24 March, 2021
The small nation of New Zealand, with its highly experimental central bank has been increasingly in the news lately, and one day after we reported that the kiwi tumbled after the government targeted housing speculators to burst a “dangerous” bubble (giving the central bank leeway to keep rates lower for longer and depressing the currency), on Wednesday it was the turn of New Zealand 10Y Yields to plunge, after a failed QE operation saw 10Y NZ bonds slide by a whopping 17bps dragging the NZDUSD further from about 0.7170 this time yesterday to about 0.6870 this morning.
The chaos broke out early on Wednesday local time when the RBNZ announced that its QE buying operation failed to find enough offers to meet target of NZ$220MM buying just NZ$152MM. The shortfall came from the Apr 2025 issue, where of the NZ$92MM in offers, just NZ$52m accepted vs target NZ$120MM/
The news sent N.Z. 10-year bond yields fall as much as 17bps, with short-end rate hike pricing continuing to unravel in a continuation of Tuesday’s move after fresh measures to cool rising housing prices were introduced. There are now just around 20bps hikes priced by the end of 2022 versus 35bps on Monday
The AUDUSD was dragged down in sympathy with it. New plans to curb property markets by PM Ardern may have also been a contributing factor, but as ING muses, “maybe investors are becoming more reluctant to part with bonds at these yields?”
23 Maqrch, 2021
One month after the New Zealand government took the historic step of adding a fresh mandate to its central bank, tasking it with considering the impact its monetary and financial policy decisions have on housing prices, a move to help calm the country’s red-hot property market, overnight New Zealand’s government took another step at popping the local housing bubble by taking aim at property speculators with a suite of new measures to tackle runaway house prices and prevent the formation of a “dangerous” bubble.
As a reminder, back in February, Finance Minister Grant Robertson said the Reserve Bank of New Zealand (RBNZ) must take into account government policy relating to more sustainable house prices.
“Today’s announcement is just the first step as the government considers broader advice about how to cool the housing market,” Robertson said in a statement. “We know the rapid increases we have seen in recent months are not sustainable, which has meant many first-home buyers are struggling to access the market.”
However, with home prices refusing to dip and stubbornly sticky at all time highs, rising by a record 21.5% in February…
… on Tuesday, Prime Minister Jacinda Ardern said the government will take more steps to cool the red hot housing market, and will remove tax incentives for investors to make speculation less lucrative and unlock more land to increase housing supply. The moves come as surging house prices keep first-time buyers and people on lower incomes out of the market, raising concerns about growing societal inequality. One wonders when the Fed will finally consider the impact of soaring home prices – largely the result of extremely easy financial conditions courtesy of the Fed – on social inequality (spoiler alert: never).
“The last thing home owners need right now is a dangerous housing bubble, but a number of indicators point towards that risk,” Ardern told a news conference. “Property investors are now the biggest share of buyers, with the highest amount of purchases on record. Last year, 15,000 people bought homes who already owned five or more.”
Not to mention the thousands of American billionaires who have decided to make New Zealand their beautiful bug-out location of choice.
As Bloomberg notes, New Zealand’s success in battling Covid-19 has seen its economy recover sooner than many others, putting it at the forefront of a global property boom as ultra-loose monetary policies encourage investment in higher-yielding assets. House prices surged 21.5% in the year through February and investors accounted for more than 40% of purchases that month, a record high.
So to dissuade speculation, the government will enforce the extraordinary step phasing out the ability of investors to claim mortgage interest as a tax-deductible expense, and will extend of the period in which profits on the sale of investment property are taxed to 10 years from five.
According to Westpac Banking Corp, the changes “will significantly reduce the financial incentives to invest in housing” and have “a chilling effect on investor demand. Today’s announcements indicate significant downside risk for house prices and economic activity more generally.”
The package is the latest salvo in Ardern’s assault on the booming property market, which is undermining her efforts to reduce inequality. Prices are soaring at double-digit rates around the country, taking the national median to NZ$780,000 ($556,000). In Auckland, the median price has reached NZ$1.1 million, making it the fourth least affordable city in the world, according to Demographia.
After tasking the central bank to pay more attention to the property market as noted above, NZ finmin Grant Robertson said today that New Zealand’s housing market has become the least affordable in the OECD and it was “essential the government takes steps to curb rampant speculation.”
Robertson said extending to 10 years the so-called “bright-line” test – effectively a capital gains tax on investment property sales – and removing interest deductibility for investors “will dampen speculative demand and tilt the balance towards first home buyers.” While the new bright-line test will apply to properties bought from March 27, the time horizon for new builds will remain at five years to encourage supply.
At the same time as the government tries to curb housing demand, it is also increasing supply which has been constrained by a raft of factors including planning rules and high construction costs. It said today it will establish a NZ$3.8 billion fund to unlock more land for housing development, and also make first home grants available to more people.
The irony, as Rabobank’s always perceptive Michael Every notes, is that virtually all of the proposed measures will have little to no impact on home prices:
- A NZD3.8bn fund to unlock more land for housing development – which won’t make any difference, as housing developers only build when prices are high.
- Government first home grants available to more people – which will also push prices up further;
- The extension of the period in which profits on the sale of investment property are taxed to 10 years from five – which won’t bother people if prices are rising 20% y/y; and
- Phasing out the ability of investors to claim mortgage interest as a tax-deductible expense.
Ardern disagreed and said that “the housing crisis is a problem decades in the making that will take time to turn around, but these measures will make a difference”, adding that while “there is no silver bullet, but combined all of these measures will start to make a difference.” Only they won’t, and instead the latest government intervention will only makes things worse as it will remove the impetuse from the RBNZ to tighten conditions earlier.
