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A return to normality?
The pandemic dominated the agenda in 2020, delaying the planned introduction of the new financial advisers’ regulatory regime. But changes are back on the table this year, and coupled with a rip-roaring housing market, advisers are poised for another busy, challenging year. Will this year be more normal than the last?
BY DANIEL DUNKLEY
While New Zealand escaped lightly compared with other nations around the world, 2020 was a difficult year. The Covid-19 pandemic, which hit our shores in Q1, dominated the year, with a six-week national lockdown in March, and second lockdown in Auckland in August.
Amid the turmoil, the long-awaited introduction of the new licensing regime was pushed back from June 2020 to March this year, giving advisers breathing room to get a transitional licence and plan for the new environment.
As the seismic economic events of last year hit home, government measures to keep the economy afloat led to a busy year for advisers.
Brokers processed a wave of mortgage deferrals at the beginning of the crisis as the Reserve Bank allowed lenders to push the pause button on home loans.
Government and RBNZ stimulus also led to a stronger than expected housing market. A record low official cash rate and scrapped LVR rules boosted activity throughout the year.
As long as our border holds firm, 2021 is likely to be a different year altogether.
Advisers, economists and commentators hope New Zealand will continue its tentative economic recovery and keep the pandemic at bay. With green shoots in the economy, there are hopes that 2021 will see a return to normality.
Mortgage rates
The Reserve Bank went for the nuclear option at the onset of the pandemic, slashing the official cash rate by a huge 75 basis points in March. Mortgage rates have steadily plummeted since then, with mortgage wars continuing into the new year.
Among the big four banks, Westpac led price cuts on one year mortgages, offering a rate of 2.29% quickly followed by its rivals.
Heartland Bank’s limited one year online offering at 1.99% continues to attract interest, while the likes of HSBC Premier continue to sharpen rates.
The official cash rate currently stands at 0.25%, a record low, but economists are divided on whether it will fall any further, given the signs of a tentative recovery, and hopes for a Covid vaccine rollout over the course of the year.
In January, ANZ revised its forecast for the OCR, predicting that rates would no longer drop below zero and into negative territory for the first time.
ANZ economists led by Sharon Zollner predict there will be one OCR cut next year, in May, to 0.1%.
ASB’s team, led by Nick Tuffley, has also abandoned its prediction of negative rates next year amid a brighter outlook for the economy. The bank’s forecasters believe the OCR has now troughed at 0.25%.
Economists are divided on whether negative rates would stimulate the economy or be a mistake.
Independent voice Michael Reddell believes the central bank should have acted more quickly to bring rates below zero, while Kiwibank’s Jarrod Kerr does not think a negative OCR would be effective.
Nonetheless, economists believe we remain in a “lower for longer” interest rate environment. ASB predicts the OCR will stay put until 2023, and the wholesale swap markets have priced in five basis points worth of cuts for the year.
The OCR isn’t the only weapon in the RBNZ’s arsenal to push down rates. At the back end of 2020, the central bank launched its Funding for Lending Programme, specifically designed to lower borrowing costs for retail banks, and stimulate the economy.
_Jarrod Kerr
Some economists believe the FLP negates the need for further OCR cuts. The programme may be sufficient to keep downward pressure on mortgage and other loan rates.
Kiwibank economists recently revised their OCR outlook and now think rates will stay on hold.
“The rampant run in the housing market has surely taken a negative cash rate off the table. We now expect the OCR to be left unchanged, well into 2022,” chief economist Jarrod Kerr said.
Kiwibank economist Jeremy Couchman warns NZ could yet see some pain from the nation’s closed border, which could influence the RBNZ’s thinking.
“We’re still waiting to see what happens over the course of the summer. The border remains closed to visitors, and that will hurt the tourism sector over these months. While the rebound has been great so far, that level of activity can’t be sustained, and we know unemployment is likely to peak at 6.5%.
On the balance of probabilities, it looks like mortgage rates will remain at current levels, or dip even lower over the course of 2021 if bad news arrives.
