A report from the Council of Regulators yesterday made it clear there would only be a limited impact on Australia and Australian banks and companies from the shock June 23 Brexit vote in Britain.
Investors have to be aware though there’s a bigger threat from the emerging strains in the NZ economy, thanks to the great dairy slide, the ongoing house price boom, low inflation and a stronger Kiwi dollar.
These hold more problems for Australian companies operating across the Tasman – especially the big four banks.
In fact the twin announcements this week from the Reserve Bank of NZ underline the extent of the problems in the economy – and why the Reserve Bank of Australia and APRA are taking a closer look at what’s happening across the Tasman and its impact on the NAB, CBA, Westpac and ANZ.
In fact the prospects for the big four banks lifting their interim and final dividends over the next year or so could depend on the health of the NZ economy, and especially the dairy slide, which has already started biting, and now the impact of any slow down in the housing sector has on the operating results of the big four banks.
The big four pay out an estimated $20 billion of their $30 billion annual results in dividends – most of that is generated in Australia from home lending and business activity, but the solid returns from NZ in the past couple of years have helped keep those payments high. But now the longevity of those fat dividends is open to question.
The big four dominate the Kiwi economy and financial system, as they do here in Australia – such have been the strains across the NZ that it would not surprise to see the four (starting with the CBA next month), reveal a sharp rise in bad debts in NZ, and flat or even lower profits from what is the most important foreign market.
With dairy prices still low and estimates of the current low prices to continue for the next few years (from the OECD in Paris), some Kiwi analysts reckon NZ farm values could fall from $NZ3.5 billion to more than $NZ 5 billion in the next five years – falls which would pressure our big four banks to cover growing losses by Kiwi dairy farmers and weakening security for billions of dollars in loans (around $A30 billion).
The tightening in home lending rules for investors and owner occupiers (especially first home buyers) this week has already seen the major banks stop lending to investors with deposits less than 40% of the value of the property (although pre-approved loans will be honoured), while some banks have told first home buyers they will have to have 15% of the value of the property as a minimum deposit. This is despite the new tighter controls not coming into effect until September 1.
Thursday’s quick economic update from the RBNZ was gloomy – with its warning about the threat to financial stability from an unchecked surge in house prices, fears of continuing low inflation (partly from the impact of the stronger Kiwi dollar) and a big hint interest rates will drop next month from the current 2.25% record low
The RBNZ has a tough policy task ahead of it as the two statements this week show – it needs to bring property (and especially prices) under control, without crashing the sector into a slump, and it is making another direct attack on the value of the Kiwi currency to try and force it as low as possible in the next few months, or stop it appreciating any further.
Both moves are linked with the new restrictions on lending to property investors part of the background to the Reserve Bank’s warning on Thursday that the dollar “needed” to be weaker.
Kiwi newspapers said that economists who monitor the Reserve Bank said the language was the strongest it had used on the currency in years, and marked a clear link between the dollar and interest rates.
“They’ve come out all guns blazing,” ANZ senior economist Philip Borkin said, told papers owned by NZME.
"It’s not a ‘whatever it takes’ message, but it certainly one where they’re responding to the tensions that they’re facing."
The bank wants to boost inflation and the only way it can do that is by forcing the value of the dollar to fall (which will boost the cost of imports, led by higher oil and fuel prices).
Cutting interest rates risky. Interest rates are the major driver of house prices, which are up more than 13% in NZ in the past year thanks to the Auckland boom spread across the country (that’s because last year’s attempt by the RBNZ to control the Auckland boom by making investing in property in the rest of the country failed).
To short circuit any added boost to house prices form next month’s rate cut, the RBNZ tightened investor lending significant and made it a bit harder for owner occupiers to get finance.
And by the way, the problems confronting the RBNZ also confront Australia’s central bank as we look to the June quarter CPI next Wednesday.
The only difference is that the bank has not (with APRA) made any recent moves to tighten home lending rules. But if inflation is low next week then the market is punting on a rate cut the following Tuesday. The Australian home lending market is not as unbalanced as NZ’s, but there are certainly strains in Sydney and parts of Melbourne and Brisbane.
Prices in Sydney and Melbourne have picked up in recent months,but prices in other cities and regions are either rising more slowly or are steady. We do not have one market driving the entire country as NZ has with the Auckland boom.
But investors should also remember that if the property crack down by the RBNZ triggers a a fall in lending, that could trigger a crunch in housing and a slide in prices – which in turn would threaten the big four banks and others in the sector (such as Fletcher Building and Bunnings).
And if that crunch is sharp enough, it could drag the NZ economy into recession by early next year – especially with the existing strains from the sluggish dairy sector and if that happens the big four banks won’t escape.
