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Speaker 1: You're listening to markets with madisone proudly sponsored by CMC Markets.

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Speaker 1: dot Co dot NZ.

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Speaker 2: The information provided in this program is of a general

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Speaker 2: nature and is not intended to be personalized financial advice.

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Speaker 2: We encourage you to seek appropriate advice from a qualified

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Speaker 2: professional to suit your individual circumstances. Property prices are unlikely

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Speaker 2: to unleash again with the Reserve Bank putting new restrictions

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Speaker 2: in play. It could mean big banks won't get much

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Speaker 2: of a windfall when or if interest rates drop soon.

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Speaker 2: So how are they preparing for the impact on their

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Speaker 2: mortgage books.

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Speaker 3: We've got changes and interest rates potentially coming up. We've

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Speaker 3: got these changes in regulations. It's a really interesting time

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Speaker 3: to see how this is all going to play out.

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Speaker 2: Winter is never that positive for proper, but this one

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Speaker 2: feels colder than most, with a freezer value growth recorded

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Speaker 2: by QV in the three months to May dropping zero

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Speaker 2: point two percent, the first quarterly fall since July last year.

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Speaker 2: Auckland a loan saw a one point four percent drop

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Speaker 2: as supply increased. According to the real estate agency Barfret

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Speaker 2: and Thompson, the number of homes on the market is

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Speaker 2: at a fourteen year high. It sold twenty six percent

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Speaker 2: fewer homes last month, the lowest June sales recorded since

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Speaker 2: twenty ten.

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Speaker 4: The pain is being.

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Speaker 2: Diagnosed by economists as required damage, meaning cuts to interest

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Speaker 2: rates could come as soon as November. But if they do,

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Speaker 2: prices may not unleash again. And that's because the Reserve

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Speaker 2: Bank just introduced debt to income limits, meaning borrowers can

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Speaker 2: only take on loans six times that of an owner

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Speaker 2: occupies annual household income before tax, or seven times for

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Speaker 2: a property investor.

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Speaker 4: It's on top of existing.

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Speaker 2: Loan to value restrictions, which have been eased slightly. But

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Speaker 2: both of the restrictions mean banks will have to alter

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Speaker 2: how much they lend to who they've had a year

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Speaker 2: to prepare for DTIs that came into effect last week,

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Speaker 2: and have another six month great period from here. In

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Speaker 2: this interview, the Bank of New Zealand's head of home

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Speaker 2: lending talks about the impact it could have on its

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Speaker 2: fifty seven billion dollar mortgage book.

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Speaker 4: James thank you so much for having us. I really

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Speaker 4: appreciate it.

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Speaker 5: No, I mean yeah, it's great.

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Speaker 3: Really excited to talk to you, and thanks for coming

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Speaker 3: to me at the Benz here today.

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Speaker 4: I have more banking blue you did Tea.

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Speaker 3: Yeah.

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Speaker 5: Yeah, I think we've got like the early matching here

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Speaker 5: going on.

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Speaker 2: Let's first talk about these new restrictions that the Reserve

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Speaker 2: Bank has put in play. A couple of acronyms dtiys,

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Speaker 2: lvrs being eased. How does this actually operationally look for

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Speaker 2: benz ed in terms of how you're allowed.

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Speaker 3: To lend, in terms of how much is it going

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Speaker 3: to impact our lean day to day? The LVR changes

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Speaker 3: should increase it because those limits have increased. So we've

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Speaker 3: increased the LVR the speed limit up to seventy five

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Speaker 3: seventy percent for investors. So hopefully as investors come back

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Speaker 3: into the market, that's gonna that's gonna spur some activity

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Speaker 3: there at least allow more customers to lend. I think

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Speaker 3: the DTI changes in a different interest rate environment could

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Speaker 3: have an impact, and I think that's what the regulator

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Speaker 3: has done, just to make sure that you know, if

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Speaker 3: we do have an interest rate environment that supports a

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Speaker 3: higher DTI position you might get, you know, you might

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Speaker 3: better kind of restrict or create a ceiling for that

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Speaker 3: that sort of lending. But in this environment, you know,

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Speaker 3: we're not seeing that as an issue. So something that

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Speaker 3: will continue to monitor, as I suppose other banks will

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Speaker 3: and as the regulator will, to see as those market

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Speaker 3: dynamics change, what the impact on those restrictions.