Regulation
After years of warnings and dire predictions, the long-awaited implementation of the new licensing regime was kicked into the long grass at the height of the pandemic. However, the months have flown by quickly, and advisers now have just a matter of weeks to get their licensing affairs in order.
Advisers have been slow to get to grips with the new regime, yet there are signs the industry is undergoing permanent change. There were a series of mergers at head group level at the end of 2020, with Kepa acquired by NZFSG, and Newpark bought by SHARE.
_David Whyte
Newpark continues to encourage advisers to work with their own FAP licence, while other major groups, such as Astute Financial and NZFSG, will see the majority of advisers work under a group licence.
_Kelvin Davidson
Newpark Group’s Gopal Sreenivasan, head of strategic partnerships, says the industry still needs to work through issues with the FMA in the year ahead, as we move to full licensing.
“My business is prepared to welcome the regime. Still, some of the things are not clear on the expectations from FMA,” he says.
Craig Pope, of Pope & Co Mortgages, based in Wellington, says he has “no real concerns” ahead of March, “as I’ve always followed a detailed six step process”.
Kris Pedersen of Kris Pedersen Mortgages says he is “still ticking a few things off, but is pretty relaxed about it at this stage”.
With an additional nine months to prepare, advisers have no excuses ahead of the forthcoming changes. Head groups have signed new agreements with lenders under the new licensing regime, and finally, the new regime is upon us.
Strategi chair David Whyte, in an article for Good Returns, noted an acceleration in transitional FAP licence applications last year following the pandemic. He believes March marks a “historic milestone” for the industry. He thinks some businesses may struggle to cope with the demands of their own FAP.
“The true cost of maintaining a FAP licence is likely to become prohibitive for some and while there has been a measure of self-congratulation in certain quarters for the numbers of transitional licences applied for, I suspect the celebrations may be premature,” he adds.
A new era of professionalism and regulation awaits the sector, and while the licensing regime may be a headache for some advisers, there is no stopping it now.
Red hot housing market
Despite dire predictions at the beginning of the pandemic, efforts to prop up the economy, such as lower interest rates, quantitative easing, and a removal of loan to value ratio restrictions, helped the market to defy gravity and enjoy a record year.
December data from the Real Estate Institute revealed nationwide prices rose by nearly 20% last year to hit a record high in December.
The nation’s average median house price rose by 19.3% to $749,000 in December, up from $628,000 in December 2019, an increase of $121,000 over the 12 month period.
REINZ said housing stock for sale had fallen to record lows, leading to faster sales and higher prices. According to its data, 11 regions posted record median prices in December.
Mortgage lending jumped to $9.2 billion in November, over $1.5 billion more than the previous monthly record total, according to RBNZ data released around Christmas. A surge in investor activity was behind the record.
Investors borrowed $2.24 billion in November, up on $1.8 billion in October, and close to the record $2.4 billion borrowed in May 2016.
Investor lending at high LVR levels, above 70%, rose to $844 million in November, up from $745 million the month before. Those levels have not been seen since 2014-2016.
While house prices rose by 8% in the December quarter, headwinds on the horizon may take some of the heat out of the market.
Amid concerns about an unsustainable housing market, the Reserve Bank has signalled plans to reintroduce LVR restrictions in March.
The restrictions are already hitting pre-approvals, and there are signs that December’s housing market flurry was partly fuelled by investors getting in while they can.
ANZ reintroduced strict LVR restrictions on investors in December, and is mandating investors provide a 40% deposit in order to get a home loan. The other big banks have not followed ANZ’s lead, but pressure on the investor market is likely to take some of the heat out of recent activity.
_Adrienne Church
ANZ economists say “affordability and credit constraints” are likely to cast a shadow on the market, and predict last year’s gains are unsustainable.
“This is expected to take some heat out of the market at some point, but when that will occur is highly uncertain. In the meantime, New Zealand’s issues with acute housing unaffordability continue to worsen.”
Kelvin Davidson, a senior property economist at CoreLogic, believes there won’t be a lot of changes in the market in the first half of the year, but expects a significant shift if the Reserve Bank opts to impose 40% deposits on investors.
