Housing boom a ‘sugar rush’

Fears for market over medium to long term

NEW Zealand’s housing market boom is not healthy over the medium to long term, Westpac New Zealand chief executive David McLean says.

Mr McLean said he believed the boom, which has resulted in record lending by banks, was a ‘‘sugar rush’’ driven by low interest rates.

‘‘I think it is a bit of a sugar rush. I think it is not a bad thing at this time when we are going through this Covid thing because it does boost consumer confidence amongst people who own houses already.

‘‘Short term, it is actually quite helpful because it does shore up confidence.’’

But in the medium to long term, house prices in New Zealand were out of whack with incomes and were the highest in the world relative to income.

‘‘That is not healthy. That makes it very hard for people to get into houses. It increases inequality.

‘‘The thing I worry about is it means a lot of our capital is tied up in housing, which is a deadweight asset, whereas if people weren’t investing in houses they might be investing in funds or equity markets where that money could get recycled into businesses who want capital for investment.’’

For a combination of reasons it was very bad for the long term but now was not the right time to try to correct it, Mr McLean said.

Some have suggested the Reserve Bank bring back bank loan restrictions to try to cool the heat of the property market, particularly when it comes to investors.

The issue could be addressed in the Reserve Bank’s next financial stability report, due on November 25.

Mr McLean would not be drawn on whether he thought the Reserve Bank should bring back the restrictions, which were temporarily removed in May.

‘‘All I can say is I’m glad I am not in the Reserve Bank’s shoes having to make that decision. It is tough.

‘‘The good thing is the Reserve Bank does have a wide range of tools available to it, as we saw through the initial response to Covid. Not just interest rates — it’s all sorts of other things they have which have been really good for the economy,’’ Mr McLean said.

‘‘My view is they should be looking at all the tools they have in terms of trying to avoid the distortionary effects of low interest rates flowing through.’’

If the loantovalue restrictions were reinstated they would have a dampening effect on future growth in house prices, Mr McLean said.

‘‘I don’t think it would lead to any kind of collapse in house prices; I don’t think it would be too worrying.’’

This week, Westpac New Zealand revealed it had allocated $320 million in impairment charges for the year to September 30.

Mr McLean said about 80% of those were forwardlooking, meaning the loans were not yet impaired.

That meant if things did not go too badly, some of that impairment could get written back into next year’s financial accounts.

If Covid suddenly went away that could happen, Mr McLean said.

‘‘But we do expect that won’t happen. We do expect there will be pain in the economy and it can take several years for the economic pain to flow through the bank’s balance sheets.

‘‘After the GFC [Global Financial Crisis] it took us three or four years for the peak of impairments to flow through.’’

The biggest drivers would be the underlying economy, which was linked to the rate of unemployment and GDP, Mr McLean said.

❛ That is not healthy. That makes it very hard for people to get into houses. It increases

inequality Westpac New Zealand chief

executive David McLean