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Speaker 5: Or those speed limits might have.

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Speaker 4: You've been preparing for this for a year, right.

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Speaker 5: Ah, yeah, yeah, exactly.

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Speaker 3: I think dt I in protect the new one, like

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Speaker 3: LVR has been in play for a long time. I

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Speaker 3: think the industry and then customers to a certain degree

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Speaker 3: are used to the concept of ALVR DTI is a

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Speaker 3: bit fresh in New Zealand, but we've been preparing for it.

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Speaker 3: So we've been you know, consulting, and we've been monitoring

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Speaker 3: our book quite a while in terms of, you know,

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Speaker 3: how it's performing against those speed limits, and it's something

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Speaker 3: we're going to continue to do and like very regularly,

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Speaker 3: like ongoing honitoring of our book, just to make sure

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Speaker 3: we understand what's happening and at a customer level, that

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Speaker 3: we can explain those changes to customers through our great

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Speaker 3: stuff out there.

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Speaker 5: Yeah.

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Speaker 2: So how much of your book currently or since last

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Speaker 2: time you checked it is actually loaned at a debt

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Speaker 2: to income of higher than six times somebody's and your income.

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Speaker 3: Oh look, I probably want to go to specific numbers,

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Speaker 3: but very very low, like almost no impact in terms

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Speaker 3: of what's happening today. And I think that's mainly because

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Speaker 3: of the interest rate environment we're in. So what you

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Speaker 3: see is we're in a comparatively high interest rate environment

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Speaker 3: compared to what we've had recently, and so that really

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Speaker 3: impacts a customer's ability to service alone. So what you've

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Speaker 3: seen is that maximum borrowing capacity shrink is those interest

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Speaker 3: rates have got higher, So that in itself is the

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Speaker 3: restriction as opposed to any kind of like DTI restriction

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Speaker 3: that the regulator board and having an impact right now?

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Speaker 2: As a bank exec, do you think of these tools

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Speaker 2: being applied by the regulator as a positive thing, because

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Speaker 2: effectively it would limit any default damage if gol forbid

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Speaker 2: things do turn ugly in this economy, or do you

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Speaker 2: find it a little bit annoying because it effectively limits

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Speaker 2: the amount that you're allowed to lend and therefore the

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Speaker 2: amount of interest that you're allowed to earn onlines.

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Speaker 5: No, I think.

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Speaker 3: I mean, the reality is we're in a regulated environment,

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Speaker 3: and I truly believe I welcome the regulation because it

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Speaker 3: does create transparency in the market and it gives us

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Speaker 3: something really concrete to monitor and ultimately is about protecting customers.

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Speaker 5: So like, I mean, who would disagree with that?

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Speaker 2: But if you look at the price of a property

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Speaker 2: that somebody will be able to purchase with these new

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Speaker 2: restrictions in play, it's significantly less than say the average price,

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Speaker 2: especially somewhere like Auckland. That means that the mortgages they're

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Speaker 2: going to come to Benz four will be quite a

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Speaker 2: bit smaller. So that really does actually impact the amount

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Speaker 2: that you're going to be able to earn in terms

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Speaker 2: of volume of an interest rate on said mortgage.

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Speaker 4: Yeah, well, I mean, I mean it's an interesting point.

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Speaker 3: I think I'll go back to what I said before.

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Speaker 3: It's really about the current environment. And so I think,

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Speaker 3: like when we assess someone's ability to repay a mortgage,

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Speaker 3: we're really going, you know, what can they safely pay back?

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Speaker 3: And so what's that maximum borrowing capacity or what do

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Speaker 3: they need for the house that they've purchased. And I

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Speaker 3: think the biggest influence on that at the moment is

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Speaker 3: the high interest rates. So what you'll find here at

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Speaker 3: bn Z as we try and project an increase in

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Speaker 3: interest rates so that when we assess someone, we're not

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Speaker 3: kind of like assessing it today's rate, but at a

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Speaker 3: rate that may or may not happen in the future,

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Speaker 3: but above what we have today, and so that plays

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Speaker 3: far more of a factor at the moment in determining

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Speaker 3: what someone can borrow. So, you know, like Auckland house prices, thankfully,

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Speaker 3: particularly for our first time bise, they've come off a

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Speaker 3: little bit, but I think that's paying more of a

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Speaker 3: role there in terms of what they can get today.

