Digital Finance Analytics (DFA) Blog
"Intelligent Insight"
The latest edition of our finance and property news digest with a distinctively Australian flavour.
CONTENTS
0:00 Introduction
1:09 Westpac Says Home Prices Will Grow
3:30 Rising Yields A Risk
7:36 NAB Cuts Mortgage Rates
9:39 NAB;s Troubles Loans
10:40 ME Bank Sold To Bank Of Queensland
13:31 NZ Cash Rate May Rise – Soon
17:22 Conclusions
Go to the Walk The World Universe at https://walktheworld.com.au/
We deep dive on recent developments in the NZ property market, as the bubble created by the RBNZ expands, and they react to try to mitigate the risks.
Go to the Walk The World Universe at https://walktheworld.com.au/
The latest edition of our finance and property news digest with a distinctively Australian flavour.
Property Expert Joe Wilkes joins us from New Zealand to discuss the latest turn of events and yesterdays Reserve Bank NZ statement – the clearest articulation yet of what faces us all.
RBNZ Press Conference:
The New Zealand Government, retail banks and the Reserve Bank are today announcing a major financial support package for home owners and businesses affected by the economic impacts of COVID-19.
The package will include a six month principal and interest payment holiday for mortgage holders and SME customers whose incomes have been affected by the economic disruption from COVID-19.
The Government and the banks will implement a $6.25 billion Business Finance Guarantee Scheme for small and medium-sized businesses, to protect jobs and support the economy through this unprecedented time.
“We are acting quickly to get these schemes in place to cushion the impact on New Zealanders and businesses from this global pandemic,” Finance Minister Grant Robertson said.
“These actions between the Government, banks and the Reserve Bank show how we are all uniting against COVID-19. We will get through this if we all continue to work together.
“A six-month mortgage holiday for people whose incomes have been affected by COVID-19 will mean people won’t lose their homes as a result of the economic disruption caused by this virus,” Grant Robertson said.
The specific details of this initiative are being finalised and agreed urgently and banks will make these public in the coming days.
The Reserve Bank has agreed to help banks put this in place with appropriate capital rules. In addition, it has decided to reduce banks ‘core funding ratios’ from 75 percent to 50 percent, further helping banks to make credit available.
We are announcing this now to give people and businesses the certainty that we are doing what we can to cushion the blow of COVID-19.
The Business Finance Guarantee Scheme will provide short-term credit to cushion the financial distress on solvent small and medium-sized firms affected by the COVID-19 crisis.
This scheme leverages the Crown’s financial strength, allowing banks to lend to ease the financial stress on solvent firms affected by the COVID-19 pandemic.
The scheme will include a limit of $500,000 per loan and will apply to firms with a turnover of between $250,000 and $80 million per annum. The loans will be for a maximum of three years and expected to be provided by the banks at competitive, transparent rates.
The Government will carry 80% of the credit risk, with the other 20% to be carried by the banks.
Reserve Bank Governor Adrian Orr, said: “Banks remain well capitalised and liquid. They also remain highly connected to New Zealand’s business sector and almost every household in New Zealand. Their ability to extend credit to firms to bridge the difficult times created by COVID-19 is critical and made more possible with today’s announcements. We will monitor banks’ behaviour over coming months to assess the effectiveness of the risk-sharing scheme.”
The Government, Reserve Bank and the Treasury continue to work on further tailor-made support for larger, more complex businesses, Grant Robertson said.
A further announcement from the Reserve Bank NZ today. They have established a Term Auction Facility to support the markets/banks, FX swap funding, and a $30bn US Swap line from the Fed. They also removed the credit tiers for ESAS account holders. All signs of Central Bank support for the financial plumbing.
New Zealand’s financial system remains sound, with strong capital and liquidity buffers.
Assistant Governor Christian Hawkesby said the Reserve Bank is actively involved in financial markets to ensure smooth market functioning despite the global uncertainty from COVID-19. Regular market operations continue to ensure there is ample liquidity in the financial system.
