The Government’s grand plan for a massive boom of apartment and townhouse building to solve Auckland’s housing crisis is quietly being picked apart by banking regulators on both sides of the Tasman.
Apartment and section developers say banks have pulled back from lending to them in recent months and property buyers also face a squeeze on mortgages from the big four Australian-owned banks because banks are hitting limits set by regulators – both in Australia and New Zealand.
The squeeze is already affecting house building plans. Auckland building consents have been trending lower since October, despite Auckland being short of around 40,000 homes and prices being high enough to signal to the market that more houses should be built. The Government had hoped that the just confirmed Unitary Plan would unleash a torrent of new supply, but now faces a funding blockage that cannot be easily removed in an election year set to be dominated by the debate over housing supply in Auckland.
Bank lending is becoming the missing ingredient in the Government’s plan to mostly rely on the private sector to fill the housing gap with apartments and town houses that first home buyers could afford, and which could take pressure off fast-rising rents.
Ratings agencies and banking sources say ANZ, BNZ, ASB and Westpac are close to limits set by the Australian Prudential Regulation Authority (APRA) for lending to commercial property developers, which includes bank loans to developers of residential apartment and terrace housing projects. The New Zealand units of ANZ, National Australia Bank (BNZ), Commonwealth Bank of Australia (ASB) and Westpac have their own boards and balance sheets and are regulated by the Reserve Bank, but cannot ignore what the more intrusive and aggressive Australian regulator does.
Last week APRA sent a letter to the big banks warning it was concerned about the growing risks in commercial property and residential development in particular because of a looming over-supply in the Melbourne and Sydney apartment markets. APRA specifically mentioned the banks’ overseas units in its statement and referred to limits on particular types of lending – known as APS 221 limits. It does not disclose the limits for different types of lending here, but it is understood the New Zealand banks have lent close to their limit for commercial property development, and have turned off the tap in Auckland.
One large-scale property developer said the big four banks had essentially stopped lending to new project developers in Auckland. Last year developers with proposals for $100 million projects were quickly getting funding offers from all four banks, but that had dried up in recent months, said the developer, who declined to be identified given the commercially sensitive nature of his relationships with banks.
“They’re not doing any projects basically. We are being tarred with the Australian brush,” he said of the recent squeeze on funding.
“Something’s happened in Australia and that’s caused a policy change within the banks here.”
Ratings agencies have also noticed a tightening of lending by the banks to certain sectors. APRA told banks last week they should set “sub-limits” for certain types of lending “to control concentrations in riskier segments of the portfolio, such as lending for development or land.”
“You probably saw the APRA statement of a couple of days ago about the potential risks for property development,” Standard and Poor’s analyst Sharad Jain told Newsroom.
“It’s quite obvious now that APRA is taking it seriously for the banks in Australia and you’d imagine by extension for the New Zealand banks,” Jain said.
“New Zealand is the biggest offshore exposure so that is always something that APRA looks at closely, and the RBNZ has progressively become more hands on too.”
So it’s not only the Australian regulator that is squeezing down on the big four’s appetite for lending.
The Reserve Bank of New Zealand has in the past taken a much lighter touch than APRA, but it has toughened its rules for the ways the banks fund themselves since the Global Financial Crisis. It introduced its Core Funding Ratio rule in 2010, which forced the banks to prioritise local term deposits and bonds as funding sources over “hot” short term loans for money markets in London and New York.
Until recently that rule did not restrict the banks much because term deposits from households were growing at roughly the same rate as mortgage lending. But from late 2015 onwards, bank lending grew much faster than term deposits, opening up a gap that the banks could not fill easily or cheaply.
To increase term deposit growth and reduce mortgage lending growth, they have increased both their mortgage rates and term deposit rates to encourage saving and discourage lending. They have also tightened their lending criteria.
In June, the biggest of the big four in New Zealand, ANZ, stopped lending to rental property investors buying sections and apartments off the plan. A Reserve Bank survey published in November showed commercial borrowers expected a significant tightening of lending standards in early 2017.
Standard and Poor’s analysts published an analysis of New Zealand banks last month which also referred to this tightening of lending, in the face of continuing strong demand for housing and Auckland’s buoyant economy.
“Despite the significant economic tailwinds behind Auckland and surrounding regions, we expect credit extension to the business sector to slow, particularly as we understand some of the larger banks are operating close to their internal limits on commercial property,” Jain and Andrew Mayes wrote.
The restrictions on housing supply could even fuel another surge in prices, they warned, particularly with net migration continuing to rise to new record highs.
“With banks reporting a tightening in lending standards for property development, it’s conceivable that new construction will slow, despite the rollout of the Auckland Unitary Plan, applying further upward pressure on house prices,” they wrote.
The pressures on banks could get even more intense in the next year or two because the Reserve Bank has also just launched a review of capital requirements, which is expected to force banks to put aside more of their profits as equity capital to back new and riskier lending. Banks are therefore looking to increase their profit margins to prepare for the extra capital requirements.
Mayes said the combination of local funding pressures and the need for banks to increase profit margins is slowing lending growth.
“So when you look at those two factors, the conclusion is that there is going to be a slowdown and it’s reasonable to expect that that would include not just home lending, but lending to the business sector, which would include property developers,” he said.