The Australian head of ANZ’s New Zealand business, David Hisco, was out last night with an article in the Herald headed Housing and New Zealand dollar overcooked.
Hisco is gung-ho on LVR limits. Here are two of his list of “things that should be done”.
Heavily increase LVR limits for property investors. The Reserve Bank wants most property investors around the country to have 40 percent deposits in future. We think they should go harder and ask for 60 percent. Almost half of house sales in Auckland are to property investors. Taking them out of the market will be unpopular amongst investors but it may end up doing them a favour. Of course this would mean less business for us banks but right now the solution calls for everyone to adjust.
Voluntary tightening of lending criteria by banks. Since the GFC banks have been more conservative than ever on lending. But the current situation will see ANZ implement even tougher criteria for investment loans as house price inflation spreads from Auckland to other regions.
I have no problem at all if the management and Board of ANZ Bank want to adopt tighter lending standards. They run a private business, in a competitive market, and must make their own choices about what risks are worth it, for their shareholders, to run. Bureaucrats and politicians are fond of second-guessing those choices, and we all know that banks have made mistakes in the past – as businesses in all sectors do – but there is rarely much basis offered by the bureaucrats and politicians for thinking their assessments of what risks private lenders should run are better than those of the bankers. Actually, Australasian bankers have had a pretty good record over many decades – and when things did go wrong in the late 1980s, it had as much to do with bureaucrats and politicians as with bankers: repress an industry for decades by regulatory fiat, and inevitably it will take everyone a while to learn how to lend (and borrow) well in a much different environment.
It is the first of those paragraphs above that I have a problem with. If Mr Hisco really thinks it would be imprudent – they couldn’t make a positive expected risk-adjusted return from doing so – to lend to anyone wanting to buy a potential rental property with an LVR over 40 per cent, he probably has the delegated authority to make that change himself. Today. He is paid a great deal of money by ANZ, and his board – and superiors in Australia – presumably think highly of his ability to manage the bank, including its credit risks It simply doesn’t need a bunch of bureaucrats telling him to do his job.
But his paragraph seems stronger on the rhetorical flourishes than on the analysis. After all, where have nationwide nominal house prices ever fallen by 60 per cent? And even if they did fall 60 per cent – or even more – in Auckland to perhaps bring price to income ratios down to a more sensible 3 (rather than the current 10), such falls seem exceptionally unlikely in much of the rest of the country, where real house prices have barely changed in almost a decade. Can bankers really not make money lending to landlords in Oamaru or Invercargill at LVRs of even 50 per cent? If so, they must be a lot less good at their jobs than they would typically have us believe? If so, one might reasonably hope for the emergence of new entrants to the new mortgage lending market – preferably non-bank lenders beyond the reach of the Reserve Bank’s controls. One can always worry about extreme hypotheticals, but if one did no bank would ever lend money to anyone for anything – which would rather defeat the point of setting up in business as a bank.
But I don’t suppose we will actually see ANZ move to ban all mortgages for residential investors with LVRs in excess of 40 per cent. Instead, Hisco wants the Reserve Bank to do it for him. That would enable him to tell his Board that he simply had no choice, and provide cover when profits fell below shareholder expectations. That should be no way to run a business in a market economy – although sadly too often it is. It is good illustration of the distinction between pro-business and pro-market policies: the former too often involve politicians, bureaucrats and big business people in each other’s pockets, providing cover for actions that work against the interests of citizens. We already see this happening to some extent with the Reserve Bank and the banks: the Reserve Bank adamantly refuses to release submissions made by banks on its regulatory proposals.
If Hisco followed his own analysis and banned all investor mortages with LVRs above 40 per cent, no doubt ANZ would lose a lot of market share. If Hisco was fundamentally right, and in another year or two house prices nationwide did fall 60 per cent, he’d be vindicated as presumably ANZ’s loan losses would be much lower than those of other banks who didn’t follow his lead (unless of course he’d taken the capital that would have funded investor mortgages and used it on something that proved even riskier, if currently less visible). It is all very well to invoke the old Chuck Prince (ex Citi CEO) line about “while the music goes on one has to stay on the dance floor”. But top executives are paid to be a bit ahead of the game in how they position their own businesses. Of course, they aren’t always rewarded – as often in life – for being too far ahead, but nothing stops Hisco making his case to the Board and shareholders for pulling lending standards in even more than the Reserve Bank requires them to. If the shareholders decline, and in good conscience he cannot bring himself to undertake such lending, he could consider other career options.
As it happens, his own economics team doesn’t seem to agree with him. Of course, they aren’t the people setting credit standards for the ANZ, but it was interesting to see their note on Tuesday shortly after the Reserve Bank had released its new proposals. It concluded.
To us, the case for requiring investors to have a 40% deposit is not overly
strong. This is particularly considering the RBNZ’s own stress tests and the fact that most investor lending was already done at sub-70 LVRs anyway.
There must be some interesting conversations going on at the ANZ. It would be very interesting to see the ANZ submission on the Reserve Bank’s proposals, and if the Reserve Bank won’t release it, there is nothing to stop ANZ itself doing so. I’ll be surprised if they do, and even more surprised if the submission recommends limiting all investors throughout the country to LVRs not in excess of 40 per cent.
Hisco seems to have some form as regards bold calls. Digging around, I stumbled on this piece from October 2014, less than two years ago. It was full of all sorts of calls for interventionist active government, but not a mention of LVR limits or bank lending standards. Back then – 21 months ago, and not that much has changed since then – it was all about supply.
The housing affordability issue is a housing supply issue, pure and simple. In 1974 there were 34,400 new homes built. Last year there were 15,000 – less than half. It’s no wonder houses doubled in price in under a decade in Auckland.
The solution is simple – urgently build more houses. To do that in places like Auckland we need to build more suburbs and allow intensification in existing areas.
In his latest piece, he hasn’t totally abandoned the supply arguments, but has rather markedly backtracked. It doesn’t appear in his five point list of things we should do now, and there is just this
The Leader of the Opposition says we need to build more homes faster. That makes sense, too, if we have the resources and approvals to do it.
And yes I did notice his comments about immigration. This is what he says about that item in his five point plan
Review immigration policies. Immigration has been great for New Zealand. We are a harmonious, diverse and inclusive society. But Auckland’s housing, roads, public transport and schools are struggling to cope. Let’s have an honest and sensible debate about immigration using facts rather than prejudice to see if we should push the pause button.
Debating using “facts rather than prejudice” seems a good idea in most areas of life, but his approach doesn’t really seem to offer much. There is little evidence (“facts”) to suggest that immigration has been “great for New Zealand”, but on-off immigration policies seem about as undesirable as unpredictable regulation in any other area of life.