Category Archives: Household Debt

First home buyers need LVRs to stay – Liam Dann. 

Real estate agents are wasting their breath calling for a removal of Loan to Value Ratio restrictions. They will not be removed prior to the election, nor should they be.

Though the housing market has cooled there is a risk that it will bounce back post-election as spring takes hold. That would be a disaster for first home buyers.

We know that population pressure is still far stronger than the rate of new building.

Those looking to get in to the housing market need prices to stay flat – or ideally fall further over the next 12 months – long enough for housing supply to reach the kind of peaks that could prevent another bubble.

If that happens then LVRs will inevitably be loosened and first home buyers will be in far better shape than they would have been without them.

The LVRs have been highly successful in cooling the housing market, but even the Reserve Bank would acknowledge that they have been just one of several factors. It’s possible they are getting too much credit.

The retail banks have also tightened their lending based on concerns that the market was in bubble territory.

Nevertheless LVRs stand out as a piece of policy that is doing what it is supposed to do.

Specifically LVRS were designed to target New Zealand’s dangerously high levels of housing debt and remove the wider risk to the economy.

The growth in mortgage lending has slowed but not by enough yet to say that the job is done.

It seems highly unlikely that Reserve Bank Governor Graeme Wheeler or his immediate replacement Grant Spencer will be swayed by lobbying.

Spencer is currently head of financial stability for the Reserve Bank so was instrumental in putting the LVRs in place.

Real Estate agents are unhappy because the market is seeing a huge slump in the volume of sales – that effects their livelihood.

Their industry concern is understandable

But the slump in the past few months is largely to do with the toughening of restrictions on investors – the big change to LVR rules last year.

REINZ’s claim that LVRs are hitting first home buyers is disputed by Kiwibank chief economist Zoe Wallis.

“While REINZ notes that LVR restrictions have been particularly hard on first home buyers, the data suggests that the recent changes to property investor lending LVR restrictions have instead opened up some opportunities for first home buyers and other owner-occupiers,” she wrote last week.

“The latest round of LVR changes has meant that the percentage of bank mortgage lending to investors has fallen from 33 per cent of all loans in July last year, down to 24 per cent.

“Over the same time period the share of lending to first home buyers has increased from 11 per cent to 14 per cent.

“Lending to other owner occupiers (i.e. people moving up the property ladder) has also increased,” she concludes.

Many first home buyers won’t need a 20 per cent deposit either. LVR rules allow banks to offer 10 per cent of their loans to owner-occupier buyers who have less than 20 per cent deposit.

So basically if you have a decent job and in excess of 10 per cent on a good solid property then there is a good chance you can find a bank that will lend to you.

And even if that takes more time, LVRs are helping your cause.

You are less likely to need a $200,000 deposit if we stick to our guns now.

Prices are falling, so the pressure to get in the market quickly has gone. Would be home owners can keep saving without feeling like they are being left behind.

There will of course be some, ready to buy now, who feel hard done by.

But it seems that the most aggrieved parties right now are would be investors and the real estate agents themselves.

Giving up on LVRs now would be akin to quitting a tough fitness regime after you’ve done most of the hard work but before you reached your goal.

It would be a wasted opportunity.

NZ Herald

Kiwi lessons for Aussie house dreams – Shamubeel Eaqub. 

Australia is thinking of ideas to use super to buy houses, and there are some lessons from New Zealand’s experience.

It’s a short-term and politically convenient salve, allowing some people to buy. But without fixing the longstanding, underlying problems of the housing market, it just adds more demand and makes houses even more unaffordable.

Allowing people to access their retirement savings to buy a house is a political no-brainer.

It helps first home buyers put together a deposit. Even better, emptying out the KiwiSaver account doesn’t affect government finances. They are both political wins.

But the long-term impact is sadly predictable: extra demand drives prices higher and many people will have less of a savings pot to retire on.

The scheme is popular in New Zealand. Around 25,000 people used their KiwiSaver savings to buy a house over the past year.

Realistically, many home buyers will need other savings and perhaps their partner’s KiwiSaver too.

For these buyers, they risk having a much smaller retirement nest egg, but they will have a house. The main risk for them is a housing crash, which would mean possibly losing equity in the house and not having long term retirement savings.

But most people would not sell their house in a housing crash. Rather, the tangible risks are from rising interest rates or lost income – which could make their mortgages unaffordable.

Interest rates are starting to increase from record lows. The Reserve Bank will probably not raise the official cash rate, which influences the floating mortgage rate, for at least another year.

But rising global interest rates, which influence fixed mortgage rates, look set to rise by around 2 per cent over the next three to five years.

It doesn’t sound like much, but with recent borrowers stretched to their budget limits, even small increases could cause financial strife.

