Landlords' reply to Bollard: Who cares?

[muppet]

Landlords' reply to Bollard: Who cares?
5:00AM Friday March 09, 2007
By Anne Gibson and Brian Fallow

Wealthy Auckland property investors have rebuffed Reserve Bank Governor Alan Bollard yesterday, saying his interest rate increase was "like water off a duck's back".

Dr Bollard lifted his bank's official cash rate by 0.25 per cent - and within hours, Westpac increased its floating mortgage rate by the same amount, to 9.8 per cent.

Its move adds about $17 a month to the cost of a $100,000 mortgage.

Dr Bollard also indicated that tighter tax rules on investment properties were being considered, and hinted at a further rate rise as early as next month to rein in the housing market.

But Auckland investors surveyed by real estate consultant and mortgage broker Kieran Trass said the new rates would have little effect because they had fixed long-term mortgages.

Over the last few days, Mr Trass surveyed 5000 landlords who each owed banks more than $500,000 and had portfolios worth $1 million-plus.

Their houses and flats were mostly in Auckland's low and middle-income suburbs.

Mr Trass said: "As the survey respondents have indicated, increasing floating interest rates is not likely to alter their decision to buy more property this year.

"It's unlikely to have much if any effect on their overall portfolio funding costs."

Even if rates went up by 2 per cent, the investors said they would still buy property because rising house prices more than offset the mortgage costs.

Mr Trass said 48.5 per cent of the investors said they would buy more property, even if rates rose by an unlikely 2 per cent.

Dr Bollard indicated that his rate increase was aimed at property investors.

A mortgage levy proposed by Deputy Prime Minister Michael Cullen clearly did not enjoy broad political support and was no longer an option, but other measures were being worked on.

They include blocking investment property owners' ability to exploit "negative gearing".

Landlords' expenses, including interest, maintenance and depreciation, can exceed the rent they get, but those losses can be used to reduce their tax liability on other income.

That has made rental housing an attractive option and helped push up house prices.

A law change would be required to eliminate "negative gearing".

Also under consideration is for the Inland Revenue Department to be more aggressive in enforcing the law requiring active traders in property to be taxed on their capital gains.

Dr Bollard also fired a shot at banks, saying he was looking at raising the amount of capital they would need to back their housing loans. That would increase the costs of borrowing.

National's finance spokesman, Bill English, gave the governor a grilling when he appeared before Parliament's finance and expenditure select committee hours after lifting the rate.

"There is no possibility you will have an alternative [to the official cash rate] for several years, and this is pointless speculation," he said. "It is hard to believe you will come up with anything that will make any difference."

It was none of Dr Bollard's business if "mums and dads" took on more debt than he thought wise, Mr English said.

"Is there a problem significant enough to warrant this speculation and to risk undermining the credibility of the tool you already have?

Dr Bollard replied that interest rates had been working but not to the extent the bank would like.

Conditions in international markets had limited how much he could lift interest rates without "hugely" hurting exporters and firms competing with imports.

Rate moves

0.25% Yesterday's increase

9.8% Westpac's new floating rate

7.7% Average rate for homeowners on fixed mortgages

http://www.nzherald.co.nz/section/1/story.cfm?c_id=1&objectid=10427881

[donna]

I wonder if there is a cost/benefit analysis generated before the decision to raise the rate?

I heard a stat that at retirement Kiwis are poorer than Cubans! That is not hard to believe.

Donna

[Skeptic]

I heard a stat that at retirement Kiwis are poorer than Cubans! That is not hard to believe.

It's pretty hard to believe if you've ever been to Cuba.

[McDuck]

Dodgy reporting style again.

Opening paragraph.

5000 people sitting in a room chanting “Water off a ducks back”

What kind of journalism is this?

[Perry]

Dodgy reporting style again.
Opening paragraph.
5000 people sitting in a room chanting “Water off a ducks back”
What kind of journalism is this?

About the same level of credibility as what passes for
monetary policy in Wellington. How long must the same
thing be said before some W'gton woodenhead actually
hears anything other than their own tinnitus?

All these points, like so many beforehand, are symptom-
chasing. One only has to think back to the Berlin Wall.

The Communists were saying that communism was a great thing.
But so many people were trying to escape from it, that they had
to build a wall to keep them inside this "great thing." Why would
the Kremlin they not see the obvious? Because they didn't want
to. And the NZ situation is much the same.

