Back to the 1960s?

This week I attended a financial advisors conference in Auckland where many speakers presented on a range of topics. One of the speakers was the chief economist from a large bank whom I have heard on many occasions over the years. This guy has a very relaxed approach to his presentation, mixing it with some humorous stories and anecdotes. He explained why banks are turning down more loan applications than ever before – good people with good loan applications, who would normally get approved, are being declined for very small and petty reasons. Why you ask? His explanation was that the finance market in NZ has gone back to the 1960’s.

Banks are rationing credit like they did in the 60’s and 70’s as there is simply not enough money in their depositor base to fund the loan applications. Interest rates are low so the mainly elderly folk who usually invest in banks have been withdrawing their money and seeking higher return investments such as managed funds, shares and property. This money is what the banks usually use to fund their lending. Banks are also worried about a correction in the Auckland market and so are being selective of which borrowers they choose to lend to based on perceived credit risk. Credit risk can include people with smaller deposits, but also people who do not have proven cash flow or a proven ability to make loan payments (lower income earners, newly self-employed or people who spend everything they earn). Banks have also been leaned on very hard by the Reserve Bank to slow down their lending and not borrow so much offshore to fund this lending (around 30% or about $110 billion is currently borrowed overseas). In addition, people who wish to borrow to build spec houses or develop property are being left out in the cold. With rising building material costs, delays with councils and a shortage of skilled tradespeople, the banks deem developers are very risky and have virtually shut up shop in this lending area. So, this brings us to the housing shortage.

The newly released Auckland Unitary Plan was designed to radically boost the Auckland stock. Here’s the problem – while the plan does provide space for enough intensification and new land to allow construction of over 420,000 dwellings, in reality, construction of sufficient volumes is prevented by insufficient labour resource, a predicted shortage of building materials and a cutback in property development finance from banks. However, it’s not all bad news. Funding from alternative sources such as non-bank lender and finance companies is on the rise.

Grant Clifton www.countrywise.co.nz