Standard & Poor's (S&P) says a fall in house prices of up to 20% may not harm New Zealand banks' credit ratings, but "robust" house-price growth, especially in Auckland, continues to elevate risks in the financial system.
The comments come in a report from the credit ratings agency that says Asia-Pacific's residential property boom may be waning as the region's economic growth rate slips. China yesterday reported September quarter Gross Domestic Product of 6.9%, the economy's slowest quarterly expansion since 2009.
"A slowdown in Asia-Pacific's real estate markets will test the credit quality of the region's financial institutions, property companies, and other related sectors," S&P credit analyst Terry Chan says. "Residential price appreciation in Malaysia, Australia, and New Zealand remains a key risk to bank ratings. That said, the banks there are reasonably placed to absorb price shocks."
The latest Real Estate Institute of New Zealand (REINZ) figures show Auckland's median price reached a record high of $771,000 in September, an annual increase of 25%. The REINZ data also showed strong increases in the Waikato and Bay of Plenty.
S&P tested the potential impact of three scenarios covering hypothetical falls in residential property prices and household disposable income.
The first scenario features a 10% decline in housing prices with no change in household disposable income. The second scenario involves a 20% decline in prices and 2.5% decline in household disposable income. And the third scenario includes a 30% decline in prices and 5% decline in household disposable income.
"Continuing short-term residential property price appreciation is an identified key risk to bank ratings in Malaysia, Australia, and New Zealand. Hence a retreat of property prices in these markets may, depending on the prevailing economic circumstances, have a solidifying effect on ratings at current rating levels, lessening the possibility of future bank downgrades associated with continuing rampant price appreciation," says S&P.
"For Malaysia, Australia, and New Zealand, we believe that a 10% or even 20% property price shock potentially may not impact bank ratings. Property sensitivities as they affect banking sector credit strength are hardly a flash in the pan for these markets."
"In New Zealand, we believe that robust house price growth - particularly in Auckland - is elevating risks in the financial system; hence, on August 14, 2015, we negatively revised our Bank Industry Country Risk Assessment (BICRA) on New Zealand and at the same time took various negative rating actions on financial institutions. This negative BICRA change followed an extended period whereby New Zealand's previous economic trend was negative primarily because of property concerns," says S&P.
"As for Australia, our expectation is that a 30% drop in property prices and a 5% decline in household disposable income could have a more severe impact on the New Zealand banking system. In our view this scenario would coincide with a significant rise in the unemployment rate and a drop in GDP growth, resulting in economic imbalances reversing and New Zealand moving into a correction phase; in this scenario credit losses across all asset classes would have a high impact on the banking system."
Potential ratings downgrades could result from a revision of S&P's capital and earnings assessments, and could also stem from a downward revision of S&P's BICRA assessment on New Zealand.
Meanwhile, S&P describes Hong Kong, where house prices have risen 45% over the last three years, as having the most resilient banking system in the Asia-Pacific. Hong Kong banks are, according to S&P, likely to be the region's most resilient to a house price shock.
"This is not completely surprising given Hong Kong households' proven resilience to extreme price movements such as the circa 70% decline in house prices between the 1997 Asian Financial Crisis, prior to which house prices peaked, and the 2003 Severe Acute Respiratory Syndrome (SARS) pandemic. During this time, banks' problem residential mortgage loans increased to only about 1.5% of total residential mortgage loans," says S&P.
Based on REINZ figures, Auckland house prices are up even more than Hong Kong's over the past three years at 50%. New Zealand prices are up 31%.
Elsewhere in the region India, China, and Japan may be more sensitive than other banking systems to a 10% to 20% fall in house prices, says S&P, with Chinese property developers "highly sensitive" under the scenarios evaluated.
"Between half and three-quarters of the ratings in this sector could be lowered," S&P says.
21 Comments
very interesting. Hopefully they start deleveraging immediately.
This makes me want to start thinking about where to take my little savings when the correction begins.
I hope my girlfriend still likes me when I get some golden teeth implants because I cannot think of anything safer than that to protect my accumulated value from the desperate gamblers once they start loosing it.
bail out is never designed for people.
If you're leveraged the bank will take your assets and will try to sell them.
Your debt will remain.
Banks will be flooded with overpriced assets in their balances that are not worth what the paper says so they will bankrupt as they will refuse to sell them at real market price.
And THEN is when the bail out happens through a haircut on deposits (OBR)
Hopefully by then people in NZ do what we must do. We have the Iceland example.. and they seem to be doing alright.
When the paper value of the assets are no longer covering the leverage then the bank is insolvent surely? Then the OBR happens, the control of the bank moves to the RB and shareholders and if need be depositors take the haircuts?
