Brian Gaynor: NZ's housing focus is bad for business

Property obsession is robbing capital from foreign exchange and job-creating sector. Photo / Janna Dixon

A number of developments over the past few weeks clearly demonstrate that New Zealand is not business friendly, particularly as far as the tradeable sector is concerned.

There has been a hue and cry over the treatment of house owners by the banks, yet they are relatively well off compared with businesses trying to raise funds.

Our politicians bend over backwards, both in terms of tax treatment and political pressure, to support housing speculation, yet they offer virtually no assistance to businesses that want to fund growth, create jobs and generate badly needed foreign exchange.

A number of statistics and reports, including bank lending figures, an ownership survey of the NZX and an appreciating NZ dollar, demonstrate that business is the poor cousin of residential property in New Zealand.

The latest banking statistics show that household debt continues to increase and, as at June 30, totalled a frightening $165.4 billion or 52.6 per cent of total bank lending.

Meanwhile bank lending to the business sector, other than agriculture, was only $87.5 billion or 27.8 per cent of total lending.

As the accompanying table shows, business has been crowded out of the lending market in more ways than one:

Over the past decade lending to households or individuals has increased by $105.3 billion, from $60.1 billion to $165.4, while lending to the non-agriculture business sector has risen by only $40.4 billion, from $47.1 billion to $87.5 billion

According to Reserve Bank data the interest rate on floating first mortgages is 6.44 per cent at present, compared with 9.85 per cent for business. Ten years ago they were much closer, with the former on 6.50 per cent and the latter, 7.38 per cent.

In light of these figures the outcry over the perceived injustice towards mortgage borrowers is clearly unjustified. Lending to households continues to increase, whereas business lending has contracted in recent months and the latter incurs far higher interest costs.

Banks have a bias towards residential property due to a number of factors, including a complicated issue called capital adequacy.

In simple terms this is the minimum capital requirements for banks, which is 8 per cent at present. Thus if a bank has $100 million of loans it has to have at least $8 million of capital.

However banks are allowed to have lower capital requirements if their loans are less risky and residential mortgages are considered to be lower risk than business loans. Banks have considerable flexibility to assess their own capital requirement and the ANZ National Bank's requirements, based on its latest general disclosure statement, are as follows:

For every $100 million of business loans the bank's minimum capital requirement is $5.06 million.

For every $100 million of housing loans its minimum requirement is $1.91 million.

Obviously, it is far more attractive for the banks to lend to house purchasers because capital is expensive and its capital requirements are much lower for this type of lending.

The other source of business funding is the stock exchange, either through equity raisings or bond issues. However the NZX is struggling to fulfil its role in this area because it is so small.

The latest Goldman Sachs JBWere ownership survey of the domestic sharemarket shows that foreign investors now own 39 per cent of the market, compared with 55 per cent a decade ago.

That's the good news, the bad news is that the NZX is worth less today than it was 10 years ago.

As the accompanying table shows, the total value of all domestic companies listed on the NZX was $43.7 billion at the end of June, compared with $51.1 billion in June 1999.

Over the same 10-year period the total value of the ASX soared from A$568 billion ($709 billion) to A$1098 billion.

The NZX/GDP ratio is only 24 per cent, compared with the ASX/GDP ratio of 92 per cent.

By contrast, total housing values have increased dramatically in New Zealand and our housing stock is now worth 13 times the NZX, compared with 4.2 times a decade ago.

Housing values have also risen in Australia but the housing/ASX ratio is only 3.0, compared with 2.3 in mid-1999.

Bond issues are also difficult to get off the ground in New Zealand unless a company has a good credit rating and/or is willing to offer high interest rates.

The clear message from these figures is that house funding, which is mainly derived from the banks, is in plentiful supply but funding for businesses, which also comes from banks or through equity and bond issues, is much more difficult to obtain.

The collapse of ProvencoCadmus this week, partly because it was unable to obtain additional equity funding, is an example of this.

Another negative factor impacting on many businesses, particularly exporters and those competing against imports, is the strong performance of the New Zealand dollar. In the past decade the Kiwi has risen from US53.2c to US67.1c while the trade-weighted index has gone from 57 to 62.2.

The underlying cause of this can be traced back to housing and our low savings rate.

We over-invest in housing for a number of reasons as mentioned above, but also because individuals can easily leverage into a rental property worth $400,000, whereas they would never have enough money to buy a share portfolio worth this amount.

If most of the population has limited savings, and can only get into the investment game through leveraged property, then the demand for residential property mortgages will be extremely high. The problem with this is that we don't have sufficient domestic bank deposits to meet this loan demand as households have $165.4 billion of bank loans but only $88.3 billion of bank deposits, a deficit of $77.1 billion.

Essentially this money has to be borrowed offshore and its importation has a positive influence on the New Zealand dollar.

But more importantly, the higher domestic demand for bank lending - compared with domestic supply - has an upward influence on domestic interest rates. As a result, our interest rates are well above the international average.

Overseas investors, particularly the carry trade, invest in New Zealand to take advantage of our higher interest rates and this pushes the NZ dollar higher and higher.

Thus New Zealand is caught in a classic low savings/high debt/over investment in housing/high interest rates trap and business is the big loser.

Finance Minister Bill English is fully aware of our unbalanced economy and has made a number of speeches on this issue in recent months.

He told a transtasman Business Circle meeting in Wellington that the tradeable sector - exporters or industries competing with imports - has been in recession for five years, contracting by about 10 per cent.

Meanwhile the non-tradeable sector - including Government, housing, finance and retailing - has grown by 15 per cent over the same five-year period.

A sustained economic recovery can only be achieved through the tradeable sector yet data indicates that the non-tradeable sector, particularly housing, is showing early signs of leading the recovery.

Unless more funding is made available to business, particularly in the tradeable sector, then we will be back on the same old household debt/housing boom/unbalanced growth bandwagon.

This lopsided growth is unsustainable and will inevitably lead to continued low GDP growth and another recession in the not too distant future.

Disclosure of interest; Brian Gaynor is an executive director of Milford Asset Management.