Speaking of which, the New Zealand dollar plunged by almost 2%, dropping to 70.20 US cents, down from 71.70 cents beforehand. Swap rates and bond yields also declined as traders speculated the central bank will be able to keep interest rates at a record low for longer thanks to the government’s own efforts to rein in home prices.
“The announcements made today relating to housing investors were bolder than most expected and will be more hard hitting because they basically take effect straight away,” said David Croy, an interest-rate strategist at Australia & New Zealand Banking Group in Wellington. If that cools the housing market, it will give the RBNZ more breathing space, and delay rate hikes.
And since the level of overall liquidity is all that matters, it means that New Zealand’s “dangerous” housing bubble is about to get even more dangerous.
Westpac may spin its business off to shareholders or find a new owner
14 March, 2021
Westpac Banking Corporation has put its New Zealand unit under review and has reportedly hired Macquarie Capital to run a scoping study to decide whether to retain it, spin it off to shareholders or find a new owner.
In a statement to the ASX and NZX, Westpac confirmed it was assessing whether a demerger would be in the best interests of shareholders.
“Given the changing capital requirements in New Zealand and the RBNZ requirement to structurally separate Westpac’s NZ business operations from its operations in Australia, it is now appropriate to assess the best structure for these businesses going forward,” it said.
The statement followed a report from the AFR which said Westpac executives meet with a handful of investment banks to talk about its options, before appointing Macquarie.
Fisher Funds senior portfolio manager Robbie Urquhart said the review was not too surprising given there had been speculation before Covid-19 all the Australian banks were looking at their New Zealand subsidiaries.
There had also been a changing of the guard in the form of a new chair and chief executive at the Westpac parent, which had been taking a number of positive steps to simplify the business.
Given that context as well as the RBNZ announcement this morning, it was logical for them to review the New Zealand business.
“It’s positive they’re looking at that and addressing all their options,” he said. “It’s big news and will be interesting to see where they land.”
He said it was too early to judge the technicalities of a split, given the capital structures and link between the businesses were quite complex.
“This will take a bit of time but I suspect they’ve been looking at it for a while,” he said. “But for the New Zealand market, having a business of that scale would be a huge positive.”
Fat Prophets head of research Greg Smith said it was a pretty amazing announcement but also coincidental given the slap on the wrist the New Zealand business got from the RBNZ.
He said the timing was curious and he was not convinced anything would happen, given the New Zealand business had historically been material and profitable.
“It could be quite positive for the Kiwi market but time will tell,” he said. “It certainly wouldn’t happen overnight but anything’s possible.”
The reported decision to review the New Zealand business comes as it faces regulatory scrutiny over liquidity issues.
The Reserve Bank of New Zealand has ordered Westpac NZ to hold more cash and commission independent inquiries after it was found to be in breach of the RBNZ’s liquidity policy.
“We have experienced ongoing compliance issues with Westpac New Zealand over recent years, most recently involving material failures to report liquidity correctly,” deputy governor and general manager of financial stability, Geoff Bascand, said.
“Furthermore, the bank has continued to operate outside of its own risk settings for technology for a number of years.
“Westpac NZ needs to take a close look at its risk governance practices.”
In December 2020, the Australian Prudential Regulation Authority (APRA) announced it was taking action against Westpac NZ’s parent, Westpac Banking Corporation, over the liquidity issues.
The breaches were identified in 2019 and 2020, and demonstrated weakness in the bank’s risk management and oversight, risk control frameworks and risk culture, APRA said.
It had also required Westpac to complete independent reviews and to hold more cash.
“APRA’s actions reflect how seriously we view breaches of our prudential requirements,” the authority said.
Needs more capital
Westpac NZ, the New Zealand incorporated bank, reported a net profit of $550 million for the year to September 30. The New Zealand banking operation also runs through a branch of Australia-registered Westpac Banking Corporation.
The business has 1.3 million customers and an estimated 19% of the consumer lending market and 18% of deposits in New Zealand.
The news also comes after the Reserve Bank of NZ announced plans to increase tier one capital requirements for all systematically important banks to 16% of risk weighted assets, from 13.5%.
Westpac NZ is considered a systematically important bank, and told shareholders in November that it would need another NZ$1.6 billion to $2.2b in capital to get meet the regulatory requirements by 2028.
Westpac has also struck deals to sell its Pacific businesses in recent months, including its operations in Papua New Guinea and Fiji, as it decided to return to its core business of banking in Australia and New Zealand.
A spin-off or demerger could involve a pro rata distribution of Westpac NZ stock to Westpac’s existing shareholders and a separate listing on the NZX and ASX.
If a sale was involved, Masssey University banking expert David Tripe was not convinced Westpac would have much luck finding a buyer.
“The interesting question would be finding a buyer that the Reserve Bank would be happy with, because that’s also a condition effectively of the sale,” he said.
A buyer would need NZ$10 billion-plus, and “one suspects they wouldn’t be happy with a private equity owner”.
Westpac NZ could raise the extra capital it needs by reinvesting profits, and that would not take a huge length of time, or it could do a partial selldown.
“But that’s tricky because then there’s the question of ownership control, credit status, how you manage things.
“Joint venture banks are prone to difficulties.
“So, my suspicion is Westpac (Banking Corporation) might be stuck with it.
“All the Australian owners of New Zealand banks are pretty much stuck with them,” Tripe said.