People bought/buy houses because of government policy, not
in spite of it. They see it as an alternative to the lack of viability
in cash savings. Savings that would help NZ bankroll its own
economy, instead of having to borrow offshore.

If the woodenheads in W'gton would go back to the source
and fix the problems, that would preclude the need for them
to be ever-rushing around with sticking plasters.

[McDuck]

It’s cant be an easy job running a country where your hands are tied by the ideals of a liberal democracy.

Everyone gets to do what they want when they want how they want, but kicks up one hell of a stink when someone else’s freedom is crimping their peace and quiet or profit making plan.

I have a great amount of sympathy for modern governments.

I think the government desperately wants to show a non intervention policy in finances.
Firstly because they aren’t able to fully predict the domino effect of their interventions, and secondly because it looks good to foreign investors.

The thing is, the government was forced to step in and put the whole OCR tool into operation.
It worked for a while, and then things changed.

People saw the “user pays” mind set saturate all their needs and activities…and not surprisingly were tricked into thinking that money rather than integrity was now the order of the day.

Satan must have been grinning, ear to pointed ear.

The introduction of the OCR tool demonstrates that changing times can void a perfectly viable control mechanism.

I mean by comparison, centuries past , when coins were real silver and gold and mint masters started eroding value by reducing the quality of the metal, the Royalty had one hand chopped off all the mint masters involved.
It worked perfectly to solve the problem.

You just cant do thing’s like that in a liberal democracy like ours.

[Gatekeeper]

I go back to Globalisation as a major factor.
NZ has little control and can only be reactive after the fact.

Stephen King: Globalisation has left central banks facing a world of growing economic uncertainties
Published: 19 February 2007
Most of us live our lives within some kind of framework. Sometimes, it's a formal framework, associated with, say, an employment contract or criminal law. On other occasions, it's an informal framework, the kind of thing that might govern family life.

We use these frameworks to form expectations about the future. We know, for example, that an attempt to break into someone else's house might be met by arrest and imprisonment. We know also that alcohol or drug abuse can destroy family life. Our frameworks allow us to make rough predictions of outcomes that stem from given actions.

Central banks also live within frameworks. They use them to evaluate the effects of changes in monetary policy.

For today's central bankers, however, there's a bit of a problem. The frameworks which have proved reliable in the past appear to be breaking down. One standard approach used by central banks is to consider changes in interest rates against measures of the amount of spare capacity within an economy. The idea is simple. Each economy has a "supply potential", the point at which resources are used to such a degree that there is a tendency neither for inflation nor deflation. If interest rates can be moved to set demand at a level consistent with "supply potential", it follows that the central bank will, through time, achieve price stability.

Another approach is to think about inflationfrom the angle of money supply growth. Given that inflation is, in some sense, a monetary phenomenon, a central bank could take the view that accelerating money supply growth might say something about future inflation, even if there is little immediate evidence of inflationary pressures coming from, say, measures of spare capacity.

At the moment, neither of these approaches is working particularly well. The problem with the first lies with the inability of central banks to be sure about the size of supply potential. The Bank of England, for example, has to fret about the scale of labour immigration. It knows the scale of recent immigration has been big, but, beyond that, information is really rather sketchy.

Perhaps the best that can be said is that labour supply has probably increased, that supply could increase further if the UK's borders aren't shut and that additional supply may have a restraining effect on wage increases. This, though, is all rather vague. In turn, estimates of the amount of spare capacity are not likely to be terribly reliable.

Meanwhile, money supply is also distorted. With capital flowing across borders at ever-faster rates, and bank deposits switching from one jurisdiction to the next, it's increasingly difficult to work out what, if anything, accelerating money supply growth means.

Why are these frameworks looking so creaky? The answer lies with globalisation. Central bankers are central to their countries or economic regions. Yet increasingly our national economic destinies are being affected by developments all over the world. As cross-border trade and capital flows have increased, so has our interdependency with other nations. In this context, a monetary framework that relies on the measurement of domestic spare capacity or money supply looks increasingly anachronistic.