“I expect two phases, the first few months will be pretty good, but the market could cool in the second half of the year, due to LVR restrictions and affordability pressures. The political debate won’t go away.
“Debt-to-income tools have been talked about [by the Reserve Bank], and an extension of the bright-line test. It feels like there could be more regulation coming. While prices rose by 10% last year, I could imagine a rise of 7-8% this year.”
Non-banks aim to grow market share
With sharper rates than ever, non-bank lenders took a swathe of near-prime and prime customers during the pandemic, with traditional lenders more selective about new business and workers employed in high-risk sectors.
Luke Jackson, NZ head of Resimac, says advisers are increasingly aware of the speed and service that non-bank options can provide.
“Non-banks have a well-deserved reputation for speed and accessibility, generally turning deals around faster than the main banks,” he adds.
“The agility offered by non-banks also enables them to adapt to change faster than competitors, which is crucial in the economic environment we’re currently in and with the fair amount of uncertainty in the year ahead.”
Non-bank SME lender Prospa recorded a 200% surge in originations in the December quarter, driven by adviser business.
Prospa’s Adrienne Church says awareness of non-banks is on the rise, and expects the trend to continue.
“This is driven by a number of factors, including new products and players coming to market, the impact of Covid on the risk appetite of traditional lenders, and more Kiwis embracing digital products and services,” Church says.
“Advisers will play a key role in building this awareness and consideration of non-banks as viable alternatives, and educating their clients on their options in the market.”
Non-banks benefit from more nimble decision making and technology processes, another reason for their success in recent years, Church says.
“One of the key value propositions non-banks like Prospa have is our ability to combine speed with flexible, personalised service,” she says.
Church encourages advisers to contact non-bank BDMs to explore their options if they become frustrated with traditional bank channels.
“The best advice for advisers is to firstly, be aware of the options available. This knowledge comes from knowing your BDMs, attending PD days and conferences and digesting the material provided from both lenders and aggregators,” she says.
Church adds: “Understanding what’s available in the market will enable advisers to offer better advice, as you can better identify options that are fit for purpose.”
Hopes for the year
Advisers hope for better turnaround times and more efficient processing from the banks.
Since the pandemic, turnaround times have worsened, with little improvement despite measures to raise more staff, and process loans in branches.
Krish Krishna, an adviser at Mortgage Suite, hopes 2021 will bring “more streamlined processing and faster turnaround times”.
“There are no signs of improvements anytime soon unless they streamline the processes and get more experienced assessors onboard,” Krishna adds.
Kris Pedersen, of Kris Pedersen Mortgages, calls turnaround times “the largest problem most advisers have faced last year”. He says the issue “is causing a large amount of channel conflict”.
Newpark’s Sreenivasan anticipates turnaround times “will stay around three to four weeks, and I predict they will get worse around March to April due to the traditional influx of applications that happen around this time of year”.
Elyce Peters, founder and director of The Mortgage Girls, says it will continue to be difficult for advisers dealing with slow turnaround times “in a hot market”: “Hopefully, they will get better at that. At the moment we’re seeing times from three days to five weeks. I feel sorry for the assessors as they are under the pump.”
She is unconvinced that the new LVR restrictions from ANZ, and planned reinstatement of LVRs by the Reserve Bank, will have a major effect on market demand.
“There’s a real push on investors at the moment, both in terms of LVRs and the tenancy tribunal developments. That’s only going to stop the people who want to get their first investment – not those with 15 plus properties. We need investment properties in the market as not everyone wants to buy a house.”
Peters hopes the industry can continue to make progress under the new regime.
_Elyce Peters
“The industry is definitely growing,” she says. “Market share is growing to become more like what we see in Australia. It’s about ensuring we provide better advice out there for clients and make sure that clients see all of the options available to them.”
She believes the new licensing regime will weed out bad advisers, leaving a more professional industry to meet the rising demand from clients.
“It will create a more professional industry, and ensure that advisers are meeting standards. Going forward, that will only create more confidence in the industry among the public, raising awareness.” ✚
