Central Bank Governor Graeme Wheeler’s quest to cool New Zealand’s housing boom is being stymied by 50-year low mortgage rates and giveaways being offered by the nation’s banks as they chase new customers.
ANZ Bank New Zealand Ltd., the largest lender, is offering NZ$1,000 ($791) with loans of NZ$100,000 or more, while Bank of New Zealand Ltd. is handing out NZ$1,000 of fuel and grocery vouchers. Westpac Banking Corp. (WBC) is giving iPads and cash, and ASB Bank Ltd. was giving a Sony 42-inch flat-screen TV.
Surging home prices could add pressure on Wheeler, who has resisted raising the benchmark interest rate from a record-low 2.5 percent to avoid fueling a currency that jumped 5.4 percent in the year through May. The Reserve Bank of New Zealand, which meets tomorrow to set rates, is instead seeking to restrain the developed world’s fourth most-overvalued housing market by regulating banks’ capital ratios and imposing restrictions on riskier mortgages, pitting itself against lenders.
“Eventually the housing sector will force the RBNZ’s hand,” said Robin Clements, New Zealand economist at UBS AG in Christchurch. “Macro-prudential tools will help, but at the end of the day only the cash rate will do the job.”
All 15 economists surveyed by Bloomberg News forecast Wheeler will keep the rate unchanged tomorrow. Clements is one of four analysts tipping a rate rise this year. Fourteen of the 15 expect an increase by March 2014.
Among major central banks, the RBNZ is the most likely to raise interest rates in the next 12 months, according to interest rate swaps data compiled by Credit Suisse Group AG. For the first time in 18 months, the shadow board set up by the New Zealand Institute of Economic Research has more support for a rate rise than a cut, the institute said today.
New Zealand house prices are the fourth most over-priced among members of the Organization for Economic Cooperation and Development, the Paris-based group said last month. The nation is in a category where prices are too high and still rising -- making the economy most vulnerable to the risk of a correction, it said.
The RBNZ will need to gradually raise interest rates later this year or early in 2014 as growth accelerates amid earthquake rebuilding, the OECD said in its biannual economic survey of the nation this month.
Home prices rose 8.7 percent in May from a year earlier, the Real Estate Institute of New Zealand Inc. said in a report today. The annual pace slowed from 9.8 percent in April, which was the fastest since September 2007.
Variable home-loan interest rates for a new borrower fell to 5.86 percent in April, the lowest since June 1965, according to central bank figures. Lenders including ANZ, BNZ and ASB currently offer mortgages fixed at a record-low 4.95 percent for one year, based on at least a 20 percent deposit.
Lenders are keeping their giveaways in place even as the central bank warns on the housing market. Westpac’s iPad offer, which is for new lending of NZ$100,000 or more, is in place for loans approved before July 6, according to the bank’s website. ANZ and BNZ don’t have a specified end date for their campaigns, according to spokespeople.
Wheeler on May 30 said he is resisting raising interest rates to cool the housing market because of the New Zealand currency’s recent strength, which weighs on exporters.
“Increasing the cash rate would carry significant risks in New Zealand in the current environment,” he said. “It would increase the rate differential between New Zealand and most of the advanced countries and could lead to a further strengthening of the exchange rate.”
The Kiwi had gained as much as 15 percent versus the greenback from last year’s low. Since Wheeler said on May 8 that he was intervening in the currency market to weaken the local dollar, it has declined about 6 percent.
Elsewhere in Asia, machine orders in Japan fell 8.8 percent in April from March, and South Korea’s unemployment rate climbed to 3.2 percent in May. A measure of consumer sentiment in Australia climbed in June, while a report later today may show industrial production in India rose in April.
In Europe, May consumer price index data for Germany, France, Italy and Spain will be released. In the U.S., mortgage applications in the week to June 7 will be published.
Unwilling to use interest rates, Wheeler has pushed for prudential measures. In May, he and Finance Minister Bill English agreed on how to implement the tools, giving the governor authority to impose balance sheet limits and other restrictions on banks as a condition of their license if there is a risk to financial stability.
Wheeler is taking aim at high loan-to-value lending, when the loan makes up more than 80 percent of the property purchase price. The central bank estimates the portion of lending above the 80 percent threshold has climbed to 30 percent of new loans, from 23 percent in late 2011.
The RBNZ on May 8 said it will increase the amount of capital that banks need to hold against risky loans. There are early signs the effort to cool the volume of the riskiest lending, where deposits are as small as 5 percent, is working.
“The appetite to lend at very low deposits has certainly diminished,” said Scott Miller, owner of Advanced Mortgage Solutions Ltd., a Christchurch-based mortgage broker. “I don’t think you’re going to see the 95 percent product removed from the shelves, but how often it is used will reduce.”
“The evidence to date suggests that during episodes of quickly rising real estate prices, LVR limits can help reduce the incidence of credit booms and decrease the probability of financial distress and sub-par growth following the boom,” Wheeler said in a May 30 speech.
Boom and bust cycles in credit and asset prices can pose real risks for homeowners and destabilize banking systems, English said when he announced the agreement with the RBNZ on May 16.
Wheeler joins policy makers from Hong Kong to Norway to Canada in tightening lending rules to tame a housing boom rather than using interest rates. Weak global growth prospects have prompted central banks in the euro area, the U.S. and Japan to add stimulus, curbing the scope of policy makers to damp their overheated housing markets without fueling currency gains.
Wheeler also faces a disparity in housing market conditions across the country that adds to his challenge. Prices in Auckland, home to a third of New Zealand’s 4.4 million people, rose 15 percent in May from a year ago, while in earthquake devastated Christchurch they gained 13 percent, the Real Estate Institute said today. Yet in some provincial areas prices gained less than 5 percent.
New Zealand’s housing market isn’t over extended by high loan-to-value ratio lending, according to the New Zealand Bankers Association.
“There’s a bit of a myth that all the lending going on is high LVR,” Wellington-based Chief Executive Officer Kirk Hope said in an interview. He estimates that banks generally have no more than 25 percent of their portfolio in the high LVR category. “Low credit growth has meant that competition is very fierce. All of the banks are competing for premium customers.”
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