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Speaker 3: And I think, again going back like it's a good thing, right,

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Speaker 3: like having both that assessment rate which we assess our

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Speaker 3: customers at, but also the DTL. They play different roles

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Speaker 3: at different times, but both are about protecting customers so

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Speaker 3: they don't get into a property with a mortgage that

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Speaker 3: they can't afford.

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Speaker 2: I'm keen to know a bit more about the state

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Speaker 2: of your mortgage book at the moment, how much in

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Speaker 2: terms of percentage you seeing and perhaps non performing lines

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Speaker 2: and defaults.

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Speaker 3: Yeah, I think what are we seeing at the moment

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Speaker 3: we're seeing generally our book is in really good shape, right,

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Speaker 3: I think, but.

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Speaker 4: Everyone sees that, like what does that mean? What does

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Speaker 4: good shape look like?

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Speaker 5: Yeah? So I think there's various measures.

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Speaker 3: Like we're at the we're at, let's hope, at the

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Speaker 3: top of the interest rate cycle. So we're seeing things

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Speaker 3: you would expect to see. So you're seeing, you know,

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Speaker 3: slightly more customers you know, late on their payments, whilst

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Speaker 3: the majority of are still a hit on their repayments.

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Speaker 3: We're seeing, you know, some increase in those leading measures

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Speaker 3: that you might take. We're not seeing a wholesale increase

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Speaker 3: in you know, mortgage de sales or or kind of

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Speaker 3: late late stage indicators like that, but we are seeing

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Speaker 3: some of those kind of like early indicators that chat

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Speaker 3: tick up. But we're working with those customers both kind

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Speaker 3: of reactively when they come to us to talk, but

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Speaker 3: also proactively like reaching out to them with solutions and

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Speaker 3: kind of like understanding their situation and making sure that

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Speaker 3: where we can, like we're helping those customers along their

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Speaker 3: journey in the interest rate environment we're in.

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Speaker 5: So I think, yeah, all.

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Speaker 3: In all, pretty good, pretty good compared to industry, and

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Speaker 3: if you compare it to other kind of similar cycles

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Speaker 3: that we're in, very free similar outcomes.

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Speaker 2: Can you give me a figure in percentage terms, in

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Speaker 2: terms of how much of your mortgage book is considered

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Speaker 2: non performing over that ninety days due?

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Speaker 4: Yeah?

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Speaker 3: I mean, and you've kind of called out one of

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Speaker 3: those key measures for that. It's like, of our customers,

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Speaker 3: which ones are passed that ninety days mark? And at

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Speaker 3: the moment, you know, really low zero point two four

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Speaker 3: percent as of May, so you know, we really haven't

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Speaker 3: seen that kind of wholesale rise in that ninety days

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Speaker 3: days past due.

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Speaker 4: Wow? So below one percent?

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Speaker 5: Yeah? Well blow, you know, below a quarter percent? Yeah.

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Speaker 2: Well, in anticipation of rates coming down, if economists like

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Speaker 2: you're on here at Benz are to be believed, they

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Speaker 2: think that you could see some cuts to the official

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Speaker 2: cash rate by Christmas, What impact do you actually expect

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Speaker 2: that to have on prices? Because historically cutstom interest rates

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Speaker 2: have really unleashed property prices, as we found out in

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Speaker 2: the COVID years. But the environment's obviously different now with

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Speaker 2: these restrictions. So how do you expect that to play?

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Speaker 1: Yeah?

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Speaker 3: I mean, as a homeowner, I certainly hope our interest

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Speaker 3: rates do come down shortly. I think what we've seen

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Speaker 3: over the last year is those projections have come out

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Speaker 3: a little bit. I think, you know, if we had

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Speaker 3: this discussion back in January, we'd probably be a lot

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Speaker 3: more sure that those interest rates cuts are going to happen.

