New Zealand's housing market boom is not healthy over the medium to long term, says Westpac New Zealand chief executive David McLean.
Speaking after the bank released its full-year result yesterday, McLean said he believed the boom which has seen record lending by the banks was a "sugar rush" driven by low interest rates.
"I think it is a bit of a sugar rush. I think it is not a bad thing at this time, when we are going through this Covid thing because it does boost consumer confidence amongst people who own houses already.
"Short term, it is actually quite helpful because it does shore up confidence."
But he said in the medium to long term, house prices in New Zealand were out of whack with incomes and were the highest in the world in relation to income.
"That is not healthy. That makes it very hard for people to get into houses. It increases inequality.
"The thing I worry about is, it means a lot of our capital is tied up in housing which is a deadweight asset whereas if people weren't investing in houses they might be investing in funds or equity markets where that money could get recycled into businesses who want capital for investment."
McLean said for a combination of reasons it was very bad for the long term but said it was not the right time to try and correct it now.
Some have suggested the Reserve Bank bring back bank loan restrictions to try and cool the heat of the property market, particularly when it comes to investors.
The issue could be addressed in the Reserve Bank's financial stability report due next on November 25.
McLean wouldn't be drawn on whether he thought the Reserve Bank should bring back the restrictions which were temporarily taken off in May.
"All I can say is I'm glad I am not in the Reserve Bank's shoes having to make that decision. It is tough.
"The good thing is the Reserve Bank does have a wide range of tools available to it as we saw through the initial response to Covid, not just interest rates, it's all sorts of other things they have which have been really good for the economy.
"My view is they should be looking at all the tools they have in terms of trying to avoid the distortionary effects of low interest rates flowing through."
McLean said if the loan-to-value restrictions were reinstated they would have a dampening effect on future growth in house prices.
"I don't think it would lead to any kind of collapse in house prices, I don't think it would be too worrying."
Yesterday, Westpac New Zealand revealed it had allocated $320 million in impairment charges for the year to September 30.
McLean said around 80 per cent of those were forward-looking, meaning the loans were not yet impaired.
That means if things don't go as badly, some of that impairment could get written back into next year's financial accounts.
McLean said if Covid suddenly went away that could happen.
"But we do expect that won't happen. We do expect there will be pain in the economy and it can take several years for the economic pain to flow through the bank's balance sheets.
"After the GFC it took us three or four years for the peak of impairments to flow through."
McLean said the biggest drivers would be the underlying economy which was linked to the rate of unemployment and GDP.
On Wednesday unemployment figures are expected to show a rise to around 5.5 per cent while GDP figures are not due out until early next month.
McLean said back in March it had expected that New Zealand would be in a deep v-shaped recession by now but the stimulus packages from government and lower interest rates had flattened that drop.
"Now the wage subsidy is off, so the question is when the support levels stop and we get through the Christmas shopping period and the spring housing market is over - how soft does the economy go?
"And maybe, it's not too bad. My view is the actual downturn is going to be a lot shallower than we thought."
But he said it was also likely to be uneven as some people and sectors were very badly hit while some domestic sectors of the economy had been going very well.
The bank's loan deferral numbers were now quite small, although McLean said there would be a small group of people who needed more permanent help. There was no sign that the end of the wage subsidies had driven a rise in deferrals, he said.
Falling deposit rates
A number of banks have dropped their term deposit rates over the last week or so.
McLean said the worry if the Reserve Bank moved to cut the official cash rate negative next year was that depositors would pull their money out of the banks.
"That is our worry, our worry is they might do something else with their money and we need those deposits to keep coming in the bank.
"On the other hand, we have got almost a record level of deposits because people have got nowhere to put their money."
He said Westpac was in a very strong funding position.
"We have got more liquidity than ever before in the bank, capital levels are higher than ever in the bank. We are as strong as we can be."
"The challenge with interest rates is when we look at our book we have as many depositors as we have borrowers. The borrowing numbers are a bit bigger but we have the same number on both sides. Many of those depositors are people who are relying on income for part of their living expenses particularly older people so I do worry about their ability to cope with rates going much lower."
A year ago depositors could get 3 per cent on a six-month term deposit but now it was down to 1 per cent or less.
Over the year Westpac New Zealand reduced its branch number by eight to 143 and McLean said the bank had just closed another two branches and was consulting on the Milford branch on Auckland's North Shore.
Staff would move to the Takapuna branch. McLean said branch closures were mainly happening in city centres where there were branches close together because people were just not coming in.
It had maintained shorter hours in other branches allowing staff to get on the phone and provide call centre support outside of those hours.
Staff in its corporate offices continued to work using a mix of home and office locations.
"We have got less than 70 per cent of our people in any one day in our corporate site. We are not pushing it either way really. You do hear of different businesses around the world either pushing people to come back to work or forcing people to stay away and saving on the rent. We are just a bit more keen to see how it evolves."
While some people liked working from home others were not so keen on it, he said.
"We are trying to come up with rules that are a bit more practical so you should have a meeting in the office a day in the office with all of your team one day a week just because that human face-to-face interaction is quite important."
McLean said it was a new paradigm for working.
"We have got to evolve our thinking we are all learning here. We have got to adjust to a new way of living."