The NZ Reserve Bank had a busy day yesterday – it moved to try and nip a speculative home loan boom in the bud by forcing the country’s banks to boost capital buffers on low deposit loans, and the governor Graeme Wheeler revealed the central bank had intervened to halt the strong rise in the country’s dollar, and might to it again.
Both developments came on the day the central bank released its financial stability report and Mr Wheeler appeared before a parliamentary committee where he was quizzed on the value of the Kiwi dollar and the danger the 7% rise in the past year was having on exports. In fact the Kiwi dollar is up more than 45% against the greenback since the depths of the GFC in late 2008.
The contrast with the situation in Australia is telling. In Australia some analysts have urged the Reserve Bank to take action to force down the value of the dollar. The RBA has not gone as far as its NZ counterpart and has chosen to push interest rates lower – not to try and drive the dollar lower, but to support the economy in coming months, with any impact on the dollar seen as a bonus.
The futility of trying to force down the Aussie was underlined yesterday when surprisingly solid trade data from China for April saw the Aussie currency rise back to just under $US1.02 – all but wiping out losses in the wake of Tuesday’s surprise rate cut.
China’s exports rose 14.7% in April, while imports grew 16.8%, much stronger than forecast and reported for March. The trade surplus was $US18.16 billion for the month. Exports were up 2.7% from March , while imports fell 7.7%. The market had been expecting a rise of just over 10% for exports and 14% for imports. The stronger data saw the return of scepticism by western analysts and in media reports.
The news about the intervention saw the NZ currency drop around three quarters of a cent to around 83.76 USc (a five week low). That was a fall of 1.3% and it took some of the edge off the currency’s strength.
NZDUSD – Kiwi Dollar Climbing Aganist The USD
“There has been some intervention,” Mr Wheeler told the NZ parliament’s finance and expenditure select committee in Wellington. And Mr Wheeler indicated that he reserves the right for further intervention to damp gains in the dollar. In February he had said investors should be aware the local dollar isn’t a “one-way bet”.
The RBNZ indicated worries about the strength of the dollar with this comment in its Financial Stability Report. "The relative strength of the New Zealand economy, in a period where the global outlook is quite uncertain, has pushed the New Zealand dollar to new highs that will be problematic for some firms that compete in international markets.” The size of the interventions wasn’t revealed yesterday, but deputy Governor Grant Spencer told the parliamentary committee that the details and the fact there had been some intervention "will become evident at the end of the month" when the central bank publishes balance sheet figures.
For the myriad Australian companies doing business in NZ – Fairfax Media, Seven West Media, APN News and Media, Woolworths, the big four banks, AMP and others – news of the move by the RBNZ to try and drive down the value of the dollar will be more than a bit discomforting, coming as it did on top of the central bank’s move against home loans with what’s called a high LVR (or a high loan to valuation ratio where 20% or less of the purchase price is put down as a deposit).
The upshot of the tightening of capital requirements for high LVR loans will be to boost the cost of capital for banks for these types of loans by around 12% according to the RBNZ. Even though it won’t have any impact until after the end of September, the move (which has been threatened for a while) is a sign to our big banks (who dominate the Kiwi economy) that they could face more changes if the boom in these types of home loans doesn’t slow by the end of 2013.
The central bank’s move to cool the housing market is in stark contrast to Australia where home lending remains weak and close to 40-plus year lows (annual growth in home lending is running at 4.4% at the moment, according to RBA data).
House prices have not risen anywhere near as strongly as in NZ where they were up 0.1% in the March quarter here across the major capital cities and in the year. In NZ, prices are rising at 8% and more (annual), with the biggest rises in Auckland and recovering Christchurch, where the constraints on housing supply are the greatest.
Mr Wheeler said the move "will strengthen the capacity of the banking system to weather a housing downturn and should also lead the banks to review the riskiness of the loans they are currently writing”.
The central bank has left its cash rate unchanged at 2.5% now for more than two years as it tries to balance the stronger NZ dollar and its impact on exporters and local demand. The NZ dollar is up 7% in the past year. There was no mention of any moving of interest rates in yesterday’s statement.
"Housing pressures are increasing risk in the financial system," Mr Wheeler said in the stability report. "House prices relative to disposable incomes are already high by international standards. Further price escalation will worsen the potential damage that could result from a housing downturn following an economic or financial shock," he said.
"Partly in light of the risks relating to the housing sector, the Reserve Bank has been reviewing whether bank capital requirements for housing loans properly reflect risk in the sector. Following stage one of this review, the Reserve Bank is increasing the amount of regulatory capital required for high-LVR housing loans. This will strengthen the capacity of the banking system to weather a housing downturn, and should also lead the banks to review the riskiness of the loans they are currently writing," the report revealed.
The RBNZ said the country’s banks had strong capital levels well in excess of the new international requirements. But despite this situation and these higher capital buffers,"rising house prices are creating risks for the New Zealand financial system, by increasing both the probability and potential impact on bank balance sheets of a significant house price adjustment".
