Category Archives: Household Debt

NZ is balancing a mortgage debt time bomb. Will it blow? – Liam Dann.

We kid ourselves we’re wealthier because of capital gains on our homes but in reality our collective balance sheet is looking worse than ever.

Last week I wrote about the world’s total debt hitting a record $230 trillion.

That’s a big pile of money. The rate at which it has been growing worries the International Monetary Fund which tallied it up. The IMF fears it could be a trigger for the next financial crisis.

Most of last week’s column got side-tracked by government debt and the debate about whether ours can afford to borrow more. ANZ economists made a good case for doing that.

As expected finance minister Grant Robertson ruled it out last week, reiterating his preelection commitment to fiscal responsibility.

The Government’s target of net core crown debt (20 per cent ofGDP) makes us look very conservative, the US Government owes more than 80 per cent of the country’s GDP.

But, as numerous correspondents pointed out, it’s New Zealand’s private debt that is the real problem for this county.

We are up to our neck in it and that creates a serious risk particularly if interest rates rise rapidly as they did before the global financial crisis (GFC) in 2008.

The Reserve Bank’s latest tally puts the total at $433.07 billion a whopping 160 per cent of GDP. That includes mortgages, credit cards, business borrowing and agricultural debt.

It will come as no surprise that our overcooked housing market is to blame for a big rise in mortgage debt over the past decade. That sits at $247.37b 91 per cent of GDP.

It has risen by 57 per cent in the past decade. As house prices have soared so has the amount Kiwis have to borrow to buy.

We kid ourselves we’re wealthier because of capital gains on our homes but in reality our collective balance sheet is looking worse than ever.

This is no revelation, of course. To be fair, it is the issue that probably tops the Reserve Bank’s long list of things to worry about. It is one of the reasons the Bank moved to introduce tough loan to value ratio (LVR) restrictions between 2013 and 2016 as annual growth in mortgage lending neared 10 percent (it peaked at 9.3 per cent in December 2016).

High private debt levels are one of the reasons the Government can’t afford to be reckless on the borrowing front.

New Zealand isn’t unique in this.

As the IMF pointed out, throughout the developed world we have seen debt mount rapidly in an environment of easy money and super low credit, essentially due to the radical policies put in place by central banks to avoid total meltdown in the GFC.

The next crunch will come when we find out how serviceable that debt mountain is, when interest rates rise to more normal levels.

That process is under way now and it worries many economists. They see this a time bomb. Some even predict another massive financial crisis coming our way.

I’m not going to argue this couldn’t happen. But I think it is important to keep the relative scale of the risk in perspective. Debt will almost certainly be at the centre of the next financial mess however it unfolds. But at a certain point that becomes about as meaningful as saying the next crisis will be caused by money.

Debt is effectively a form of currency that enables value transactions to take place in the future rather than just the present. Like money it works as long as there is confidence in the system that accounts for it and enforces payment.

So could the whole thing come tumbling down? Sure.

But let’s look at some reasons why it might not, at least anytime soon.

What’s happening with interest rates is not a shock for markets in fact it’s a slow, orderly process. New Zealand’s official cash rate is 1.75 per cent and it is not expected to go up for at least a year.

Mortgage rates could still rise because local banks need offshore funds to cover their lending costs.

But the proportion they need has fallen. Ten years ago when the GFC hit about 40 per cent of bank funding was sourced offshore. Now it’s less than 30 per cent.

We have learned and made some progress since the GFC.

There are plenty of headlines about US rates rising right now. Even then, the US Fed’s forecasts are for 2.9 per cent by the end of 2019 and 3.4 per cent by the end of 2020. That is hardly apocalyptic. In Europe they are still extremely low. Their forecasts suggest they’ll still be just 0.75 per cent by the end of 2020.

The other positive is that local house prices have flattened out without crashing. That has meant the annual rate of growth in the nation’s mortgage debt has stabilised at about 5.8 per cent.

If rates rise slowly and the growth in housing debt stays steady, if the Government pays down debt and if New Zealand keeps a top grade credit rating then we should be okay.