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Speaker 3: And I think Mike's provided some guidance on this one.

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Speaker 3: But I think most of the downward rate cycle, if

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Speaker 3: you listen to the commentary at the moment's probably going

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Speaker 3: to happen next year. So in terms of what happened,

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Speaker 3: what the impact has on the property market, you would

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Speaker 3: have to expect if history repeats that it's going, you're

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Speaker 3: going to see it spur some more demand and some

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Speaker 3: more access to credit because people will better afford to

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Speaker 3: borrow more. And so the impact that I think that

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Speaker 3: might have as interest rates come down, I think that's

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Speaker 3: where you'll start to see things like DTI and you

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Speaker 3: know that higher DTI leadings start to play more of

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Speaker 3: a factor. And I think it's why we're monitoring it

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Speaker 3: right and we'll continue look at it's not going to

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Speaker 3: be instant because you've got you know, you know a

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Speaker 3: series of cuts if we're in a downward rate environment,

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Speaker 3: and we'll see the impact as that plays out, So

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Speaker 3: it'll be something we'll be measuring week to week, month

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Speaker 3: to month, and there's those interest rates hopefully again drop,

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Speaker 3: So yeah, it'll it'll be interesting to see.

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Speaker 2: I guess the way to think about it is kind

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Speaker 2: of like a speed limit in the property race, right.

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Speaker 2: People can't afford to speed at the moment, but perhaps

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Speaker 2: when they can afford to speed in future, the regulations

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Speaker 2: are going to say not today exactly.

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Speaker 3: And it's much like the LVR restrictions that have come

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Speaker 3: in over the last few years. There's still the ability

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Speaker 3: to lend over those those limits, like the banks are

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Speaker 3: set at tolerance level essentially twenty percent over, but it

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Speaker 3: does kind of restrict it. And we saw it work

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Speaker 3: with LVR, you know, the amount of high OLVR lending

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Speaker 3: has come down and ultimately that's played out reasonably well

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Speaker 3: as the economy is changed and we've entered a higher

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Speaker 3: interest rate environment. So I think we're just going to

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Speaker 3: essentially see a new measure play a slightly different role,

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Speaker 3: but the same outcome and protecting customer.

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Speaker 4: For the lights of property investors at least.

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Speaker 2: There's also other changes like interest deductibility being back on

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Speaker 2: the agenda. Is that encouraging them to render the market

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Speaker 2: at all or not yet?

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Speaker 3: I'm super interested to see, Like I think you mentioned

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Speaker 3: the interest deductibility. I think the other ones the bright

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Speaker 3: line test. So we've seen that decrease from ten years

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Speaker 3: to two years. I think we're waiting to see, right, like,

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Speaker 3: how will that spurit more supply onto the housing market.

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Speaker 3: What's going to happen near Not sure, but I think

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Speaker 3: we'll start seeing that quite soon.

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Speaker 5: Now you know those changes have come into play.

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Speaker 3: It'll be really interesting to see what impact that has

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Speaker 3: on the housing market, particular, because the housing market's interesting already.

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Speaker 3: We're seeing quite a lot of supply. I think who

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Speaker 3: might quote the other day that it's the highest supply

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Speaker 3: we've had in seven years, So a lot of property

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Speaker 3: on the market, and you know, things aren't moving as quick.

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Speaker 3: You know, prices aren't as inflated as they were, so

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Speaker 3: you're seeing much more of a buyer's market, and I

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Speaker 3: think that's enabled particularly first home buyers re into the market,

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Speaker 3: and I think, you know, it's been a long time

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Speaker 3: since they've had their day in the sun, but having

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Speaker 3: them kind of like contribute to about a quarter of

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Speaker 3: the mortgage lending in the market at the moment. That's

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Speaker 3: you know, we've all got to feel.

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Speaker 5: Good about that.

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Speaker 2: Is that reflective on your book too, the first home

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Speaker 2: buyer piece being about a quarter of your mortgage book roughly.