To see why, imagine a world with a single central bank and a single currency. Many of the problems facing today's central banks would simply disappear. There would be no exchange rates. There would be no concerns about imported price inflation, because there would be no imports. There would be less difficulty in interpreting money supply developments because there would be no cross-border capital flows and no central bank foreign exchange reserves. Global demand and supply would be more accurately measured because there would be none of the tricky aggregation issues caused by having to add estimates of national income together in the absence of a common currency.

The idea of a global central bank helps to tease out the difficulties our real-life central banks are facing. Globalisation cuts both ways. Enhanced capital and labour mobility and heightened information flows tend to penalise those economic regimes that underperform global "best practice". As a result, more and more nations have made their central banks independent and given them the common goal of price stability. If all central banks are pulling in the same direction, the chances are that each central bank, individually, will achieve price stability.

Simultaneously, though, growing economic interdependence reduces the ability of central banks, individually, to determine a nation's economic fate. There are two problems. First, there are data limitations. If, for example, UK export performance depends increasingly on the strength of activity within emerging markets, it's likely that UK export performance will become increasingly unpredictable, because emerging market economic data is often neither timely nor particularly reliable.

Second, there are co-ordination limitations. In a world of economic interdependency, it is all too easy for policymakers to disagree on the root cause of economic problems and, hence, on the appropriate solutions.

Meanwhile, for financial markets and for the man in the street, central banks' actions may appear increasingly unpredictable (the charts show how market expectations of US and UK interest rates have changed rather a lot over the past 12 months, despite not many actual changes). Academic economists seem split down the middle when it comes to dealing with economic uncertainty, whether as a result of globalisation or other disturbances. Some argue that central banks should do as little as possible; others that central banks should do a lot more.

Even here, though, there is no definitive "right" approach. In a two country - and, hence, two central bank - world, the central bank that decides to be "activist" will have an influence on the exchange rate which might, in turn, force the other central bank to become activist too, even if its staff would prefer to be "passive".

Central banks like to pride themselves on their transparency. Many have argued that with transparency comes an increased degree of predictability. I'm not sure this is right. At the moment, enhanced transparency is revealing the uncertainties, rather than the convictions, of the central banking community. There's a good chance that those uncertainties will only increase as our economic interdependence grows ever more complex.

Stephen King is managing director of economics at HSBC

[Perry]

I wonder why the fractional reserve isn't seriously
constrained? Abolition would be better, but that
would be pie-in-the-sky. It would be such a simple
tool to implement and use. Sure, the banks would kick
up a fuss. So what? I suspect that the populace would
go for it, when they were told that the banks were
profiting hugely by charging interest on non-existent
money loaned to said populace.

Like McDuck, I have a modicum of sympathy for
the woodenheads.

But that sympathy is homoeopatic. Doing the right
thing was never easy.

[Perry]

Cullen Pushes For Extra Tools

Finance minister Michael Cullen admitted in a speech in Wellington
today that New Zealand needs tools other than the official cash rate
(OCR) to combat inflation and rein in the housing market. Raising
interest rates hammered exporters and harmed the economy, he said.

[Gatekeeper]

Behind NZ's Housing Boom
Australasian Investment Review

Sydney, Mar 13, 2007 (ACN Newswire) - So we think we Australians are besotted with houses and all things property (units and holiday homes).

Well apart from booming Perth where's the hottest property market in our region?

Across the Tasman in New Zealand. House prices are rising at an annual rate of more than nine per cent.

Our four big banks know it: they are helping finance a boom that will end in tears as New Zealand lifts interest rates and considers tougher measures to try and curtail price inflation.

The Reserve Bank of New Zealand lifted its official cash rate to a record 7.5 per cent late last week and now looks certain to further lift it in coming months.

A few weeks ago we reported on a balloon floated by NZ Finance Minister Cullen that some sort of two per cent penalty rate be imposed on home loans to help the Reserve Bank of New Zealand rein in the house price inflation.

That lasted about an hour before he shot down his own suggestion: the proposal would have hurt the local arms of our big Four (Westpac, National/ANZ, Bank of NZ/NAB and ASB/CBA).

But some sort of quantitative control is being pondered across the Tasman and RBNZ Governor Bollard made that clear in the latest quarterly monetary policy statement accompanying the rate rise.

NZ house prices are rising like the Australian sharemarket has been rising: in fact on a rough comparative basis you could say that what shares are to millions of Australians at the moment, houses are to Kiwis.

