Inside Economics: Could KiwiSaver funds buy back our banks over time? – Liam Dann

Hi, Judith, I like the idea... in theory at least. I certainly like it more than trying to buy the BNZ.

It would (by almost every estimate except Winston Peters’) cost in excess of $20 billion to buy and nationalise the BNZ.

That’s money that the New Zealand Government doesn’t have.

Buying the BNZ wouldn’t boost competition either, as it would consolidate bank ownership in this country (with Kiwibank).

It’s not clear how it would make much difference to consumers unless it offered us cheaper loans or lower fees, but that would mean lower profits (so taxpayers would be subsidising it), making the price we paid for it look even worse.

The upside, of course, would be that the dividends wouldn’t be flowing out of the country.

In my view, that’s the biggest problem we have with the foreign ownership of the big four banks.

They made about $7 billion in profits last year.

About $6b of that leaves the country in dividends – that’s roughly 1.5% of gross domestic product (GDP) straight off the current account, every year, with no end in sight.

We could act collectively to address this by encouraging our KiwiSaver funds to buy back our banks incrementally.

But this definitely isn’t about nationalising the banks.

They’d still be private and listed on the ASX. But the shares are always on sale. There’s nothing to stop Kiwis buying them.

We also need to remember that KiwiSaver funds are private. The Government can’t really tell them where to invest.

Their goal is ultimately to maximise returns for their investors.

And it would be risky to be overly invested in banking. If there were another Global Financial Crisis (GFC), for example, we’d be highly exposed.

But hypothetically (it’s a thought experiment, really), we nearly have enough invested in KiwiSaver overall to buy the New Zealand divisions of all four Aussie banks – about $120b.

It’s not a serious suggestion, but we could certainly up the percentage of New Zealand ownership by boosting our savings and investments overall.

You may say I’m a dreamer

Imagine if New Zealand really powered ahead economically in the next 30 years to the point where our savings per capita matched Australia’s.

It sounds far-fetched, but let’s channel John Lennon for a moment (it’s easy if you try). We would, by default, then own a much larger percentage of the Australian banks simply because they are a natural component of any KiwiSaver fund.

They would certainly be a reasonable investment. The four banks earn more profit in New Zealand than the entire rest of the Deloitte Top 200 combined.

New Zealanders could then own an appropriate amount of the Australasian banking system on a per capita basis.

We’d have a reasonable chunk of the dividends flowing back into our economy without artificially inflating our investment risk.

If we’re doing this progressively on the ASX, the hypothetical endpoint for New Zealand interests would be about 18% of the banks.

That would be the value of the New Zealand divisions relative to the total market cap of the big four.

Of course, in reality, it wouldn’t be that clean.

Australian investors don’t actually own their banks outright either.

They just own a better percentage of them than we own of our banks.

According to their online share registries, about 33% of ANZ is foreign-owned.

Westpac has about 27% foreign ownership.

Big Wall Street funds like BlackRock and Vanguard invest in banks around the world.

KiwiSaver funds do too, as do Aussie Super funds.

While they tend to focus on Australasia, they have to spread their risk geographically as well as by industry.

From an investment point of view, it makes just as much sense to look at investing in Dutch banks or Japanese banks as it does local ones.

Australian super funds now hold 48% of assets internationally.

The goal ultimately is to shrink the outflow of international dividends and grow the inflow.

That is a less nationalistic way of looking at things, but it is also much less risky in the modern globalised financial system.

The message really is quite simple, whether you are an individual or a country – save more and invest more.

Q. Kia ora Liam,

My parents bought their first home by capitalising the family benefit and got a 2.5% State Advances loan.

If you went back one further generation, my grandparents bought their state house after living in it for over 20 years – I’m a firm believer that home ownership builds stability in communities and that stability is an important factor for progress in education.

My first home also used Family Benefit capitalisation and a first-home buyer grant that was available after five years of saving.

