High house prices destabilising economy, says RBNZ

Graeme Wheeler: Household and farm debt still too high

New Zealanders still carry too much debt and an overvalued housing market is not helping, Reserve Bank governor Graeme Wheeler says.

In the central bank's six-monthly financial stability report, released this morning, Mr Wheeler says that while debt has been reduced since 2009 it is still too high and the country remains vulnerable because of this. 
 
The report cites over-investment in housing as a key factor in the country's ongoing economic vulnerability.
 
"House prices are already elevated relative to fundamental metrics, such as income and rents, and a property market rebound would exacerbate the risk of a sharp property price correction at some point in the future," the report says.
 
"Household debt is largely secured on property assets and a substantial property price correction could result in significant strain on household and bank balance sheets."
 
Credit growth has begun to pick up over recent months and banks have been reducing their lending requirements to encourage borrowers, mostly for competitive reasons. 
 
"House prices are rising, particularly in Auckland, in the face of housing supply constraints.
 
"Excessive credit growth could worsen housing market imbalances, given that house prices appear overvalued on a number of measures."
 
Household and farm debt are still too high, although business debt levels remain comparatively low, the report says.
 
"Leverage in the agricultural sector remains high, especially among some dairy farmers, leaving the sector vulnerable to a fall in incomes. Households are  also relatively indebted due to the substantial rise in borrowing over the past two decades."
 
Bank lending is matched by bank deposits, something which has not happened for more than 20 years. That period saw the increase in debt funded by borrowing from offshore wholesale markets.
 
The ability to return to that sort of debt expansion is not likely be repeated, the report says.
 
"The difficult external funding environment, along with both regulatory core funding requirements and banks' own efforts to place a greater emphasis on retail deposits, may place a brake on future upswings in credit  expansion."
 
Mr Wheeler also cites the New Zealand currency as a constraint on the economy. 
 
"The high New Zealand dollar and weak global demand are hampering prospects for some firms. 
 
"New Zealand's comparatively high interest rates compared to other economies are leading to increased foreign holdings of New Zealand portfolio debt, putting  pressure on the currency."

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24 Comments & Questions

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What are we going to do about it. Enough of talking and let's see some action.

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we will see if Mr Wheeler is Captain Courageous or Private meek

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bring back the core funding ratio, which national deferred. = Over-borrowing offshore fixed, lower exchange rate, tighter credit for housing, less heat in housing prices

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What successive experts over many years chanting the same mantra completely overlook is Kiwis almost genetically imbedded motivation and godlike ordained instruction to own property and no-one yet has found a way to change that social condition. It would take a social earthquake to achieve and that wont happen for a long long time. It is the reason early and even later immigrants escaped serfdom and endured the NZ journey because they couldnt own in the land of their birth.That motivation and ethic is what has made New Zealand great and unique with house ownership being an expression of love for the Country, faith in the future and security for a lifetime and is passed down the generations. Woe betide anyone who artificially interferes and it is little wonder Govts over the years have avoided a capital gains tax as they know the risk of interfering with the marriage of kiwis and housing. As a mere incidental, housing has survived in the face of other investment forms collapsing and that motivation also makes bank lending on housing a good risk.

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Oh what a short memory you have - between late 2007 and mid 2009 housing was in deep trouble, falling between 7-10% depending on which metric you believe. It was only the imposition of cuts in interest rates to emergency low levels which prevented a major bust (and which is now causing another nascent housing bubble (along with the fact that the idiot banks are again lossening their lending criteria). Goodness knows why interest rates remain at these totally unsuitable emergency low levels, the economy is not in recession, nor close to it. Housing WOULD have collapsed (just like all those other investment forms) had the RBNZ not run to its rescue - there is nothing unique about it as a class of asset, it is merely the repositary which kiwis automatically turn to when credit is made cheap and abundant.

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well said. And further more did the sharemarket get propped up at the same time? Don't think so.

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What a load of bollocks. the house market is just that. the result of supply and demand. Failures of corporate governance in the finance company sector plus a lack of trust in the NZX companies and banks has correctly lead to astute investors using bricks and mortar as their investment of choice. The Governor needs to take a reality check. Like all academics with no experience in the real world he lacks the nous to understand that Kiwi investors are smart people in the main who wont invest in sectors that they dont trust.
the Governor should spent his time working out how to restore confidence to other investment sectors rather than slagging off good hard working Kiwis.

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I dont think we are smart or sophisticated investors on the whole. Most dont invest in sectors we dont understand and most dont understand the productive investment sectors.

I still dont trust the sharemarket from my experiences in 1987. I havent seen enough improvement to convince me that I wont get ripped of by the directors of these companies telling me lies while feathering their own and their friends nests.

