17 May 2017

The Credit Crunch

A new era of banking industry conservatism looks set to gradually rein in Auckland’s property market over the next few years.


share

Borrowers finding it difficult to borrow funding for housing now, brace yourselves. It’s only going to intensify as New Zealand banks struggle to get sufficient credit, says economist Shamubeel Eaqub.

Banks are becoming much tighter in terms of lending because of capital constraints imposed on them from overseas, explains Shamubeel. “The global banking and finance sector is shrinking. They’re tightening up even further rather than loosening up. (quote) The impact will be much bigger on developments and new projects than on residential.”

Due to the regulatory measures already imposed, Shamubeel points out that house sales volumes have dropped. “Sales volumes typically lead house prices.

Shamubeel says the big property market drivers are not population growth and immigration. Just look at rents in Auckland, he says. If population was the main driver, you would expect Auckland rents to be going through the roof. They’re not. “They’re only rising 3.5% to 4% in Auckland, not like in Wellington where rents are around 8%.

“The big market driver is credit risk restrictions from the bank.”

Shamubeel cites the end of the world’s eight-year experiment in quantitative easing as the reason for banks tightening their lending.

Quantitative easing is an interventionist policy that adds more funds to the economy. Some say it’s like printing money. That’s a simplistic explanation. According to Investopedia, it is an unconventional monetary policy in which a central bank purchases government securities or other securities from the market to lower interest rates and increase the money supply. It does this by flooding financial institutions with capital to promote increased lending and liquidity.

Economist - Shamubeel Eaqub.

Economist - Shamubeel Eaqub.

The European Central Bank is phasing out its vast programme. The Bank of Japan has started weaning its economy from its monthly fix. And in Britain, Theresa May has signalled she doesn’t believe rolling more pounds off the presses is the answer to the country’s problems.

Quantitative easing was an emergency measure that helped major economies to stabilise and after the shock of the GFC, there was no Great Depression. Inflation did not spiral out of control and asset markets recovered their nerve quite quickly. But it has meant, the world is trapped in slow growth and economists are debating whether the experiment was successful.

The result has been to avoid a depression but it did not resolve the underlying problems facing the economy. Real asset growth has been slow. The same scenario is playing out in countries all over the world including New Zealand.

So, as world economies addicted to the low interest rates and borrowing reach their limits, everything is about to tighten. The Reserve Bank has already announced a capital review in the wake of the changing global regulatory environment. Governor Grant Spencer said, it is becoming less clear whether New Zealand’s historical position on bank capital is being maintained relative to Australia and other peers.

This reliance on external funding is an important vulnerability of the New Zealand system, as starkly demonstrated during the GFC. While liquidity buffers must be the first line of defence against funding market disruptions, a strongly capitalised system also helps to mitigate the risk of reduced market access.

Banks are no longer able to source money cheaply to on-lend to New Zealanders. They will be even more careful about how they lend and are likely to raise rates.

Shamubeel expects interest rates to rise. "The US will raise rates by about 2% over the next 2 years. Look for fixed rates to rise here – not so much floating. It’s very gradual, but they are winding back qualitative easing and slowly unwinding these experimental policies."

“But it’s the availability of debt – not the cost of debt that will make buying a property harder. Banks are pulling back on gearing because they are not willing to take so much risk.”

Westpac economist Michael Gordon.

Westpac economist Michael Gordon.

At this stage, nobody should panic. Westpac economist Michael Gordon counters, we can expect more of the same for a while yet. “The economy has followed a fairly consistent story for the last couple of years – namely, modest underlying growth, with an overlay of very strong population growth. The main drivers of growth have also reflected the growth in people numbers: construction (people need somewhere to live), retailing, and personal services. We expect more of the same for this year.”

He notes, the latest round of loan-to-value restrictions have kept Auckland prices flat. “Prices in the rest of the country have continued to rise in that time, but at a slower pace than before. There is a major shortage of houses in Auckland, and it’s likely to get worse before it gets better. But I suspect that that shortage has already been ‘baked in’ to Auckland property prices over the last few years.”

Economic commentator Bernard Hickey also concurs.

We’re among the 5 most expensive cities in the world – up there with London, Hong Kong and Sydney. There’s still lots of demand and not enough supply supporting prices.

While the Unitary Plan finally moved through the courts a few weeks ago and it’s now in place to provide 410,000 extra houses over the next 23 years, supply and demand are not likely to come into line in the near future, says Bernard. “There is a huge housing shortage in Auckland. It’s generally agreed from 30,000 to 40,000 houses are needed. From the point of view of home buyers thinking prices are high and they surely must fall – be sceptical.”

So, more of the same for the rest of 2017. But if you’re considering a major loan in the future, perhaps do it sooner to avert frustration further down the line.

share

Return to blog

More recent posts

6 December 2018

Taken In Context


With more than 30 signature projects in and around Ponsonby and Grey Lynn to its name, RTA Studios has, in its own small way, begun to change the fabric of the streets and neighbourhoods it…

More
29 November 2018

Less Is More


With significantly less rubbish collected than in years gone by, this year’s Cox’s Bay Clean Up has been hailed a huge success – going to show that efforts over previous campaigns are beginn…

More
22 November 2018

Maximum Impact


When it comes to making sure your outdoor spaces are spot on for a Spring/Summer sale, nobody does it quite like Ian Morrow of home and garden makeover company Market Ready.

More
15 November 2018

Good for people, planet, and Earth


James Denton is a man on a mission. His challenge: to help Aotearoa New Zealand be the first country to take the lead towards plastic-free, waste-free living.

More
8 November 2018

Wintergarden Blooms Again


Since the late 1800s, the Auckland Wintergardens have enthralled with dazzling displays of tropical and seasonal botanical wonders.

More
8 November 2018

One Out of the Box


Described whimsically by it’s owner as ‘straight out of 1970s Palm Springs’, this house by architect Dominic Glamuzina looks as if it has been picked up out of a different country from a dif…

More
1 November 2018

Co-Housing – A Viable Alternative


A self-financing, community-led housing development gives hope to a handful of Aucklanders looking for affordable homes and a more sustainable and environmentally conscious way of life.

More
1 November 2018

All Around The Watchtower


A unique piece of Auckland’s architectural heritage, considered by many as a blueprint of how we should tackle the issues of housing density while being sensitive to the existing homes in ou…

More
25 October 2018

Rock Solid


Rarely can businesses say anything positive about the massive storms that hit Auckland this winter.

More

Contact Us

Are you interested in knowing more about one of these articles? Please fill out the form below to get in contact with us.