It is disappointing that, when a housing bubble develops, no-one ever seems to blame the banks for the role that they played in creating the bubble, or the part they play in bringing it to an end.
KPMG’s quarterly survey of NZ financial institutions showed mortgage lending reached a new high of $227.7 billion, up $8.4b since December 2015. From an economy that has a GDP of only $250 billion, that is a frightening number.
This lending boom helped the main banks to increase their combined profits to $1.2b after tax in the following three months to March 2016, up 8 per cent from $1.11b on the December quarter.
I suspect that the good times are coming to an end. Most of the attempts by the Government and the Reserve Bank to rein in the market have had the unintended consequence of raising house prices and cutting out first-home buyers, so that currently speculators represent 60% of the house buying market in Auckland. When unsuccessful first-home buyers have returned to their parents, or found rental accommodation in a garage, the speculators will have cleared the field and will suddenly realise that they are gambling against each other in a zero sum game.
This could be unpleasant for the banks, who will presumably do what they always do in such circumstances – they restrict borrowing to reduce exposure, and increase interest rates to minimise losses. The first move is easy because the Reserve Bank has asked them to stop lending to overseas speculators, and restrict the amounts that they will lend to NZ- based speculators. The banks have gladly obliged.
Another instance of the Banks tightening credit is their refusing to roll over a loan to Silver Ferns Farms, which has a large stake in the NZ meat industry. I have mentioned some time ago that Shanghai Maling, a Chinese govern- ment state-owned enterprise, has put in a bid to secure a controlling stake in Silver Fern Farms. The bid has been accepted and awaits a decision from the Overseas Investment Commission (OIC), which is probably routine.
By 2013 SFF became indebted to the banks to the tune of $388 million. By 2015 the debt had been reduced to $120 million and appeared to be sound. However it is claimed that bank owners of the debt have exerted pressure on SFF so that it has little option but to accept Shanghai Maling’s offer. It is very strange that the banks have showered billions of dollars on the destructive housing market but will not take a relatively small risk to maintain the integrity of a major national agricultural concern. Is that indifference or are the banks getting nervous?
Putting up interest rates
On 11th August the Reserve Bank lowered interest rates to 2.00%, a record low. The Banks have responded by largely ignoring the cut and, in one case raising interest rates marginally.
This demonstrates the sheer futility of the typical Reserve Bank, whose powers are limited at best and useless if the private banks have a different agenda.
As I understand it, the whole point about the Reserve Bank changing its OCR rate is to achieve a certain objective. In this instance the intent is to get people to spend more and to fund that spending with loans, which add money to, and stimulate, the economy. The hope is that inflation will then move up from a present, nearly recessionary, 0.2% to a more desired 2 – 3%. Ignore for now that this argument is almost total hocus. The real point is that the banks have refused to play ball.
They must offer a reason of course and have stated that with interest rates this low, it is in the best interests of Kiwis to save their money to pay off their own existing debts and forget all about the housing crisis.
So the banks aim is to have less money in the economy, not more! What will this do to the GDP? Nevertheless this suits the banks’ agenda very well. Less debt means less bad debt.
However, if you are one of those families living in a garage and wanting a house, what is the point of saving at 2% pa if your dream home is adding value at the rate of 20% pa. They don’t know that the boom will end tomorrow … and the banks cant possibly want that to happen. So what is the point? The point can only be that saving instead of spending will enable the Banks to save their necks again and they really don’t care who else gets hurt.
The next failed dream: wealth through immigration.
The government is very keen on immigration because, all things being equal, immigration increases the GDP and so creates the illusion of greater wealth. Whether this translates into greater per capita wealth (and it hasn’t), doesn’t bother the government.
Of course, if the increase in population out-strips the GDP that suggests that labour is getting cheaper. It also increases the price of houses. Probably neither outcome upsets the government much.
If the migrants really had essential skills, as the government claims, that ought to increase the GDP, but the reality is that most of the migrants have minimal skills and are mostly employed under contract, for which the minimum wage does not apply.
So NZ has failed to train sufficient Kiwis since the last financial collapse, despite the Christchurch earthquake and the need for tens of thousands of houses, while people are sleeping in cars. And we are now importing labour at below minimum wages, while students are leaving schools and universities without any prospect of permanent jobs.
Dennis Dorney is a regular contributor living in New Zealand, and is an ERA member.