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Speaker 3: Oh, I mean, we're seeing more and more first home

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Speaker 3: buyers choose BINGZ. We're actually spending quite a bit of

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Speaker 3: time focusing on, you know, what do they need? What

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Speaker 3: do first home buyers need? Like how can we get

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Speaker 3: more of those first home buyers? And I think restrictions

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Speaker 3: like the LVR restrictions that allows us to you know,

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Speaker 3: actually maybe have more on offer for those customers as

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Speaker 3: they play in a market which you know, they've got

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Speaker 3: more opportunity to play being buyers market.

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Speaker 2: But is it actually a buyers market because then you

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Speaker 2: introduce to income restrictions, so it looks like a buyer's

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Speaker 2: market for now, but then when they actually come to

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Speaker 2: the amount that they're going to be able to get

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Speaker 2: in a wal which it's not going to be very much.

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Speaker 3: Well, yeah, so on that, I think, like you to

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Speaker 3: a buyer's market in the sense that there's much more supply,

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Speaker 3: there's more optionality for a consumer, and there's not as

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Speaker 3: much competition, and then in terms of the DTI, as

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Speaker 3: I say, like at the moment, we're not seeing the

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Speaker 3: impact that's not going to restrict their lending from a

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Speaker 3: kind of like macro level at the moment. I mean, sure,

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Speaker 3: their affordability given the high interest rates and that's what

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Speaker 3: we used to assess, that's going to play much more

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Speaker 3: of a role at the moment. But you know, I

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Speaker 3: think customers that you have the ability to service, you know,

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Speaker 3: essentially a lower loan given where property prices have come down,

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Speaker 3: I think you know, that's where the opportunity exists.

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Speaker 2: That kind of suggests to me that there's a way

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Speaker 2: for seal expectations still to drop to meet buyers in

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Speaker 2: the market.

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Speaker 4: Would you agree with that? Do you think there's still

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Speaker 4: some reckoning to be had with that gap?

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Speaker 3: I mean, yeah, there's probably people that are more better

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Speaker 3: placed to answer that than me, But yeah, I mean

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Speaker 3: I think like it is a supply and demand market.

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Speaker 3: I think the fact that things are staying on the

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Speaker 3: market long or as you have got maybe a little

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Speaker 3: bit of a disconnect between buyer and seller expectation, and again,

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Speaker 3: like we've got changes and interest rates potentially coming up,

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Speaker 3: We've got these changes and regulations. It's a really interesting

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Speaker 3: time to see how this is going to play out.

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Speaker 3: I think, you know, one of the interesting things is

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Speaker 3: maybe the property market's not you know, not on its

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Speaker 3: highs that it has, or we're not seeing the sales

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Speaker 3: volumes that we've seen in the past, but there's still

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Speaker 3: mortgage activity. First time wise, we've talked about them. They

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Speaker 3: are playing an important role and they purchase part of

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Speaker 3: the market. But we're still seeing New Zealanders kind of

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Speaker 3: get out there and look for a good deal. So

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Speaker 3: we're still seeing a lot of mortgage activity, which is

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Speaker 3: really good, right, you know, a lot of competition, you know,

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Speaker 3: good opportunities for homelown customers, both existing and tomorrow's homeland

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Speaker 3: customers as well.

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Speaker 2: I was actually going to bring that up because you

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Speaker 2: are still writing new loans as we speak. Right last

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Speaker 2: time I looked at your financial year to the end

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Speaker 2: of September twenty twenty three, you had about fifty seven

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Speaker 2: billion dollars worth of housing loans on B and z's

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Speaker 2: mortgage book. How much growth do you think we should

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Speaker 2: expect to see in that mortgage book, specifically given the

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Speaker 2: environment that we're heading into.

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Speaker 3: Yeah, I mean a little bit of its prophesizing, right,

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Speaker 3: But I would say like the things we're seeing at

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Speaker 3: ben Z are somewhat reflective of what's happening in the market.

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Speaker 3: Talked about first home buyers, We've talked about investor activity

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Speaker 3: in the markets petering off a little bit. That's the

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Speaker 3: same can be said about our mortgage portfolio. But I mean,

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Speaker 3: you're seeing a lot of refinances happening. You've seen people

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Speaker 3: searching for a better deal, people looking for things in

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Speaker 3: their banks that you know, maybe as outside their homeland.

