By Gareth Vaughan
The Auckland housing market is not an area of significant risk concern for banks at the moment, but it would be if the current high price rises continue, says Westpac NZ CEO David McLean.
Speaking to interest.co.nz after Westpac posted its interim results yesterday, McLean said if Auckland house price growth continued at current levels and didn't moderate, eventually it would get risky from a bank risk perspective.
"It's not an issue of real risk concern for the banks at the moment and so therefore we're happy to leave it to the policy makers (such as the Reserve Bank and government) to come up with a solution," McLean said.
Last Friday government valuer Quotable Value said the average Auckland residential property value hit $809,200 in April, up 14.6% compared to April last year. When adjusted for inflation Auckland values are 14.5% higher over the past year and 27% above the 2007 peak, QV says.
Of Westpac's $40.7 billion home loan portfolio, 43% is in Auckland.
Although expressing a reluctance to weigh into the debate on how the Auckland housing market could be cooled, McLean said it was fundamentally an issue of supply and demand.
"You've got to address one or both of those things (supply and demand). (But) public policy's something I'm reluctant to get into debating."
In terms of a capital gains tax or some other form of property tax, McLean said any solution wasn't merely one of those measures on its own.
"Sydney has capital gains tax and stamp duty and their house prices have been rising at the same rate as ours," said McLean.
Stress testing 'doesn't show alarming levels of loses'
Nonetheless he would like to see price rises moderate.
"We would be concerned if the growth kept on going and didn't moderate and eventually things would get risky from a (bank) risk point of view," said McLean.
"In terms of our own lending book, we do stress test it regularly. We do it ourselves and we do it with the Reserve Bank. They apply very, very severe hypothetical assumptions."
"Some of these scenarios are very, very extreme and all the testing we do doesn't show alarming levels of loses," McLean added.
LVR speed limits derisking banks
The Reserve Bank's restrictions on trading banks' high loan-to-value ratio residential mortgage lending have helped derisk banks, he added.
"The Reserve Bank's over 80% LVR restriction has meant that the actual risk in our book has come down because we've got a lower level now of over 80% mortgages. It was 21%, nearly 22% (of Westpac's home loan book) before the restrictions came in. It's now 17%. And of course every month we're writing over 80% loans at about 6% or 7% (of total new mortgage lending), so every month it's coming down again so the level of risk in the book is lower," said McLean.
Westpac says it uses a servicing assessment approach to determine borrowers' capacity to repay mortgages. This includes an adequate surplus test and discounts to "certain forms" of non-salary income. Also included is an interest rate buffer, which in the current interest rate environment is in the range of 2% higher than the standard lending rate.
"When things are going well like now you've got to look at everything and say 'are we writing business today where the risks are hidden?' And everything we're testing seems to indicate that we're not," McLean said.
Auckland the global city
Meanwhile, he said there were a range of ways to look at Auckland house prices.
"One way that somebody has come out with recently is if you look at global cities (such as) Auckland, Sydney, Melbourne, New York, Hong Kong, we're not out of whack. And if you think of Auckland as a global city, on those sort of metrics, we're not out of alignment with that," said McLean.
He was referring to a Core Logic report commissioned by Westpac for internal consumption.
This article was first published in our email for paying subscribers early on Tuesday morning. See here for more details and how to subscribe.
We welcome your comments below. If you are not already registered, please register to comment
Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.