That is a lot of ”ifs”.

It is not a formula likely to reassure many of the gloomier economy watchers.

But it’s about as much optimism as I can muster on the issue. The risks are real and this country can’t afford to relax about its private debt levels.

Up to 90% of first-home buyers relying on parents – Tamsyn Parker * Bank of Mum and Dad can take a Hit – Diana Clement.

When the Bear inevitably comes, New Zealand’s economy will take a massive hit, and real estate values, based on blind and irrational exuberance, will crash down to long term average values, or worse. A large percentage of kiwis will be ‘under water’. Parents will be losing their homes as well as the kids. Our record levels of household debt will be our undoing, and the catalyst for a serious and prolonged economic depression. Hans Hilhorst

Up to 90% of first-home buyers relying on parents

Tamsyn Parker

The gap between the property haves and have-nots looks set to widen as a growing number of first-home buyers turn to their parents to get help jumping on the property ladder.

Figures from Australia show over 55 per cent of first home buyers received some help from their parents last year up from just 3.3 per cent in 2010.

There is no across industry data on what percentage of first home buyers need parental help but figures from Mike Pero Mortgages show it is likely to be higher in New Zealand.

Mark Collins, chief executive at Mike Pero Mortgages, said 60 to 70 per cent of first home buyers had parental help and for those under 30, the proportion jumped to 80 to 90 per cent. The difference for those under 30 is probably linked to having less in their KiwiSaver accounts to draw out. “If you are in your mid 30s to 40s you have probably been earning at higher rate.”

Collins said he had been surprised by the figures although he pointed out that it was mainly Auckland where parental support was so high in the regions it was more like 20 per cent of first home buyers. “Getting a 20 per cent deposit together in Timaru is not as hard.” Most parental loans are on a “pay it back when you can” basis which could cause complications if the parent’s situation changed and they need the money back quickly. “It means there is almost four people in the deal.” Collins urged people to get advice and put a legal agreement in place for the loan.

John Bolton, chief executive at mortgage broker Squirrel, said the number of first-home buyers who were helped by their parents to get on the property ladder was “pretty significant”.

“The majority would have some sort of parental support. Parents typically help out either through a cash contribution or through providing a limited guarantee over their home, which is more common. Often it is not really a gift, it is a loan which is interest free, which they pay back when they can. The situation has changed dramatically from 10 years ago. Back to 2008 first-home buyers were able to borrow 100 per cent. You didn’t even need a deposit. Then the global financial crisis hit and lending was tightened up and most buyers now need a 20 per cent deposit.”

Karen Tatterson, an Auckland mortgage broker with Loan Market, said the number of first-home buyers using parental help had doubled in the last 10 years and rising property prices was the driving factor. Tatterson who has already planned to help her own son get on the property ladder, said it is a common thread of discussion among her and her friends how they were going to be able to help their children out.

But it is a challenge made tougher for those with more than one child. Typically parents who helped out used the equity in their property to boost the deposit over the 80 per cent threshold so the children did not have to pay a low equity fee.

In Australia, the average value of the help provider by parents was A$80k, and Tatterson said here it was around $50k to $80k in New Zealand.

But the situation has fueled concerns that only property owning families will be able to help their offspring locking renters and their children out.

Economist Shamubeel Eaqub said the divide between the property haves and have-not had been happening for a while. He pointed to the last census in 2013 which showed just over half of adults were renting and home ownership levels were falling across all age-groups.

“This divide is going to multiply. Only those people with parents with property are able to access it because they are trading in the same pool.”

Eaqub said 30 to 40 years ago people didn’t need help from their parents because they could save a deposit from their own income. But that is no longer so easy.

Last week, the Real Estate Institute revealed it takes Aucklanders on an average weekly income 16 years of hard slog to save for a house.

Eaqub said homeownership rates had peaked in the early 90s and the children of those who had struggled to get on the property ladder were now coming through.

