David Hisco: Housing and NZ dollar over-cooked

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David Hisco is the CEO of ANZ New Zealand, the country's biggest bank.

Auckland house prices and the New Zealand dollar are over-cooked.

Having been in banking since 1980 I have seen this movie before. The ending is pretty much the same - sometimes a little plot twist, but usually messy.

This one has some different characters involved. Record low interest rates in New Zealand, 40 houses being built a day in Auckland yet the city needing 60, deflation in some of our trading partners, political turmoil in Britain, Australia and the US, some banks in Europe in trouble; the list goes on.

In the quick snack media world we live, sadly many are making decisions based on the last headline or quote rather than research and facts. Here is a fact: property markets can and do go backwards.

Reserve Bank Deputy Governor Grant Spencer says the solution to Auckland's housing problem is a team game and that not all the heavy lifting can be done by them. He's right. Spencer has also suggested immigration policy needs to be looked at. Our creaking infrastructure might do with a period of catch up.

David Hisco, CEO of ANZ New Zealand, says the housing market and strong New Zealand dollar can't continue to run this hot. Photo / NZME
David Hisco, CEO of ANZ New Zealand, says the housing market and strong New Zealand dollar can't continue to run this hot. Photo / NZME

The Leader of the Opposition says we need to build more homes faster. That makes sense, too, if we have the resources and approvals to do it.

The Auckland Council says we need a unitary plan that allows us to build up and out. That's logical but unpalatable to a vocal few.

The Prime Minister recently told the Reserve Bank to get on with tightening loan to value ratio (LVR) rules. Part of the delay in it happening may be the Reserve Bank demonstrating that it won't be told what to do by politicians.

Listen: David Hisco talks about the property market:

Record low interest rates have played their part in this problem. But, because New Zealanders aren't good savers banks have had to borrow from offshore to fund this rapid expansion in housing lending. And this funding supply is not endless unless banks want to pay higher prices for it. I doubt banks can keep lending at the current huge volumes anyway.

SO HOW DO WE SOLVE THIS PROBLEM?

At ANZ it's not uncommon to find ourselves in complicated situations where different parts of the business have a solution to a problem. Breaking the impasse requires collaboration, leaving egos at the door, and a willingness to move from your previously held position and try something different. Most of all, it requires the fortitude to make a recommendation that everyone can live with (versus 100 percent agrees with). Then, like with all good strategies, it requires military like precision in its implementation.
Finance Minister Bill English recently told an ANZ post-Budget breakfast that the
Auckland housing market was overheated and that some investors would end up losing money.

Salaries and wages have hardly changed whilst house prices have risen - this can't continue so it's a matter of when, not if, the market adjusts.

That may be true but New Zealand's issues go beyond housing. The strong Kiwi dollar, while great if you're heading overseas on holiday, is impacting our exporters. It's not helping with the recovery of the dairy industry. It also makes NZ tourism, one of our largest industries, far less attractive for overseas tourists.

The softness in the Australian economy, coupled with the fundamental changes they are going through with the end of the mining boom, makes our largest trading partner vulnerable. With the possibility of parity between the New Zealand and Australian dollars how long before they start buying their goods from cheaper sources?

There are storm clouds on the horizon for sure and when they break who knows what will happen.

One thing is certain, if employers start laying off staff because exports to an uncertain world are dropping, those people won't be able to afford their mortgages and when that happens they will sell their houses. If unemployment rises and the dollar drops, overseas investors will cash in their chips and sell, most probably in a stampede.

The Baby Boomers who have become property investors in recent years based on shallow deposits will soon realise what I'm already seeing - more and more rental properties where owners either can't find a tenant, or the rent can't cover the mortgage. Salaries and wages have hardly changed whilst house prices have risen - this can't continue so it's a matter of when, not if, the market adjusts.

New Zealand is a great country and we've come out of the Global Financial Crisis well compared with many. But logic tells me things cannot continue to run this hot.

Eventually, landlords will realise that getting a measly yield is not worth it, nor is leaving a property empty, and they will try to sell and take any possible capital gain. Nobody knows where the top of the market is but, as they say, nobody ever went broke taking a profit.

The solution probably lies in pulling many levers which will no doubt trigger other consequences. But things we can do right now include:

Heavily increase LVR limits for property investors. The Reserve Bank wants most property investors around the country to have 40 percent deposits in future. We think they should go harder and ask for 60 percent. Almost half of house sales in Auckland are to property investors. Taking them out of the market will be unpopular amongst investors but it may end up doing them a favour. Of course this would mean less business for us banks but right now the solution calls for everyone to adjust.

Weaken the New Zealand dollar. The Reserve Bank should look to weaken the dollar, making our export industries more competitive. That's good for employment and our balance of trade in the long run. The Reserve Bank in Australia are already examining unconventional measures to do this. The longer our dollar is out of step with the rest of the world we will slowly drift towards being uncompetitive. Rising unemployment and rising house prices can't co-exist.

Voluntary tightening of lending criteria by banks. Since the GFC banks have been more conservative than ever on lending. But the current situation will see ANZ implement even tougher criteria for investment loans as house price inflation spreads from Auckland to other regions.

Review immigration policies. Immigration has been great for New Zealand. We are a harmonious, diverse and inclusive society. But Auckland's housing, roads, public transport and schools are struggling to cope. Let's have an honest and sensible debate about immigration using facts rather than prejudice to see if we should push the pause button.

Have a strong focus on infrastructure build, particularly in the growth regions. We always seem to play catch up in this country relying on bureaucratic formula to work out demand. There are smart ways to fund infrastructure that can spread cost across the generations if we choose to go that way.

New Zealand is a great country and we've come out of the Global Financial Crisis well compared with many. But logic tells me things cannot continue to run this hot.

Low interest rates give borrowers the best chance to repay their debt and that is what they should do, not use them as a chance to borrow to the max.

Now is the time for New Zealand to navigate carefully if it wants to remain as one of the world's better performing economies.

- NZ Herald

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