Fitch warns on NZ property bubble

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Fresh from Fitch this morning:

Fitch Ratings-Sydney/Singapore-08 April 2013: Fitch Ratings says that challenges are increasing for New Zealand’s major banks with strong asset growth and fierce price competition potentially leading to asset bubbles. This in turn may impact bank financial strength and place negative pressure on Viability Ratings (VR).

In a report published today, Fitch highlights that New Zealand’s high household debt and a low national savings rate could pose a risk to the financial system if asset prices decline or if the unemployment rate increases. Potential asset quality pressure could contribute to weaker future earnings, and ultimately impact capitalisation.

In addition, New Zealand’s property market has seen strong house price inflation and credit growth – particularly in higher loan/value (LVR) mortgages – in the past 12 months, while leverage remains high in some segments of the agriculture sector which could leave bank asset quality susceptible to weather-related events such as drought.

However, the banks’ current strong capitalisation and impairment reserves, and healthy operating profitability provide buffer for a moderate house price correction. Significant deterioration in these measures is only likely after a material housing or economic downturn.

To address some of these issues, the Reserve Bank of New Zealand (RBNZ) has recently announced consultation on measures to strengthen its macro-prudential regulation. Any additional regulation which limits the creation of asset bubbles, and ensures strong banking balance sheets will be viewed positively by Fitch. The consultation paper outlines measures which include limits on LVRs for mortgage lending and sector exposure, the counter-cyclical buffer to strengthen capital levels, and a temporary increase in the core funding ratio. The consultation process closes on 10 April 2013.

At end- December 2012, New Zealand’s banking system remained sound with the largest four banks (ANZ Bank New Zealand, ASB Bank Limited, Bank of New Zealand Limited, and Westpac New Zealand Limited; all rated AA-‘ with Stable Outlook. They are all owned by major Australian banks and together hold a market share of 85% of New Zealand’s mortgage assets.

Note that Fitch views the the deployment of macroprudential policies as rating favourable.

David Llewellyn-Smith

Comments

  1. And here we have the ultimate answer; the only one that’s probable – financial pain for our economy. Hopefully you in Australia will see what happens to us, and act accordingly – a bit like Cyrpus ought to be a lesson for others in Europe. This is going to hurt.

    • Well, considering the words of Sir Humphrey Appleby, there’d be two kinds of policy answers:

      *) the controversial move – prop up the banks, more stimulus.
      *) the courageous move – make the property prices come down.

      And, according to him “a controversial policy will lose votes, whilst a courageous one will lose the election”. Which one do you think the local politico-housing complex will choose?

      • The Controversial Move. But in the case of the topic of this tread “Do we really care? After all it’s your banks that will prop up our housing market!”

        • No doubt that the Aussie banks have fuelled your property bubble, I would suggest that NZ depositors should pay! Just like in Cyprus…however in reality NZ will have a frustratingly strong bid for property as far as the eye can see because of the region it lives in. Fitch are comparing your economy to others in the developed world that are on the wrong side of the China balance sheet.

      • Excellent analysis of the situation. Provided national public debt remains suitably lower than debt levels of comparable countries, it’ll be the controversial move. I can imagine that Australia will continue to increase national debt to prop up all manner of things until it’s something approaching what we see in Europe. And even then, they’ll keep borrowing. I mean, why would they stop? What are the politically palatable alternatives?

        Just imagine Swanny (or Hockey or Robb or someone else in some far off government) saying something like “at 50% of GDP, our national debt is comparatively low than almost all other OECD nations, which have an average national debt of 150% of GDP”. Australia has one of the best performing economies in the developed world, we have excellent financial regulators and our banks are very well capitalised.”.

  2. Someone, at some stage, needs to provide an alternative model to the politically popular “paper it over” “solution”.

    I say that any nation that lets its urban land prices fall, adopts pro-development and pro-growth policies, lets debt get written off, and goes forward from there, will be demonstrably ahead of all the other “keep on papering it over” nations within 10 years.

    I am HOPEFUL that New Zealand MIGHT just be the nation that does this. The problem is that the Key Government did not crack straight on with this when they first got elected, so there is faint hope now that they will have long enough. The electorate is notoriously fickle and loony minor parties have so much “balance of power” clout.

    There is very little hope of a National-led government in coalition with, say, the “Winston Peters First” party, actually being able to do the necessary. And that is about the most hopeful scenario. Labour+Peters and/or Greens/Maori is a case of “abandon hope”.

    • I agree and the Kiwis have a huge political advantage as well, similar to Iceland, why would should their tax payers prop up their Aussie bank overlords that have 85% of NZ mortgages.