Icelandic banks, except their dept was foreign debt/deposits. NZ has a different profile surely?
For a % of Auckland houses that have boomed, OK. but if we saw a 20% drop I assume that is nationwide? On top of that many areas in NZ are pretty flat so could take many years to recover the negative equity inferred. The Q is why is 20% a reasonable drop when we have seen parts of the USA drop 30%+?
A 30% decline might be a bit optimistic
http://www.newgeography.com/content/004058-urban-containment-and-housin…
"Our annual Demographia International Housing Affordability Surveys had shown house prices in the Dublin area to peak at a “severely unaffordable” median multiple (median house price divided by median household income) of 6.0, well above the normal 3.0 relationship between prices and incomes. Paying more for housing reduces household discretionary incomes and lowers the standard of living.
After peaking in 2007, Dublin house prices plummeted. Single family house prices fell 53 percent from 2007 to 2012, while apartment prices dropped 61 percent, according to the Central Statistics Office property price index (Figure 3). This year, finally, prices have begun to trend upward."
Dublin peaked at a median multiple of 6 - Auckland now at 9 ++ . Tauranga now at 6!!
http://www.interest.co.nz/property/house-price-income-multiples
No doubt someone will comment that NZ has control of interest rates - it's only got 2.75% to play with though.
Also the Republic of Ireland has a 12.5 corporation tax rate.
The major diff is not the interest rates its the over supply of housing stock both US and Ireland built during the price boom, the building boom bringing in Polish workers, which further stocked the local economies and caused a temporary demand for accomodation. The tide turned, all the Polish workers left at (demand drop) just after a massive supply of new builds had been dropped into place.
US same story, cheap bulk building of houses over and above demand in heated markets.
NZ hasnt had this and is struggling to get builds going.
A lot of those Irish Houses were built in remote areas - would not have impacted on supply to the Dublin market.
http://www.slate.com/blogs/behold/2014/08/10/val_rie_anex_photographs_g…
Remember also that Dublin peaked at a median multiple income of 6. The Australian lenders are still lending circa 7 times joint income in NZ.
It's not simply a supply issue - cheap and excessive credit has vastly inflated prices and perversely stoked demand.
What price Auckland house prices if RBNZ had mandated a maximum LTI of 3.5 as the central bank of ireland has recently done.
People can build houses for 250k, 130-150 sq m in NZ. If enough land gets freed in auck and enough developers eye up 600k builds (costing them say 400k all up), and bring several thousand online at once, which they havent managed to do yet, at the same time immigration in NZ turns negative (which hasnt happened yet either, and has only happened in the past due to the AU mining boom, which looks a long way from happening again...) then I could see falls of 20% plus magnitude. But it would need another 2+ years of extreme over building along with prob another 20% price increase in auck (any sign of price falls likely to stop developers in tracks before the builds even get going) before this would eventuate. The pockets of freed up land in undesirable areas just arent enough to create this dynamic in my opinion, and so we'll see flat lining prices, and flat lining consents, and rents increase as there people compete for a roof, and people leaving auck for the regions, where prices will jump 50% over the next 2-3 years
Unheard of? Were you not around in 2006-2007? 7x household income in secondary cities common.. 10 years of flat or falling prices with 20% income increases have seen these come down into the 4-5 handle range; but Auckland at 9x means many smaller cities likely to rise back to 7x if Auckland prices remain high pushing investors and home owners looking for better value into the regions.. already happening big time in ham and tga
Same here. Instead of leaving I wrote several letters to ministers citing demographia studies. 9 years on not a hell of a lot has been done. The only solution (think atlanta USA) is to free up massive amounts of land to be zoned as residential. After seeing the govts pathetic effort with these land releases in auckland Im now of the opinion NZ, like the UK, is simply too small, and the land outside cities often too productive (unlike desert land in texas/atlanta) to ever see enough land freed up that would see scale building allow 3-4x income multiple housing.
Tauranga was actually above auckland in 2007 on the price to household income multiple, at 7.5.
Meanwhile some markets in nz are still very affordable, and you'll find owning is actually cheaper than renting in some secondary cities, hence the re-rating higher if auckland prices are maintained. Maybe not 50%, but 30% easy.
iPredict? They have some things going for average auckland prices.
75% chance average auck price breaks 900k this month I think I remember seeing.
Then some interesting predictions further out which seem to point towards a slowing down of the rate of price rises in auckland e.g ave 1 million unlikely to be seen until 2017-2018 I think I recall (which is only another 10% up from here so this points towards next 12 months price rises falling under 10% p.a growth).
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