Top banking chief executive David McLean says the fortunes of residential property are "cause for some concern" but pose no widespread risk.
"Auckland housing would be a theoretical risk if you thought it was a bubble that was going to burst," says McLean. "I don't think it's a bubble that's going to burst but you'd have to assume that at some time there will be a downturn."
Asked what could cause that, McLean cited traditional issues including a massive swing to net emigration, a big spike in unemployment and massive spike in interest rates.
"So from a bank's point of view, rather than worrying what might cause it, we've got to say 'let's assume it does happen, how would we respond?'
"So we need to ask, 'are we writing loans now that we would regret in that situation?'
"From a credit risk point of view, most of our credit risk portfolios are in very good shape."
McLean, who is CEO of Westpac New Zealand, said downturn scenarios were being studied regularly by the bank.
"The housing market does cause us some concern.
"We don't think it's a tremendous risk for the banking sector, partly due to the fact that bank lending policy has not been excessively loose and partly due to the fact that the Reserve Bank has tightened up with the macro prudential standards, LVRs, etc.
"That's made the lending books safer. So there's a little bit of concern about the risk but when we forecast and stress test under various scenarios, we can't really see losses coming through."
Those stress tests include assuming higher unemployment ratios and house price drops, modelled on events in Britain, Ireland, Spain "and New Zealand in the 1930s" -- in effect a Depression-style downturn.
McLean cites two big housing sector problems:
• Social issues: Houses become unaffordable for people on a low to moderate incomes.
• Asset class dominance: Housing as an investment class dominates.
That is not good for the economy as it impact on stocks, bonds and managed funds. Capital was not being recycled which in turn created an issue for businesses raising money, McLean explains.
Banning or restricting foreign buyers was not the solution: "I don't see them as the real cause of the problem. And there's no easy way to fix that. It's supply," he says, referring to the need to build more residences, particularly in Auckland, which is partly being addressed by the Unitary Plan and other initiatives. "So it will correct, but it will take a few more years".
Cyber security remains one of his biggest concerns "for all businesses, particularly those who have customer data or those involved in payments".
He cited phishing and denial-of-service attacks. "They aren't successful yet but they have the effect of slowing the system down. We worry about it for ourselves and we worry about it for our customers. We're not complacent about it."
I don't think it's a bubble that's going to burst but you'd have to assume that at some time there will be a downturn.
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Dairy prices concerned him last year but price rises were up, he noted. However, he questioned whether than was a short-term blip or a trend. "Farmers have a tremendous capacity to adjust their costs and we have seen across our portfolio there's been a 30 per cent reduction in costs over the last couple of years so we think that almost all of the farmers in our portfolio are going to be able to manage through. For those who can't, we'll help them make the right decisions."
He is concerned about global structural changes in the dairy sector, resulting in more supply hitting world markets and inventories being better managed. The days of payouts of $7-$8 per kilogram of milk solids are past, so he is anticipating a more moderate payout environment.