S&P warns on New Zealand housing

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By Leith van Onselen

Ratings agency, Standard & Poors (S&P), has again warned that New Zealand’s housing market is vulnerable to a sharp correction, especially if there is an external economic shock.

While S&P does not expect a big increase in credit losses, it does “consider the stand-alone credit profiles of all banks and credit unions in New Zealand as remaining subject to negative pressures”.

Of particular concern to S&P is a potential “hard landing” in China, which “could potentially have a material impact on the New Zealand banking system”, although it does “consider the probability of a hard landing to be low”. According to S&P, a hard landing in China would manifest in New Zealand via “soft commodity prices which could fall sharply in a hard landing scenario”.

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S&P also notes New Zealand banks’ ongoing reliance on offshore financing, which it claims is a “key weakness of the New Zealand banking system, with net banking sector external debt funding about 32% of system-wide domestic loans”:

“In our view, any disruption in the offshore wholesale funding markets might be to the detriment of the cost and availability of funding for banks. A potential scenario includes a euro zone crisis that causes a dislocation in international funding markets.”

“In particular, we consider the New Zealand banking system’s sensitivity to a disruption in external funding as possibly being more pronounced during a period of rapidly depreciating currency, falling property prices, or increased credit losses. Nevertheless, we believe that the major banks are likely to benefit from their parents’ support in normal as well as most stress scenarios”.

S&P also expects that increasing credit growth will increase the New Zealand banking system’s offshore borrowings.

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It is important to note at this juncture that the health of New Zealand’s housing market is inextricably linked to both the Australian economy and China. As Finance Minister, Bill English, noted earlier this week:

“We’re a suburb of Australia and Australia is a province of China, and we are dependent on the economic management in both those economies. China has demonstrated an ability to deal with really complex issues, but they are still a command and ­control economy and there’s always the risk they could get it wrong.”

The above statement by Mr English is an acknowledgement that New Zealand’s heavy reliance on China comes both directly via dairy exports and indirectly through Australia, which is New Zealand’s biggest export market. In the event that China’s economy were to slow dramatically, New Zealand exports to both nations could fall dramatically, as would soft commodity prices.

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New Zealand’s big four banks are also subsidiaries of Australia’s big four, so have the same inherent external funding vulnerabilities. Were global capital markets to seize, such as via a Chinese hard landing, both financial systems would likely come under strain simultaneously, reducing the prospect of New Zealand’s banks gaining “their parents’ support”, as argued by S&P.

In any event, New Zealand’s housing market is already beginning to slow. The latest RBNZ housing loan approvals data for the week ended 7 February showed that mortgage demand is still falling (see next chart).

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Meanwhile, government valuer, Quotable Value, last week reported that it was surprised at the softening in the housing market, whereas the REINZ has recorded a marked reduction in sales volumes.

Thankfully for New Zealand, the RBNZ’s caps on high loan-to-value ratio mortgage lending appear to be working to cool the housing market, which should help to reduce risks of a major price correction down the track.

[email protected]

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About the author
Leith van Onselen is Chief Economist at the MB Fund and MB Super. He is also a co-founder of MacroBusiness. Leith has previously worked at the Australian Treasury, Victorian Treasury and Goldman Sachs.