“The measures we are implementing today provide additional support to domestic financial markets. We will ensure our operations make financial markets operate smoothly,” Mr Hawkesby said.
“We are working in tandem with the banks, the wider financial market community, and the Government.”
The Term Auction Facility (TAF) is a program that will alleviate pressures in funding markets. The TAF gives banks the ability to access term funding, with collateralised loans available out to a term of 12 months.
Banks currently have robust liquidity and funding positions and can manage short-term disruptions to offshore funding markets. The opening of the TAF will provide confidence that the Reserve Bank stands ready to support the market if needed. Further operation details on the TAF are available in a Domestic Markets media release.
The Reserve Bank is providing liquidity in the FX swap market, to ensure this form of funding can be accessed at rates near the Official Cash Rate (OCR). This activity will increase in the weeks ahead to support funding markets.
The Reserve Bank has re-established a temporary USD swap line with the US Federal Reserve. This will support the provision of USD liquidity to the New Zealand market, in an amount up to USD 30 billion. This is a facility that is being offered to many other central banks globally.
The Reserve Bank has been providing liquidity to the New Zealand government bond market to support market functioning.
To support the implementation of monetary policy, the Reserve Bank is removing the allocated credit tiers for Exchange Settlement Account System (ESAS) account holders. This change means that all ESAS credit balances will now be remunerated at the OCR. Under the previous framework, banks were charged a penalty rate on deposits of cash balances above their allocated credit tiers.
The removal of credit tiers for ESAS account holders will provide additional flexibility for the Reserve Bank in its market operations, by keeping short-term interest rates anchored near the OCR regardless of the level of settlement cash in the system. This framework for monetary policy implementation (i.e. a floor system) is common among other central banks overseas.
The Reserve Bank will continue to monitor the use of our liquidity facilities and ESAS settlement accounts. We anticipate that liquidity will continue to be distributed efficiently throughout the banking system. If not, we will review our framework for monetary policy implementation as needed.
The Reserve Bank has a number of tools to provide additional liquidity and the ability to increase the size of operations where needed. We are committed to using these to support smooth market functioning.
In addition to the tools listed above, the Bank has an established role to provide liquidity in the New Zealand dollar foreign exchange market in periods of illiquidity or dysfunction, and is operationally ready to undertake this role if required.
Mr Hawkesby reiterated that the Reserve Bank continues to monitor developments, and remains ready to act further to ensure markets and the financial system operate in a stable and efficient manner.
The Reserve Bank of New Zealand, Te Pūtea Matua, is taking proactive steps to ensure it is well positioned to effectively and efficiently manage New Zealand’s monetary policy in an environment of very low interest rates.
In a speech launching its Principles on Using Unconventional Monetary Policy, Reserve Bank Governor Adrian Orr said as kaitiaki (caretakers) of Te Pūtea Matua, the Bank’s activities involve continuous assessment of our monetary policy framework, including the most effective tools and their best application.
Mr Orr said the Reserve Bank has not, and still does not, need to use alternative monetary policy instruments to the OCR, but it is best to be prepared.
“An inability to predict what might happen next is no excuse for not preparing for what could happen. That’s true for businesses, governments and central banks. It is in light of both economic theory and recent global experience that we have been assessing what alternative monetary policy tools may be available to the Reserve Bank of New Zealand – and their relative desirability. We are fortunate, unlike many other OECD economies, to have the time to prepare for such possible needs.”
The Reserve Bank typically implements monetary policy by controlling the Official Cash Rate but as interest rates fall, this tool could be pushed to its limit in the future. Given this, in recent years, the Reserve Bank has been considering the unconventional monetary policy tools and policy framework that it would use to meet its policy targets.