There is little hint of a worsening labour market. Jobs are growing at a reasonable pace and wages are rising in industries where vacancies are hard to fill.

For now, using KiwiSaver to buy a house has been a happy scheme for those who have used it. But this has added to the demand to buy houses. Some of these people would not otherwise be able to buy a home. Additional demand, in an already hot market, increases prices. This makes it harder for the next crop of buyers to access the market.

KiwiSaver withdrawal to buy houses was equivalent to 25 per cent of house sales, up from less than 10 per cent five years ago. The scheme has boosted demand for house buying. In that way, the scheme has been very successful.

But at a wider level it has failed. Home ownership has continued to fall despite this policy, which is now at the lowest level since 1946 (my estimate using partial data). Helping some people into the market has not changed the fundamental underlying problem – that houses are unaffordable.

To improve home ownership, we need to make houses affordable.

Whether in Australia or New Zealand, the fixes are similar.

But it is a long list of difficult things to fix: poor rental conditions, slow land supply, broken local government infrastructure funding, not building enough social housing, tax incentives for property investment, cultural obsession with property investment, banking rules that encourage mortgage lending, and a construction sector that is not big enough and not efficient enough.

Stuff

Economist: Pay rises won’t be enough to cover interest rate rise – Tamsyn Parker. 

Auckland 2017

‘Falling Off The Property Ladder’

$1,000,000 House – $700,000 Mortgage

1% Rate Rise = $135 PER WEEK!

$900,000 Mortgage = $173 PER WEEK! 

All going to the Banks rather then into the economy. Insanity.

Pressure on employers to boost workers’ wages is not going to be enough to cover the rising cost of mortgage rates, warns an economist.

Daniel Snowden, who analyses retail and consumer economic data for the ASB bank, said mortgage rates were roughly back to where they were a year ago but in about 18 months time were likely to be higher.

“In 18 months time it will be particularly unpleasant for people rolling off two-year rates,” Snowden said. Banks began lifting longer-term fixed mortgage rates at the end of last year and that has been followed by a flurry of increases in January.

Kiwibank has increased some of its fixed-term mortgages rates twice already this year and ASB also announced plans to increase its rates last week. While smaller banks SBS bank and the Co-operative Bank have also raised rates.

The banks have blamed rising funding costs from borrowing money in the offshore market for the rate rises.

“With the majority of mortgages fixed for two years or less, rising interest rates are going to impact people much more quickly in the current cycle compared with when interest rate cuts happened back in 2008/09.”

It’s recommended people calculate what a higher rate would cost them ahead of time to see what they could afford.

NZ Herald

OECD: Fears of a massive global property price fall – Szu Ping Chan, Isabelle Fraser. 

Property prices have climbed to dangerous levels in several advanced economies, raising the risk of massive price falls if markets overheat, according to the Organisation for Economic Co-operation and Development (OECD).

Catherine Mann, the OECD’s chief economist, said the think-tank was monitoring “vulnerabilities in asset markets” closely amid predictions of higher inflation and the prospect of diverging monetary policies this year.

Mann said a “number of countries”, including Canada and Sweden, had “very high” commercial and residential property prices that were “not consistent with a stable real estate market”.

The EU’s financial risk watchdog recently warned that eight countries, including the UK, had property markets that risked overheating in the environment of low interest rates. The Bank of England also cautioned last month that the improvement in household finances seen since the 2008 crisis “may have come to an end”.

The OECD’s Mann said countries such as Canada, New Zealand and Sweden had all seen rapid increases in house prices over the past few years.

While many of these countries have already introduced policies designed to reduce financial stability risks, including forcing buyers to find larger deposits and imposing borrowing limits, Mann suggested that a house price crash would also reduce household spending.

NZ Herald

Fed rate hike a milestone for world markets – Jamie Gray. 

US Federal Reserve chair Janet Yellen’s announcement of an official rate hike marked a significant milestone for the world’s financial markets.

In one of the year’s most anticipated market events, the Fed raised its official fed funds rate by 25 basis points to a range of 0.5 to 0.75 per cent.

While the hike came as a surprise to no one, the Fed’s projection that it could raise rates three more times in 2017 was seen as a more aggressive, or hawkish, stance than was generally expected.

The US 10-year bond yield bumped up to 2.57 per cent for the first time since 2014, giving investors yet more evidence that world interest rates are finally on the move after a seemingly interminable post-Global Financial Crisis hiatus.

At 0.5 to 0.75 per cent, the fed funds rate is still a long way short of the 3 per cent norm. 

NZ Herald

Janet is saying: “interest rates are going nowhere but UP!”. 

What inevitable shock will pop NZ’s bubble? – Brian Fallow. 

An air of unreality surrounds the economic and fiscal update the Government released today.