“The consequence of that is going to be more apparent.” But he said there was no quick fix for this kind of generational shift. “I’m not confident we can turn around homeownership rates anytime soon. It has taken around 30 years of pro homeownership policy to build up rates in New Zealand and he was not convinced the political environment was open to the kind of policies needed to change it significantly.

Diane Maxwell, Retirement Commissioner, said it was seeing more and more older New Zealanders trying to help their adult children into a home. “It can be a good thing but it does depend on the finances of parents and how much strain it puts on their own situation. “We’ve seen situations where people have sold their family home and moved out of the city to free up money for kids. That may lead to greater isolation as they move away from their community and friends. Maxwell said there was also a risk that parents would loan or give money to their children that they would need later in life.

“We have worked on a case where a retiree lost his entire life savings sending money to an inheritance scam his key motivation was that with the inheritance windfall he would be able to buy houses for his children. It is not a good thing if the financial situation and home ownership status of the parents had a greater impact on the child than their own prospects in life.

Bank of Mum and Dad can take a Hit

Diana Clement

Helping your children buy their first home can come back to bite.

Lending money for a deposit or guaranteeing their loan can break families apart and lead to parental bankruptcy unless everyone goes in with their eyes open.

The risks of gifts

Gifting the deposit is one of the ways parents help. Lending the money, however, may be safer. Parents often don’t think of the consequences of their action. What happens, for example:

If your child splits from his or her partner? Half of your gift might go to the now less than favourable former partner.

If your child develops an expectation you’ll shell out money whenever they want it?

If the other children become bitter and twisted that their sibling got more than they did?

With your Will? Do you take this money into account when divvying up your wealth?

Some parents borrow themselves in order to fund a deposit for the children. Banks are wary of this and may not lend if they see the child didn’t save the deposit money themselves.

If the child subsequently loses the home, the parents are still stuck paying the loan they took out.

More than a piece of paper

If you don’t have cash to lend to the children, but still want to help, another option is to go guarantor. That means you guarantee that if the child can’t repay the loan, you will.

Banking Ombudsman Nicola Sladden says parents don’t always understand the implications of this. it’s much more than a piece of paper that you’ve signed.

“Parents are frequently unaware of how a guarantee works in practice. The amount of a guarantee is often unlimited. Even if it is limited to the amount of the loan, it is often a guarantee of all the customer’s borrowing up to that limit, not simply of the original home loan.”

This means parents are accepting legal liability for other debts incurred in their name, irrespective of whether those debts were incurred before or after they provided the guarantee.

That’s a very good reason to get legal advice and use a mortgage broker who may be able to negotiate a more limited guarantee.

Many a parent has been caught by their kids behaving badly.

“It is natural for parents to assume that they know their child’s credit history, their likelihood of making repayments and whether they will be clear and transparent about the borrowing. But this is not always the case. It can lead to severe relationship breakdowns if a guarantor is actually called upon to pay the loan. The fact a bank requires a guarantor means that the borrower did not meet the bank’s lending criteria or that the borrower may default on the loan.”

Impossible to cancel

When parents realise the extent of what they’ve signed up for, they sometimes try to cancel the guarantee. It’s not so easy and does not absolve the guarantor of all responsibility.” says Sladden. “They will still be liable for debt incurred right up to that point in time. If a parent does cancel a guarantee, the child may then struggle to continue borrowing finance from the bank.”

Another fish-hook in the three-way guarantor relationship between parent, child and the bank is that, when things go wrong, there is no obligation for the bank to pursue the child for the debt first. The bank can just go straight to the guarantor for money.

If the parents can’t come up with cash to pay, the bank can force the sale of their home if it’s easier to sell than the child’s.

If a guarantor has an account at the same bank as the borrower,” says Sladden, “the bank may take funds from the guarantor’s account to cover the debt.”

The new American Dream: rent your home from a hedge fund – Simon Black. 

About a month ago I joined the Board of Directors of a publicly-traded company that invests in US real estate.

