S&P warns against NZ property market overheating
"All the more reason NZ should have a bank deposit insurance scheme like every other country has."
Featured commentNew Zealand's banking system is at risk from property prices overheating if the country's exports stop being worth so much or the kiwi dollar falls out of bed, says the international credit rating agency Standard & Poor's says.
S&P issued a report on the banking sector, saying "significant risk remains of a sharp correction in property prices".
The rating agency, which assesses country and business credit-worthiness, noted the recent jump in Auckland and Christchurch property prices and suggested New Zealand is still vulnerable because of the run-ups in value seen in the mid-2000s, before the global financial crisis, let alone the latest appreciations.
On balance, S&P thinks these risks are unlikely to be borne out, saying "we expect that strong asset quality ratios are likely to be maintained at levels supportive of banks' current ratings, on the back of a benign economic outlook and stable property prices".
It also predicts that property prices will not rise much from where they are now, even if the New Zealand economy stays on an even keel.
"Our base case scenario sees real estate prices continuing to stabilise at current levels over the medium term, and such an occurrence having a stabilising effect on asset-quality ratios."
Remains vulnerable
In part, that outcome will depend on the state of the world economy, S&P says. With New Zealand banks funding about 37 percent of their lending from sources offshore, the country remains vulnerable should global financial markets seize up in another crisis.
However, S&P warns about a scenario where the world economy strikes trouble and the New Zealand dollar, along with export prices, falls sharply.
"In our view, such a scenario, in conjunction with a rise in unemployment, could increase the risk of a significant in banks' credit losses on the back of a build-up in housing prices and domestic credit over the period that preceded the global financial crisis."
Such a turn of events "would have a material impact on the financial strength of the balance sheets of New Zealand banks", although the four largest are all subsidiaries of Australian banks and retain their owners' AA-minus credit ratings.
New Zealand-owned Kiwibank is rated A+, while The Co-operative Bank and Heartland Bank carry BBB-minus rates. TSB Bank is slightly stronger, with a BBB-plus rating.
S&P's assessment comes at a time of growing government concern about a pick-up in residential housing prices, which is worsening New Zealand's housing affordability problem.
Finance Minister Bill English used a speech yesterday to outline the government's desire to see the Reserve Bank of New Zealand use new macro-prudential tools to control banks' lending and capital adequacy ratios.
(BusinessDesk)
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Comments and questions18
Is the same S&P that now stands accused of massive fraud on the much the same topic?
How can you trust their views?
Maybe they have an agenda in mind....
6/2/13
The US Department of Justice on Monday filed a civil suit charging Standard & Poor’s Ratings Services, the world’s biggest credit rating agency, with defrauding investors and the public by inflating the credit ratings it gave to subprime mortgage-backed securities in the run-up to the 2008 financial crisis.
Coming nearly four-and-a-half years after the Wall Street crash, the suit is the first federal action against a credit rating firm. S&P and its main competitor, Moody’s Investors Service, played a critical role in the vast edifice of financial speculation and fraud that came crashing down following the bursting of the housing bubble in 2007.
S&P, Moody’s and Fitch Ratings are all private, for-profit companies. As previous US government investigations have documented, S&P and Moody’s made huge profits between 2004 and 2008 by landing contracts from Wall Street banks to rate residential mortgage-backed securities (RMBS) and collateralized debt obligations (CDOs), which were assembled by the banks from home loans and sold to other financial institutions and investors around the world.
http://www.madein-greece.com/News.aspx?pid=2311&langid=72&mdl=news&ncid=38&itemid=1375#sthash.djPBp9lG.dpbs
What a bunch of collosal drivel.
The lawsuits against the credit rating agencies for failing to predict an earthquake are politically motivated and baseless. Even if they weren't, ratings are not an investment advice or guarantees - yet agencies are being prosecuted on the basis that a) they have the ability to accurately foresee the future; b) the US recession and freezing up of credit markets (which caused the losses on RMBS) was somehow their fault; c) the litany of pleas and warnings issued over and over again that ratings are not guaranteed, are not investment recommendations and are only to be taken with a grain of salt somehow meant nothing. It's ridiculous.
While I have little respect for the ratings agencies, I find it odd that people criticise them for not doing their job and warning people about market or product risks and then, when they do warn about risks, they criticise them again!
So explain this. How can S & P give AA- credit ratings to four Australian banks that are privately owned and yet give state owned Kiwibank an A+. From my limited knowledge, an A+ is less than an AA-. Is this so? If so, does this suggest that S & P think that the State of New Zealand is more of a credit risk than one of these Aussie banks? Doesn't make sense to me. I remember this national Government bailing out quite a few financial institutions. Investment in banks seems risk free to me.
And, of course, were such events to occur government guarantee - I know there is not one at moment - would be introduced and we would all be in the cart propping up the banks and perhaps paying out on a few like SCF. You either make it clear to the banks and the country that you are going to let the banks fall over or you take a stick to them to get them in line as the trade off for implicit guarantee!
You are right, and the precedent has been set by Christchurch etc with the govt stepping in.
Realising this is a given, why doesn't the govt just setup a deposit guarantee scheme common in so many countries?
Or do an Iceland and make the price of a bailout a change in ownership of the banks?
I.e. bailout = equity.
Nothing much will be done - the government are secretly delighted to see the real estate engine motoring again (having realised they can't get/won't get much growth out of the rest of the economy), but will hope it doesnt blow up in their faces. Their fall back position will be a) Who could have known? and b) That even if it does they will just socialise the losses by bailing out the banks. Wheeler will just sit on his hands (because that is what the retail banks want him to do). We have learned absolutely nothing from events in other parts of the world in the last 10 years. Zilch.
Shouldn't your article headline read "S&P sees risk of sharp correction in housing market possible but unlikely"? This is S&P's base case.
At risk of being accused of being a cut and paste artist, S&P headlined their own piece exactly as here. They clearly wanted to be heard, I'd argue. I agree the base case is quite amiable, and reported it as such.
And Standard and Poor's, as well as other rating agencies, are always correct.
It is time that the Reserve Bank pull up the banks and sets restrictions on Loan to Value Ratio(LVR).
And by making first home buyers exempt from such restrictions would give them a fair chance of buying one.
But without restricting non resident purchase of residential properties in New Zealand this tool may not really be helpful.
Define first home buyer though? What ive you owned one, and sold it? What if you put another in a trust, or your kids name? or a company? Or what if your company owned a house? Or a building that's not really a house? Or a home office? What if I have flatmates? It's impossible to police.
All these supposed silver bullet policy ideas thrown around have been discarded or not yet impletemented because they don't achieve what they set out to. And you endup with a basket case of unfair, ineffective regulation that doesn't do anything at all.
Can someone define a 'first home buyer'.
All the more reason NZ should have a bank deposit insurance scheme like every other country has. Australia has A$250,000 cover per account for Aust. based banks only, not their branches in NZ & overseas.
Rabo is the only bank in NZ whose parent bank gaurantees NZ depositers.
You lost your money on the Stock market, finance cos., are Banks next ?
Why do you have to take this risk when depositers in other countries don't , I can't read the future so who can & be sure it will never happen?
Wake up Key & English, we are out step with all others as usual.
If a bank goes under I wonder how secure its insurance scheme would be?
The issue of a banking licence here seems to be like giving a nuclear bomb to some apparently nice trustworthy person as an exhibition piece and hoping that person will be responsible with it. And if the nice person is not ... bang for us all.
When it comes to a property bubble forming and heading to a bust as we have now, do not listen to anything a real estate company, property investor or banks tell you.
Their real job is to talk the market up, hoping prices continue to go ballistic.