Reserve Bank (RBNZ) Governor Adrian Orr says banks need to be “forgiving” when dealing with mortgage holders under financial pressure.
Orr has repeatedly called for banks to be “courageous” with their lending during the COVID-19 crisis. But speaking to interest.co.nz on Tuesday, he added “forgiving” to his commentary.
Asked how concerned he was about what would happen when mortgage holders’ six-month repayment deferrals expired, Orr responded: “It is a concern.”
He said the banking system could manage, but was worried about the impact on individuals.
“Without doubt, you’re going to see hardship going on in housing, and banks are going to have to be courageous, forgiving and thinking hard about all of the tools and means they have of smoothing out that payment structure,” Orr said.
Mortgage holders jump at deferral and interest only offers
According to the New Zealand Bankers’ Association, banks approved repayment deferrals on $18.9 billion of consumer loans to 53,779 customers, in the nearly two months to May 18. Consumer loans include mortgages secured against owner-occupier and investment residential property, personal loans, overdrafts and credit card lending.
In this time banks reduced loan repayments (by going interest only for example) on $19.3 billion of consumer loans to 59,237 customers.
Meanwhile according to the RBNZ's more granular, but less timely data, as at the end of March, 21% of all housing loans were interest only. In February, this portion sat at 19%.
The value of housing loans on interest only increased by $4.0 billion between February and March to $57.7 billion. Of this $4.0 billion, nearly three quarters was for loans secured over owner-occupier property.
April data is due out on May 29.
Persistence of unemployment the key issue
Further responding to the question around concerns over people struggling to pay their mortgages as deferrals expire, Orr said: “The banking system itself is very robust, and robust to a broad range of quite significant negative economic shocks. Everything that we’ve talked about to date in our Monetary Policy Statement; the banking system will get through. It will be fine.
“But of course, you could take far more extreme scenarios where it won’t be. That’s not a forecast, it’s just about saying, how prepared are you for what?
“The most significant challenge through the banking sector is of course household lending. The most significant thing for household lending is whether people have a job or not. Unemployment - both the level, but more the persistence of that unemployment - is the thing that puts a real drag on bank profitability, bank stability.
“We’re not looking at anything that’s threatening that at the moment, but banks will be using a lot of their capital, which we insisted they build up. They will have to dip into their rainy-day funds to see themselves through.
“What I worry about most of course is the humanity side of it.”
Orr noted low interest rates reduce debt servicing costs significantly, but recognised people ultimately still need incomes to service their mortgages.
The RBNZ expects the unemployment rate to increase from 4.2% in the March quarter to 9%, according to its “baseline scenario”. But if the country remains under COVID-19 restrictions for longer, it sees the unemployment rate reaching 12%.
‘The banks need to stand up and compete’
Moving from the issue of banks being "forgiving" to that of them being “courageous”, Orr repeated grumbles he made last week around banks not cutting mortgage and other retail lending rates as much as they could in response to the RBNZ’s quantitative easing programme lowering wholesale rates.
He recognised banks are still competing for deposits and had in recent weeks contended with high international borrowing costs.
“Whilst they can explain what their cost of funding was at that point, it doesn’t mean that we’re particularly excited or thrilled about it, because our game - the Reserve Bank - wants to see those interest rates passed through as quickly and as fully as possible to New Zealand households and businesses,” Orr said.
He believed banks would start lowering their lending rates more as demand for credit picks up once people get back to work and business resumes more normally.
“We saw some of the interest rates drop below 3%, but margins still remain heightened relative to where we would prefer them,” Orr said.
He said the RBNZ had given banks a hand by deferring the date by a year from when they need to start holding more capital. It had also provided them with an “enormous amount of liquidity” through various schemes.
“But the banks need to stand up and compete,” Orr said.
“I hope that there are some courageous ones out there that really will compete and force the hand of those who prefer to keep the margins.”
86 Comments
Question for you in regard to this link of yours: https://www.youtube.com/watch?v=MlUIzjhFnk8&t=920s
So money is moving from stocks to the money market., really useful to know, but who is buying?
So, just so we're clear - you are saying the NZ wide median price will be $1.36m by 2027-2030 and the Auckland one will be $1.85m.
As a review - Auckland median price March 2016 was $885k and March 2020 was $945k, so 4 years into the 7-10 it has added $60k of the $885 it needs to appreciate by for your formula to hold true, and then extrapolating....
