The banking inquiry is asking the wrong questions

Monday, 4 November 2024

We should be asking government why more is not being done to funnel more of the country’s capital away from housing and into the primary sector, says rural lender Andrew Laming.

Andrew Laming is co-founder of NZAB, a specialist Agri Finance Advisory Firm working across NZ.

OPINION: What should our banking system focus more on: pushing house prices higher, or supporting our productive sector to innovate and grow?

In the last six years our main banks have lent just over $111 billion in additional debt to the housing sector, and just over $2b to agriculture. The largest agri-lender in the country, ANZ, have actually reduced their lending to agriculture by $2b while at the same time writing more than $32b of new housing loans.

Take out the dedicated agri-lender Rabobank and it’s even worse. Over that period, the main banks have collectively reduced lending to the primary sector by $1.5b.

But the other banks are no different.

Even Heartland, an earlier upstart in agri-lending, has clearly moved to focus their growth on home lending. Its agri-lending growth has been flat, but its home lending growth has leaped ahead by a staggering 28% compounded growth per year.

The small bank players have collectively reduced, or chosen not to participate, in agri-lending and have instead gone large on the home loan sector.

Why does this matter?

Agriculture is a capital intensive industry. It needs a lot of money.

Farmers spend months and sometimes years growing a product to take to market, and while they wait for the produce to grow, get sold, then get paid they have to pay for all of the costs associated with growing the product. Most of the cash that farming puts into our local communities is paid before the farmer even knows if they will make a profit.

When banks reduce their appetite to support farmers, things slow down. Farms don’t sell, product innovation to improve environmental performance slows down, the use of local products and services in our communities slows down. This slow down hurts our economy.

It’s also self reinforcing – restrictions on debt capital mean that farming can start to suffer as an investment class, as other investor capital becomes reluctant to participate.

Again, this means even more capital flows to the housing sector as it becomes a one-way bet.

Does New Zealand want a future that has even higher house prices or do we want to advance the productive and business sectors that have the confidence to continue to develop new product offerings, invest along the supply chain, incorporate new technology, develop away from marginal farm systems and bring in the next generation of talent to ultimately invigorate the country?

Andrew Laming, director of agri loan broker NZAB.

There are 370,000 New Zealanders employed in the food and fibre sectors of New Zealand.

The sector makes up 82% of all our merchandise exports - almost $60b in export receipts - and has a greater share of our self-employed businesses than any other sector.

This is why we have made our submission to the Rural Banking Inquiry. We believe there are key questions that the Government needs to be asking and responding to, because If we do nothing new, or simply seek to increase competitiveness in the home loan market, the majority of NZ’s future capital will continue to flow into the housing sector, driving up prices while driving away the industries that pay the mortgages.

So, how do we encourage the banking sector to focus investment and capital into agriculture?

Why have no new entrants, or even existing smaller banks, been willing or able to participate in our sector; instead, joining the herd and lending more on housing?

Why, when so much needs to be invested in protecting our environment, encouraging the next generation of farmers to invest in their futures, and therefore improving our resilience as a country, are we allowing our banking sector to require any spare dollar to be paid to them in increased profit margins?

The banks blame the Reserve Bank regulatory settings. The banks are now applying approximately twice the margin to a farming loan versus a home loan. The Reserve Bank states that their capital requirements make up less than half of the impact the Banks are imposing on farmers. So what is the truth?

These are the questions we seek answers to. But not just answers. We need to see meaningful change to ensure that we can continue to be world leaders in our fields.