunately too often it's going to zombie businesses and overleveraged property speculators, who are NOT adding to supply.

Way too low. Think you are talking 500k minimum these days. 1 million seems about the price of a average new house in Wellington satellite cities. 500k in those areas will almost be a tiny house.

It's mainly the land value though, isn't it? You can build a nice place for 250K.

Good luck with that.

For a "nice place" the build cost is about $2'500/m2 so if you want a 200m2 house that's $500k + land and fees

Kit set homes "Full Build prices start from $133,980 + GST - Pack only prices start from $69,700 + GST". That's off the easybuild website.

Also lots of additional costs. Council costs, foundation slab, all the costs connecting services etc. .

Can get that rate in New Plymouth quite easily provided you aren't building on a cliff (>10% slope in my book) or need special foundations or want gold plated taps or a marble kitchen bench top. I've seen new houses in the last 2-3 years around here where foundations have cost anything from 10k to 50k above normal foundation costs for a flattish section. Few of the new houses built here in the last 2-3 years are less than 150m2 and more likely in the 180 to 200m2 range. So yes a reasonable sized house of 150m2 including a double garage can be built for about $375k
A 100m2 house is quite adequate for a starter house.
As usual the land is usually the killer.

Land should be cheap in many places in NZ, as NZ has plenty of land.

Oh, those poor wee banks, poor things, fancy having to "compete' for deposits. At such high rates, too. What will they think of next?

It's as if a Government entity interfering in the market destroys the market and creates bubbles.

Adrian, if you are going to pseudo-nationalise the commercial banks by providing a cheap money source so they can print your money, make sure you get dinner for us all first by taking lots of their equity, least there be a cold dark uncomfortable night afterwards.

Of course it should be for businesses only. We do not need to inflate the NZ housing Ponzi, we need to grow the real economy, not the "real estate economy".