2026 $1.77m
2036 $3.54m
2046 $7.08m
2056 $14.2m
Now, I have a 10 YO, so you're saying by the time he is 46, the Auckland price will be $14m. Are you sure you believe that?
Just to be clear, I was being facetious. But imagine in 2036 if people are taking out $5 mill mortgages at negative 18% interest rates.
Not a big problem for the borrower, the interest goes directly towards paying off the principal with a token monthly payment from their meagre wages. Also the massive credit impulses from borrowing going directly into the hands of existing asset owners and stimulate the economy.
Bank's wont even need to worry about mortgage defaulters.....Non-performing loans should become a thing of the past.
What were house prices in the 70's? I seem to remember living in a place in Pukekohe where we saw the council records that showed that property on a full sized section was developed for $13k, its likely worth close to $7-900k now... so $14.2m in 36 years... possibly
You are missing a fundamental point. Price appreciation is a function of monetary policy. It would be possible to run a policy of austerity and crash prices to the ground. On the other hand, if you print enough dollars then there is no limit to where the nominal price can go. Is the house actually worth more? It would depend on what other price and wage increases have occurred. It is obvious the predication that has been made is based on an extreme debasing of the money. I would not bet against the policy makers.
The doubling in a decade argument always comes up near the end of a property boom and historically the same old arguments come up as to why they can double "just because they have for the past 5 decades" or equally why they cannot double "because incomes cant keep up, interest rates wont fall any further etc"
See this article from 2009...
"We asked 10 of the best-known investment property sales organisations to tell us the capital growth predictions they put to investors thinking about buying properties from them."
http://www.stuff.co.nz/business/9595/Property-will-double-in-price-in-d…
For the record the overall NZ QV HPI in January 2009 when this article was published was 1445, a decade later in January 2019 it was 2632 so no values didn't double in the decade they 'only' increased by 82%.
Of course interest rates have fallen a lot since 2009 giving some added fuel for the doubling in the last decade but what happens if mortgage rates go down from the current 3%+ to 2%? Then values could inflate by a third even if there is zero wage increases.
History speaks volumes and whilst the future is always different form the past it most certainly rhymes with it.
In saying that we can most likely expect values to fall in the next few recessionary years.
There will inevitably come a decade, sooner or later, when values may well halve instead of nearly doubling but I wouldn't bank on it occurring in the next decade unless heaven forbid we have repeat/s of Covid like event/s that lockdown the economy for extended periods.
Personally not a believer in regular cycles - that should be abundantly obvious with random occurrence of Covid19.
However just observing, 60 years of personal experience, and that of my parents going further back is that wages and houses move upwards and dollars remain the same.
My first holiday work while still at school was in as an adult worker in a wool store: $1.00 per hour was the envy of my mates. Put a 40 hr weeks wages into the then new Bonus Bonus; 50++ years later still got them - still $40.
I remember - I think the late 1970s - when Devonport houses went for an astronomical $90,000. My parents first home (1960) $12,000; RV today $950,000. My first home (1982) after a small housing inflationary period $55,000; RV today $850,000.
When both my parents and I purchased our homes, today’s dollar prices were inconceivable- just like house prices are likely to be in 20 or 30 years.
The most under estimated benefit of long term homeownership is mortgage leverage. Long term house prices go up; the mortgage remains static. If 20% equity, houses go up 20%, value of one’s equity increases in value 100%. That is what has brought financial security to boomers.
Sure, one is going to see declines in house prices over the short term - and ones equity is negatively affected by a greater amount than the percentage fall - but just like the KiwiSaver growth fund, short term volatility can be expected in long term investments. Being able to service the mortgage is going to be the most significant factor for both homeowner and the bank - not the house value and ones equity.
Calling COVID19 'random' stretches it a little P8. I suggest that with the corect understanding of human activities around the world this was entirely predictable, and I believe some one has been cited as predicting just such an event. Denial however can have the impact you talk about....?
Murray
A one in a hundred year event with timing not predictable is a random occurrence.
Don’t put too much faith in the doom and gloom soothsayers who are always predicting immediate clamity - yes, by the fluke of chance they will be right sometime but predicting the occurrence of a significant virus equal to the 1918 pandemic in any one year and in this particular year means that they would be wrong 99% of the time.