We currently subsidise landlords $2 billion a year, which underpins high rents and increases house prices.

More than $2 billion is spent on Working for Families.

What do you think about letting families use a proportion of the NPV (net present value) of both as the deposit on a home?

You would need some restrictions, say use a five-year history for calculations and require the house to be retained (or replaced) for say seven years to stop exploitation.

Nga mihi

Trevor Mallard*

*Yes, that’s the Sir Trevor Mallard (I checked).

Q. Hi Liam,

I am interested in you describing the accommodation supplement as a subsidy to landlords (which it is). It costs over $2 billion a year, 90% of which goes to landlords via their tenants, and only 10% of which goes to subsidise mortgage payments for first-home buyers.

Wouldn’t it be better to allocate more of this to first-home buyers?

Why don’t we do that?

John.

A: Thanks, Trevor and John,

These questions both flow from a recent question I answered about the inequity of credit availability in society (May 20).

Couldn’t we do more to help the poorest people use debt in a positive way to create wealth, instead of borrowing at high rates of interest to cover weekly living costs?

I asked for ideas on the back of an envelope, and I got a few to ponder.

These two cover similar territory and are worth considering, as this is the sort of thing we used to do in the past.

Family Benefit capitalisation was a widely used pathway to home ownership in the 1950s-70s.

You essentially said: “Instead of paying me $x/week, give me the lump sum now to buy a house.”

It seemed to work ... until New Zealand hit financial strife in the early 80s.

It’s worth noting here that, ironically, Mallard was in the 1984 Labour Government that axed the Family Benefit capitalisation scheme.

But to be fair, he was a newly elected backbencher, and the scheme was swept away in the wave of Rogernomics reforms.

Could we bring it back in some modern form, then?

In theory, an Auckland family receiving both accommodation supplements (at about $200-$250 a week) and Working for Families (which varies hugely by income and number of kids) of about $200/week could capitalise that over five years to a deposit of between $80,000 and $100,000 – more than enough for the deposit on a modest townhouse.

Of course, we’ve then got the problem of how the family cover the mortgage costs without an accommodation supplement. In cashflow terms, they could be a lot worse off.

Back in the 1950s and 1960s, the scheme worked partly because housing was much cheaper relative to incomes.

State Advances loans were available at 2.5-3%, and the capitalised amount was a much more meaningful share of the total purchase price.

Maybe the policy might work better outside Auckland.

In a provincial centre where house prices are $400,000-500,000, the mortgage repayments might actually be lower than rents.

Mallard mentions that it might just be a portion of the subsidies that is capitalised.

So there might be a sweet spot for capitalisation and making the mortgage payments.

You could, of course, introduce more of a government subsidy (as was done in the past).

We could allow the accommodation supplement to continue, but redirect it towards mortgage costs rather than rent (effectively making the Government a silent equity partner).

The benefits of getting more of our poorest people into home ownership are multiple.

So it all sounds good, but I feel the need to mention a few more fish hooks.

Working for Families entitlements aren’t guaranteed – they depend on income, family size, and policy settings. Can you really capitalise something that might change within the five-year timeframe?

And I hear the landlords in my ear ...

Are rental payments really lost? They are not all profit, and much of a landlord’s revenue flows back through the economy.

What would a policy like this do to the market? Would it just add demand and push up prices ... sending more profit the way of the Aussie banks?

I don’t know the answers, but there is something appealing about making better use of that $2b subsidy to change people’s lives for the better.

Liam Dann is business editor-at-large for the New Zealand Herald. He is a senior writer and columnist, and also presents and produces videos and podcasts.

He joined the Herald in 2003. To sign up to his weekly newsletter, click on your user profile at nzherald.co.nz and select “My newsletters”.

For a step-by-step guide, click here. If you have a burning question about the quirks or intricacies of economics send it to liam.dann@nzherald.co.nz or leave a message in the comments section.