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Yep, you're bang on. The quandry for Mr Wheeler Dealer is that to fix means "interference" in the market, be it banking regulations or concessionary loans (Savage introduced them), currency manipulation (Holyoake did that), riding roughshod over local Govt to get 'cheaper' land and resource consents on demand (when they were called building consents prior to the 90s you could get them with in a month = at the next council meeting)
All of these are counter to free market doctrine. so those tools aren't in Mr Wheeler's tool box.
What does he have? A jaw bone, and a seriously blunt instrument which can influence interest rates up to control house prices at the expense of the productive sector and tip over our most productive industry - the dairy farms, let alone all the other productive industries.
The Government, Mr English, has told Mr Wheeler that's the priority.

From today's statement Mr Wheeler has come to grips with the consequence of that predominant imperative.

It's house price stability with a derelict industry, or properous industry with rampant house prices.

Mr Wheeler and Mr English have chosen house price stability.
Auckland wins over the provinces.

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The Government that introduces a CGT on houses will see themselves consigned to the Opposition benches for several decades.

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Personally would not mind no CGT so long as the reserve bank and govt stay hands off when sh*t is hitting fan like 2008 and lets the house sector ride the waves like the rest of the economy. In that way trainspotting property gurus may rethink their love affair and property where risk is properly factored into the investment. Why should interest rates not move when the sharemarket needs a little shot in the arm?

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Low interest rates coupled with strong rental growth (particularly in AK) is making investment in housing particularly attractive at the moment. The lower capital required by the banks on lending on this type of asset incentivses them to expand this part of their balance sheets. Plus they are creaming it on the move to floating rates by borrowers. This asset class in inherently more attractive as it is difficult to value "mark to market" and it has low relative liquidity, meaning that investors are insulated from rapid moves in the market this gives risk adverse investors a feeling of comfort. I not saying its a great form of investment, simply that it makes a lot of sense to many people who have seen the markets move adversely over the GFC in many other forms of investments. The RBNZ can continue to voice its concerns, but guess what guys it ain't going to make any difference.

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If the buyers offer for a property for sale is what they have in cash then the property market would stabilize, with increases in line with inflation.

If the the buyers offer for a property for sale is what they can convince a lender they are worth as a risk [ for +10 years ] then the property market will only rise and be unstable.

A simplistic view but maybe one worth looking at altering.

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"has correctly lead to astute investors using bricks and mortar as their investment of choice". Does this astuteness extend to the $11 billion of losses on leaky homes?

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'Woe betide anyone who artificially interferes ..'
' the house market is just that. the result of supply and demand.'
Both comments are completely wrong. The housing market is greatly interfered with by local government zoning rules which are just some bureaucrats idea of what is best for you.
Those bureaucrats have decided that even though you own the land, they will decide what you can do with it. That is tantamount to property theft without compensation.
It is not a market which results from freely participating buyers and sellers. It is a market bound up by heavy regulation which causes shortage so prices rise in conjunction with the other factors to make the perfect storm. The question is can the National government manipulate it so prices do not fall and so they protect their buddies.

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I'm of immigration heritage and a house owner of a certain age and I agree with correspondent #4 about the drivers of house ownership in this country.
However in the days when bank managers encouraged prudence and stable behaviour in their staff as well as their potential clients, huge housing debts weren't possible - you could only borrow a certain amount relative to your income and ability to pay. This kept inflation away from the door of house purchasers.
None of us really benefit from the fact our house is "worth" many multiples of what we originally paid for it when to buy another costs the same quantitiy of multiples - its a zero sum game from which the banks gain hugely (we pay them to administer their property on their behalf and think we live in our own houses ... ) and our grown up children with children of their own and in possession of a good, if expensive, education, cannot afford to buy even a "dump" in Wellington for under 500K ! what absolute nonsense it all is. It needs some sensible attention brought to it by intelligent people.

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Sorry about my last post - I meant correspondent #3 and not 4.

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Talk from the RB is cheap, most people are waiting for action!
The RB, if they were doing their job properly would be cutting the Auckland property boom off at its knees!
The banks are only interested in profits. Their lending is now becomming irresponsible, with 95-100% loans.
A lot of people are going to get hurt when this bubble bursts, and it will!

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Let them get burnt. noone has to buy.
Just like the 87 crash.

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Who hired this muppet? Watch this space, he wont be in the job in Nov 13.

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Young New Zealander can't afford to buy a house ( not even a unit ) in Auckland any longer .I am off to Oz along with my mates. Go off and make some money.

Last one out , turn out the lights

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Maybe when directors, sharebrokers and CEO,s get a few moral ethics people may then invest in the stock market

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More likely it is current policy that is destabilising the economy.

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Moved from Auckland recently where house prices are silly...but have learned it is not just over heated there. Wgtn too.

Went for a house in Island Bay GV 570k, RV 645k, sold for 700k!

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