The position brings a lot of insight into what’s happening in the US housing market. And from what I’m seeing, the transformation that’s taking place today is extraordinary.

Buying and renting out single-family homes has long been the mainstay investment of small, individual investors.

The big banks and hedge funds pretty much monopolize everything else. They own the stock market. They own the bond market. They own all the commercial real estate. They even own the farmland.

Single-family homes were one of the last bastions of investment freedom for the little guy.

But all that’s changing now.

Last week a huge merger was announced between Invitation Homes (owned by private equity giant Blackstone Group) and Starwood Waypoint Homes (owned by real estate giant Starwood Capital).

If the deal goes through, the combined entity would be the largest owner of single-family homes in the United States with a portfolio worth over $20 billion.

And this is only the latest merger in an ongoing trend.

Three years ago, for example, American Homes 4 Rent bought Beazer Pre-Owned Rental Homes, creating another enormous player. A few months later, Starwood Waypoint bought Colony American Homes.

And of course, Blackstone was one of the first institutional investors to start buying distressed homes, forking over around $10 billion on houses since the Great Financial Crisis.

At one point, Blackstone was reportedly spending $150 million a week on houses.

There are some medium-tier players coming into the market as well. A friend of mine runs a fund that owns about 2,000 rental homes in Texas, and he’s buying every property he can find.

I called him for his perspective on what’s happening in the housing market. Here’s what he told me:

There are lots of little guys assembling portfolios of 10-100 homes. And I like to buy these guys out because they have much higher funding costs than us.

And, eventually, as we get larger, medium-sized funds like mine will get bought out by Blackstone and the other mega players.

In short, medium-sized funds are buying up all the little guys. And mega-funds like Blackstone are buying up all the medium-sized funds.

This means there’s essentially an ‘arms race’ building among the world’s biggest funds to control the market, squeezing small, individual investors out of the housing market.

Then there’s the situation for renters.

US Census Bureau statistics show that, over the past decade, the number of rental households has been rising steadily while the number of homeowner households has been falling.

In other words, the American Dream of owning your own home has been fading.

It’s easy to understand why:

US consumer debt is at an all-time high of over $1 trillion (mostly credit card debt), with an additional $1.3 trillion in federal student loans.

Americans… especially younger people, are far too heavily indebted to be able to save any money for a down payment.

Moreover, despite all the hoopla about the low unemployment rate in the US, wages are totally stagnant.

(Plus bear in mind that most of the jobs created have been for waiters and bartenders!)

So the average guy isn’t making any more money, or able to save anything… all while home prices soar to record levels as major funds gobble up the supply.

This means that the new reality in America, especially for young people, is that if you’re lucky enough to not be living in your parents’ basement, you’ll be relegated to renting your house from Blackstone.

But… there is some interesting opportunity in all of this.

With a supply of more than 17 million rental homes in the United States, there’s a LONG way to go for this trend to play out. We’re still in the early stages of the mega-fund consolidation.

And some savvy little guys are figuring out how to cash in on this trend.

Think about it: mega-funds don’t have the capacity to buy up homes one at a time. They just don’t have the time.

They need to buy homes in big volume… hundreds, even thousands at a time. And they’re willing to pay a premium if they can buy in bulk.

That’s why medium-sized funds like the one my friend runs in Texas are basically assembling large portfolios with the sole purpose of flipping everything to the mega-funds.

But smaller investors can play this game too.

Medium-sized funds need to buy in bulk as well. They don’t have the time or resources to buy up homes one at a time.

This creates a unique, niche opportunity for individual investors to assemble small portfolios, say, 10 properties, with the sole purpose of flipping to medium-sized funds.

We know some people already doing this. They essentially put several single-family homes under contract simultaneously (with only a small deposit on each home).

But, BEFORE they close, they make arrangements to flip the entire package of homes to a medium-sized fund through a double-escrow closing.

This structure guarantees a neat profit to the small investor while requiring limited up-front capital.

And like most great investment opportunities, it’s been very lucrative so far because very few people are doing it.

SovereignMan.com

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