It forecasts brisk economic growth averaging 3 per cent over the next five years, generating ever plumper surpluses.

It sets up an election-year debate about how to divide up those surpluses between tax cuts/income support, increased spending on public services, debt reduction and resuming contributions to the Cullen fund.

But by definition, the cheerful forecasts for economic growth do not allow for New Zealand being sideswiped by an economic shock from the rest of the world – the kind of shock that turns a lot of two-income households into one-income households and pops a property bubble.

The chances of getting through the next five years without such a shock are very low indeed.

There’s Donald Trump, for one thing.

Everything we know about his temperament and character indicates he is a disaster waiting to happen – the only question is when and in what arena. His election is akin to putting a child behind the wheel of a supercar and handing him the keys.

For example, hard on the heels of trampling over the One China policy, this week he has fired off intemperate tweets over the renminbi’s depreciation against the US dollar – oblivious to the complexities of China’s exchange rate policy and ignoring the effect his own election has had in driving US interest rates and the US dollar higher.

It does not augur well for relations between the two largest economies, nor therefore for the rest of us.

Then there is Europe.

Last weekend’s Italian referendum adds political instability to that country’s bitter cocktail of feeble economic growth, high unemployment and sky high public debt.

It increases the chances that a toxic build-up of bad debt in the Italian banking system will go from being a chronic to an acute problem, shaking the single currency’s already rickety foundations.

If it is the harbinger of Euro Crisis II, The Sequel, it would only add to Europe’s other challenges: Brexit, populism, refugees and Russian irredentist adventurism.

China, meanwhile, is sitting on a credit bubble. The ratio of private sector debt to gross domestic product (fast-growing though its GDP is) has doubled over the past eight years.

“The rapid increase in Chinese debt, continued pressure on the renminbi from capital outflows, and high house price inflation in major city centres indicate large vulnerabilities in the Chinese economy,” the Reserve Bank says in its recent financial stability report.

“A disorderly unwinding of China’s imbalances could particularly affect New Zealand banks’ access to offshore funding markets, given that China is the second largest market for New Zealand exports.”

Against this international background, fragile at best, we need to look at our own finances from the standpoint of resilience.

Our Reserve Bank has only 1.75 percentage points now available for conventional monetary policy.

New Zealand households are net borrowers from the banks to the tune of $75 billion, and “other residents” (ie businesses) another $25b. The banks fund this by being net borrowers from non-residents (foreign savers) to the tune of $92b.

Access to that inflow of savings at tolerable interest rates, and the ability to lay off the risk that when it has to be repaid the exchange rate will have moved against us, are clearly vital.

Offshore funding markets could be disrupted by a number of factors, including credit rating downgrades, a disorderly unwinding of vulnerabilities in China or Europe, and geopolitical risks.

Statistics NZ reported this week that 99,000 owner-occupier households spend 40 per cent or more of their pre-tax income on housing. Another 127,000 households that rent spend 40 per cent or more of their income on housing.The Reserve Bank tells us that about a third of new mortgage lending is at debt-to-income ratios of more than six times.

Looking forward there are two possibilities. One is that the economy is not walloped by an almighty international shock.

In that scenario, banks are increasingly reliant on offshore funding, their funding costs are rising and mortgage rates inevitably follow.

The more likely scenario is that there will be a shock that sees unemployment rise, incomes fall, foreclosures and forced sales jump, and a hit to household wealth generally that deepens the recession.

NZ Herald 

An Obesogenic & Debtogenic environment. Shopping our way into debt. – Bernard Hickey. 

Two apparently unrelated things happened in the first week of October that say so much about New Zealand these days.

The world’s two biggest “fast fashion” chains, H&M and Zara, opened shops here, creating the kind of scenes we’ve not seen before. More than 300 people queued and there was applause and a rush for the racks when the door opened.

Remember, these were people queuing to pay money for clothes that can be bought any day of the week, from any computer on the planet, and there is no shortage of choice It is not queuing for bread in a war zone. It was an active choice by sane people willing to take time out of their busy days to enthusiastically consume.

Four days after the H&M opening and the day before the Zara opening, Treasury published a paper on the rise in New Zealand’s household debt to record high levels relative to income. Our household debt to income ratio of 165 per cent is now about 5 per cent above those previous highs of 2008 and rising quickly as debt rises around twice as fast as incomes.

Researchers are starting to look at the issue of debt and saving in a similar way to those who study obesity epidemics. Our Western society has created an environment full of cues and prompts to encourage us to eat high-energy food as often and as cheaply as possibly – an obesogenic environment.

It has also developed into an economic geography that encourages us to spend money we don’t have.

There are ways you can look at obesity epidemics as being very similar in terms of what do we have to do around changing the systems and the culture, and not just the information, so different choices are not just possible, but different choices are being normalised. NZ Herald