Figures released yesterday show that New Zealand house price inflation jumped to a three-month high in February, adding to evidence that prompted the RBNZ to raise interest rates last week.

House prices rose9.3 per cent last month, compared to February 2006, according to Quotable Value New Zealand, the government valuation agency.

This was after rises of 8.8 per cent in January and 9.2 per cent in December (annual rates).

The RBNZ Governor Alan Bollard raised the benchmark interest rate a quarter point to a record 7.5 per cent last Thursday in response to the continuing boom in housing.

He said the accelerating demand for housing may feed into the consumer price index and force another rate rise later in the year.

So what's driving it? A solid domestic economy and the old bugbear of central bankers everywhere: capital gains and lots and lots of anecdotal evidence of the easy money to be made. It's a boom being financed by a banking system, looking at the only form of competition left in the country: mortgages.

The RBNZ's Gov. explicitly mentioned ancillary tools in the media statement to be considered as a way of controlling the explosive growth in house prices.

"Since late 2005, the Bank, in conjunction with the Treasury and other agencies, has been considering whether there might be other tools or policy options in addition to the OCR that could provide assistance to monetary policy in maintaining low inflation."

(That's where Finance Minister Cullen's flirtation with some sort of interest rate premium or penalty on mortgages came from)

"…potential measures include greater emphasis on the enforcement of existing tax laws regarding capital gains made on investment properties and changes to the tax rules around investor housing.

"Development of these options with the relevant agencies is progressing. Also, in the area of mortgage credit growth, we are considering the scope for changes to banks' capital adequacy requirements on housing lending aimed at moderating the credit amplifier effect on the housing market, while at the same time ensuring that banks have an adequate buffer against a possible housing downturn."

Analysts say the RBNZ is hamstrung in what it can do: if it wants to introduce (with Government help) quantitative restrictions on home lending to force up the price, then the bank's charter will have to be altered to include that. It may need new legislation, or it may need some sort of in writing agreement with the government.

It would look as though attempts to control house prices through restrictions on the amount of money to be lent by banks would not be covered by the RBNZ's charter to target inflation (except by a very loose reading).

Analysts now say the rise last month means a further lift in official rates to 7.75 per cent and even eight per cent can't be ruled out across the Tasman.

April 26 is nominated as possibly the next time a rate rise can happen.

It is like using a piece of blunt wood to slow the economy; business leaders have criticised that, the NZ dollar has risen, export industries don't like it and imports will continue at high levels.

But they will be cheaper, especially imports of fuel and other oil-based products, so that will be a moderating influence on consumer price levels.

But it's not good news for the banks (especially the ANZ and the CBA) nor is it good news for Fairfax, APN, Woolworths, Lion Nathan and Harvey Norman who are now deeply entrenched in the NZ economy, especially the sector dependent on consumer activity.

Kiwi economists are now forecasting the domestic economy to slow even further this year as a result of the official rate going to 7.5 per cent. If it goes further the slowdown will be even more marked (around one per cent growth in GDP by the end of the year and well into 200.

Dr Bollard warned last week that a further tightening of monetary policy "may be required".

The housing market had been supported by the still continuing expansion of mortgage credit at very low margins and strong growth in household incomes. (blame the big four Australian banks)

Dr Bollard said the recent sharp fall in inflation due to falling petrol prices and the high exchange rate was temporary and understated the degree of persistent inflation in the economy.

"Our concern is that the recent pick-up in housing and domestic demand may gain momentum, giving rise to a stronger cyclical upturn at a time when resources are already very stretched. "This could reverse the rebalancing of the economy that has been underway since late 2005 and present substantial risks to the medium-term inflation outlook. It would also increase the prospect of a more costly correction in the country's external deficit.

"We are continuing to assess alternative measures that might support the OCR, working with the relevant government agencies. "These include a tightening of tax rules applying to housing investment and changes to bank capital requirements to help moderate the amplifying effect of credit on the housing cycle.

"However, we will continue to rely on the OCR as the primary instrument of monetary policy.

"The current policy tightening is aimed at reducing the risk of an unsustainable rebound in activity. "Depending on the persistence of the current upturn, further tightening may be required. A return to a moderating trend in housing and domestic demand will be essential if we are to see a reduction in medium-term inflation pressures."

I think this is called 'fasten your parachutes' after yesterday's figures. An annual growth rate of more than nine per cent in house prices is clearly unsustainable.