The work to develop the Reserve Bank’s preparation for unconventional monetary policies has involved:
“We are confident of our success in assessment and implementation, but we are also aware that these tools work best when supported by wider stabilisation policies and additional macroprudential considerations. In the event we ever had to use these unconventional tools, our goal would be to ensure a strong and sustained increase in economic activity, with inflation expectations remaining well-anchored on our target mid-point.”
In the coming weeks the Reserve Bank will release a series of technical papers explaining the tools in more detail, examining their pros and cons, and outlining how they would potentially be used.
Note:
The principles and speech do not discuss current economic conditions or the Reserve Bank’s outlook for the Official Cash Rate (OCR). The Reserve Bank’s next OCR decision is scheduled for March 25.
The Bank remains prepared in its business continuity role to ensure a well-functioning financial system, including ongoing consumer and business access to credit and cash, liquidity to the banking system and a stable payments and settlements system.
REINZ has released their January 2020 residential report today, and they reported the busiest January in 4 years. The annual average rise across New Zealand was 7%, with Auckland at 4.4% and other areas up 9.1%. Auckland is actually now among the faster-rising regions. Prices in Canterbury are rising, although to date this has been slower than many other regions.
In January the median number of days to sell a property nationally decreased by 6 days from 48 to 42 when compared to January 2019 – the lowest days to sell for the month of January in 3 years.
Low interest rates and lighter regulation are driving the market. Over 2019, the RBNZ cut the OCR from 1.75 percent to 1 percent and they indicate that the OCR will remain at 1 percent for some time. In response, household debt continues to rise. Lower debt servicing costs enables higher household spending on consumption, although returns from savings will be lower as well.
Over the past year New Zealand construction activity has ramped up substantially while net migration has steadily declined. The cancellation of earlier plans to introduce a capital gains tax has also helped to drive the market.
For New Zealand excluding Auckland, the number of properties sold increased by 0.9% when compared to the same time last year (from 3,279 to 3,308) – also the highest for the month of January in 4 years.
In Auckland, the number of properties sold in January increased by 9.7% year-on-year (from 1,180 to 1,295) – the highest number of residential properties sold in the month of January since January 2016.
Sales in Auckland were the highest for the month of January in four years, with particularly strong uplifts in sales volumes in North Shore City (+29.0%), Waitakere City (+28.6%) and Rodney District (+21.1%).
Regions outside Auckland with the highest percentage increase in annual sales volumes during January were:
• Nelson: +42.6% (from 54 to 77 – 23 more houses)
• Manawatu/Wanganui: +15.3% (from 281 to 324 – 43 more houses) – the highest for the month of January in 3 years
• Bay of Plenty: +11.5% (from 340 to 379 – 39 more houses) – the highest for the month of January in 4 years
• Marlborough: +11.3% (from 62 to 69 – 7 more houses).
Regions with the largest decrease in annual sales volumes during January were:
• Tasman: -29.3% (from 58 to 41 – 17 fewer houses) – the lowest since January 2017
• Southland: -27.2% (from 151 to 110 – 41 fewer houses) – the lowest for the month of January in 6 years
• Otago: -17.1% (from 269 to 223 – 46 fewer houses) – the lowest for the month of January in 9 years.
In the recent Reserve Bank NZ Monetary Policy Statement, they indicated that over the medium term, annual house price inflation is expected to slow as net immigration moderates, residential construction activity remains high, and the effects of past lower mortgage rates fade.
However, they expect residential investment growth is expected to pick up over the next six months, in line with recent high levels of residential building consent issuance. That said, residential investment is forecast to decline very gradually as a share of GDP later in the projection period, reflecting ongoing capacity constraints in the construction sector.
In December 2019, the Government announced a substantial investment package of $12bn, equivalent to around 4 percent of annual nominal GDP. The Treasury forecasts that $8.1bn will be spent between June 2020 and June 2024, mainly on infrastructure projects
Which is probably just as well, given that business investment is forecast to fall ahead.