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Speaker 3: So you've seen some movement there and I think that

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Speaker 3: will continue to happen. But then those other factors we've

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Speaker 3: talked about, whether their legislative, regulatory, or interest rate driven,

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Speaker 3: they will kind of should see more purchase activity and

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Speaker 3: more purchase activity kind of contributing to that overall mortgage

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Speaker 3: system growth.

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Speaker 2: Yeah, I imagine you were seeing a lot of refixing

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Speaker 2: and refinancing activity at the moment, a people fixing for

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Speaker 2: shorter periods of time, and the hopes that rates could

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Speaker 2: come down soon.

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Speaker 3: Yeah, I mean that's really interesting, And I think going

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Speaker 3: back to what we're talking about before, we're talking about

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Speaker 3: like the commentary has somewhat changed. I think everyone expected

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Speaker 3: us to enter a downward rate environment a lot sooner

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Speaker 3: than we have. So now the re sink commentary has been, hey,

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Speaker 3: it's actually probably going to be likely towards the end

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Speaker 3: of the year or next year. We've recently seen a

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Speaker 3: shift into people choosing those longer terms. So that's just

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Speaker 3: telling me, like maybe customers that thought they could just

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Speaker 3: wait out a decrease, they're now just.

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Speaker 5: Making a decision.

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Speaker 3: Actually, I'm just going to go a little bit longer.

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Speaker 4: I'm interesting.

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Speaker 2: I would have thought it would have been the opposite,

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Speaker 2: that people were looking to fix for like six months

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Speaker 2: or a year at most.

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Speaker 3: So that's what we've seen, you know, over the kind

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Speaker 3: of like call it last six months. But just recently

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Speaker 3: we're starting to see customers going.

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Speaker 4: No, I can't be bothered.

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Speaker 5: Yeah, I'm just not.

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Speaker 3: Gonna wait and I'm gonna I'm gonna lock myself and

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Speaker 3: I'm gonna get that surety. And then when I do

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Speaker 3: into that downward red environment, they'll better, you know, take

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Speaker 3: advantage of that.

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Speaker 2: What are people fixing out? What kind of rates are

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Speaker 2: we talking for something slightly longer term?

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Speaker 3: Yeah, well, I think like definitely lower for longer term

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Speaker 3: at the moment. But you know, I think there's as

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Speaker 3: I say, there's lots of competition in the market. Rates

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Speaker 3: are competitive everywhere, extremely competitive environment. So there's good deals

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Speaker 3: out there. But I think probably do have some empathy

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Speaker 3: for the customers that are still rolling off those historically

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Speaker 3: low rates. So you're still seeing customers, you know, roll

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Speaker 3: off those pre COVID rates. Those you know, hindsight's a

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Speaker 3: good thing, but those customers that locked in for a

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Speaker 3: long time during that kind of COVID post COVID period.

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Speaker 4: We were talking like twos and threes percent.

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Speaker 3: Exactly exactly, and so there's still some of those, not

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Speaker 3: many left, but they're rolling on to a much higher rate.

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Speaker 5: That's that's probably starting with a six.

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Speaker 2: Do you think that cycle is fully through your book? Like,

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Speaker 2: how much are we talking in terms of what's left

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Speaker 2: to roll on to those those high rates.

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Speaker 3: Yeah, we're really talking about low numbers. Now, most of

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Speaker 3: our customers have rolled through those those low rates, as

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Speaker 3: they would have across the industry. But I mean those

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Speaker 3: people that fix those long kind of four or five

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Speaker 3: year terms back during that pandemic period, some of those

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Speaker 3: are still rolling off.

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Speaker 2: I've got to ask, if or when the Reserve Bank

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Speaker 2: then cuts the official cash rate, how quickly are you

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Speaker 2: going to action it?

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Speaker 4: On your book and.

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Speaker 3: Here, well, yeah, I think like the realities, we'll look

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Speaker 3: at that when it happens. But I think that, along

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Speaker 3: with a bunch of other cost of funds is you know,

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Speaker 3: I think we will be contributors to the downward right environment.

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Speaker 4: Thank you so much for your time, James, always good

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Speaker 4: to chat properly.

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Speaker 5: Thanks