I reckon they'll end up disallowing residential property losses being claimed against other income.

Then, and this is the more important one because in January 08 Basel II comes into effect and in it's current form it allows bank to lend even more! Capital requirements will move down to 30% (from I think 50% presently) for residential loans.
No way he's going to let that happen.
So expect the banks to require more equity after Xmas and also higher interest rates.

[Gatekeeper]

Like I said, Basel II comes into effect January 08, and it looks like all the "No Doc" "Lo Doc" people will be copping it. Quite clever of the RBNZ really. Shouldn't affect the average family working hard and paying off their mortgage, or wanting to get one. I wonder if this will be the straw...
Quite an important bit of news.

Hike looms for ‘risk’ loans
Banks likely to pass on higher costs for `lo-doc' loans under Basle II
NICK SMITH

TENS OF thousands of New Zealand homeowners face significant interest rate rises next year – and it has nothing to do with the official cash rate.

The banks will be passing on to their higher-risk “lo-doc” customers the additional cost likely to be hundreds of millions of dollars of complying with the international banking agreement, Basle II, due to be formally adopted in January 2008.

The assessment of risk, called a loss given default (LGD), that the banking sector applies to its entire mortgage lending portfolio will, under Basle II, soar from its present 6% to more than 20%.

ASB’s head of group finance and risk management, Stewart McRobie, told The Independent Financial Review Basle II recommends raising the floor of the LGD to 10%.

The Australian banking regulator APRA has “suggested 20%,” McRobie said.

“The Reserve Bank is suggesting an even higher number.”

He declined to give an exact number but said suggestions it could be as high as 30% were “outlandish.” David Tripe, head of Massey University ’s centre for banking studies, said the effective impact of raising the LGD will fall on homeowners with mortgages that don’t conform to standard bank lending criteria.

These people have loan-to-value mortgages of 90% or more, bad credit history, poor or missing documentation of income and assets, have missed payments, or a combination, he said.

Of the $134 billion mortgage market, Tripe said, this high-risk category could be as much as $15 billion, meaning as many as 75,000 mortgages will be affected.

Changes to the LGD provide the commercial banks with the economic incentives to differentiate on the basis of credit quality, Tripe said.

“Banks may stop offering the same price to all customers,” he said, adding “the Reserve Bank would not be unhappy with that pattern of behaviour – it’s economically rational.

“It’s reasonable to expect [these people will] face higher interest rates.


“It’s not unreasonable that it’s paid by the borrowers and it may assuage the fears of people who are grizzling about the way the Reserve Bank is pushing up the OCR.”

McRobie confirmed the banks are negotiating with the Reserve Bank over the LGD and a range of other measures under Basle II related to operational and market risk.

“We’ve gone to them with some views,” he said, as will have the other banks.

But, McRobie claimed, ASB had little exposure to interest-only loans and “even between 90% and 100%, the exposure’s very low.”

Other banks are in a much more difficult situation.

Asked about the impact of an imposed LGD of more than 20%, Westpac spokesman Mark Watts said Westpac New Zealand had no comment. BNZ’s Brenda Newth and ANZ’s National Craig Howie also offered no response.

Under Basle II, banks’ capital requirements are ultimately expected to be reduced.

But, McRobie explained, banks need to apply for advanced accreditation status to benefit from those laxer requirements.

The Reserve Bank is in charge of the accreditation process, another lever it can exercise over the commercial banks in its battle to rein in housing.

Negotiations, said McRobie, are continuing: “It’s very formative, it’s still unfolding.”

With Basle II scheduled to come into force next January will there be a capital release in 2008?

“I think the answer is no. Will there be a capital release sometime later?

“It’s certainly possible but it remains to be seen.”

Tripe said, however, it’s extremely unlikely the Reserve Bank would delay implementation.

http://www.theindependent.co.nz/story1.html

Risk starts to have a cost!

[cube]

All good for the S/LO industry!

[Gatekeeper]

Why's that Cube? I don't know much about them. Do they not take out Lo Doc loans?

[cube]

SLOs don't need a loan at all, until the tenant buyer is ready to buy using 'traditional' finance. If getting that finance is harder, the Lease Option will last longer.

Lease Options need finance, but it doesn't have to be a Lo-Doc one if the investor has sufficient income and/or access to cash.

cube