Financial system vulnerabilities remain elevated and more effort is required to ensure that the system remains resilient over the longer-term, Reserve Bank Governor Adrian Orr says in releasing the November Financial Stability Report.
International risks to the financial system have increased. Global growth has slowed amid continued uncertainty about the outlook for world trade. This has resulted in reductions in long-term interest rates to historic lows, including in New Zealand. While necessary to maintain near-term inflation and employment objectives, prolonged low interest rates can promote excess debt and investment risk-taking, and overheat asset prices, Mr Orr says.
Mr Orr noted that the Reserve Bank’s Loan-to-Value Ratio (LVR) restrictions have been successful in reducing the more excessive household mortgage lending, thereby improving the resilience of banks to a significant deterioration in economic conditions.
But, there remains the risk that prolonged low interest rates could lead to a resurgence in higher-risk lending. As such, we have decided to leave the LVR restrictions at current levels at this point in time.
Mr Orr says the Reserve Bank is committed to bolstering the long-term resilience of the financial system. “Strong bank capital buffers are key to enabling banks to absorb losses and continue operating when faced with unexpected developments. The Reserve Bank has proposed increasing these buffers further with final decisions on the Capital Review proposals to be announced on 5 December.”
Deputy Governor Geoff Bascand says good governance and robust risk management processes within financial institutions are important to maintain long term resilience. Our recent reviews of banks and life insurers, and the number of recent breaches in key regulatory requirements, reinforces the need for financial institutions to improve their behaviour.
“We are engaging with industry to ensure that they strengthen their own assurance processes and controls. We have also reviewed our own supervisory strategy and will be taking a more intensive approach, which will involve greater scrutiny of institutions’ compliance,” Mr Bascand says.
“Some life insurers have low solvency buffers over minimum requirements. Recent falls in long-term interest rates are putting further pressure on solvency ratios for some of these insurers. Affected insurers are preparing plans to increase solvency ratios and are subject to enhanced supervisory engagement. This highlights the need for insurers to maintain strong buffers, and insurer solvency requirements will be reviewed alongside an upcoming review of the Insurance (Prudential Supervision) Act.”
Westpac New Zealand Limited (Westpac) has retained its accreditation as an internal models bank following completion of an extensive remediation process required by the Reserve Bank.
In 2017 the Reserve Bank required Westpac to undertake an independent review of its compliance with internal models obligations. The review found that Westpac was using a number of unapproved models and that it had materially failed to meet requirements around model governance, processes, and documentation.
The Reserve Bank imposed a precautionary capital overlay in light of the regulatory breaches, and gave Westpac 18 months to remedy the failures or risk losing its accreditation as an internal models bank.
Deputy Governor Geoff Bascand says that following the remediation process, Westpac is now operating with peer-leading processes, capabilities and risk models in a number of areas.
“Westpac has taken the findings of the independent review as an opportunity to make meaningful improvements to its risk management, and we commend it for its co-operative and constructive engagement in working with Reserve Bank over the remediation period.
“The changes that Westpac has made to its internal processes, governance and resourcing, as well as a suite of new credit risk models for which it has sought approval, have given us confidence in its capital modelling and compliance and satisfied us that it now meets the internal models bank standard.
“Looking forward, we will continue to hold all internal model banks to the same high standards.”
Internal models banks are accredited by the Reserve Bank to use approved models to calculate their regulatory capital requirements. Accreditation is earned through maintaining high risk management standards, and comes with stringent responsibilities for the bank’s directors and management.
Banks are required to maintain a minimum amount of capital, which is determined relative to the risk of each bank’s business. The way that risk is measured is important for ensuring that each bank has an appropriate level of capital to absorb large and unexpected losses.
The Reserve Bank will amend Westpac’s conditions of registration from 31 December to remove the two percentage point overlay applying to its minimum capital requirements.
As a condition of retaining its accreditation Westpac will need to satisfy several ongoing requirements, which it has committed to resolving, Mr Bascand says.