A coin toss in Two-up is 50 times more predictable and even that is called a “random event”. :)
But more predictable than we might think:
Nassim Nicholas Taleb is “irritated,” he told Bloomberg Television on March 31st, whenever the coronavirus pandemic is referred to as a “black swan,” the term he coined for an unpredictable, rare, catastrophic event, in his best-selling 2007 book of that title. “The Black Swan” was meant to explain why, in a networked world, we need to change business practices and social norms—not, as he recently told me, to provide “a cliché for any bad thing that surprises us.” Besides, the pandemic was wholly predictable—he, like Bill Gates, Laurie Garrett, and others, had predicted it—a white swan if ever there was one. “We issued our warning that, effectively, you should kill it in the egg,” Taleb told Bloomberg. Governments “did not want to spend pennies in January; now they are going to spend trillions.”
It's time for the banks to really take a fine-toothed comb to their expenses, cut back on all those non-essentials - do they really need those smashed avo brunches and takeaway lattes? They can't expect to take a holiday to Bali every year and still be profitable. Time to put away the selfie stick and stop moaning. There is plenty of opportunity out there if they are willing to work hard and save.
Here are a couple of courageous rats courageously leaving the ship:
https://www.smh.com.au/business/banking-and-finance/two-top-execs-leave…
This is going to end in tears, I'm hoping they won't be mine.
https://www.zerohedge.com/markets/can-debt-be-inflated-away
Inflation is not an issue in this wealth destruction episode:
March 2020 was the great epicenter of what everyone hopes will be the sum total of GFC2, but what in markets (and data) looks to be instead maybe just its opening drama. In TIC, this global dollar shortage blows apart the monthly figures beginning in the way you’d expect.
If egregious total net “selling” amounting to a massive $87.7 billion in US$ assets by foreigners was abusive in December 2018 at the worst of Euro$ #4’s landmine, then what might we call -$227.8 billion in March 2020?
About right, given events. December 2018’s total was already a record, where March’s obliterates it almost times three. Thus, a startling (for some) proxy for, and a window into, the level of monetary destruction which must’ve been visited upon the global system by what you don’t see originating deep within the shadows.Link
Orr says "The banks will need to be 'forgiving'"
Which banks? the Australian Banks? Orr is in cloud cookoo land. He will receive a lesson in how Australian businesses are run. Australia is a very un-forgiving place. Australian businesses operating in Australia have to be un-forgiving
The expectation that they will be forgiving is laughable
The friendly neighbourhood bank manager during a recession: https://www.youtube.com/watch?v=8L4HHPTiZN8
This is Banking Mr Orr, not the Vatican. The motive for banks is profit. If they smell losses, they will not lend despite your sermons on courage. If customers don't pay, they will crush them to the letter of the contract despite your salvationist creed. You're up the wrong creek mate.
Watching the housing market closely. New listings starting to come on with prices rather than auction as people don't want to wait a month they want out NOW. There will be loads downsizing as kiwis can no longer afford anything over 1.2mil and zero immigration and foreign buyers. Take the gains while you can and consolidate your position. You now need to factor in one of you losing your job or reduced pay or hours and then hope more interest rate cuts are coming to help you get through the next few years.
I doubt there is all that much "smart money" left in the property investment market currently. All the smart money is already cashed up and sleeping deeply at night, dreaming of sugar plums and higher yields in 2022. The rest are mostly still in denial. If the "V" shape and single digit unemployment level materialises, the denial might yet be maintained. But if not, it will be very ugly.
Pipe dream. National's MPs own an average of 3.4 houses per MP, as do many of their voters who also got their start from state-assisted affordable housing and now claim to have done it all on their own two feet. There's no way they'll actually choose to stand on their own two feet in these circumstances; all stops will be pulled out to prop up their portfolio values.
Even blue-voting pensioners with savings will need to be sacrificed to keep the property bubble inflated.
Banks will typically give good customers six months to sort out their financial position. However eventually it does become a case of helping people to realise that if they cannot pay a mortgage they need to make arrangements to sell. "Extend and pretend" will always have limits, I mean are you going to push people into a position where they would still be paying the mortgage into retirement? To me that would be cruel and bankers will just have to earn their money by having that robust conversation about selling.
Chinese finger trap.https://www.rt.com/shows/keiser-report/488916-warren-buffett-investing-…
“Be courageous” LOL
Newsflash Mr Orr. Bank CEOs keep their job and make their bonuses by ensuring that the banks share price goes up (and continues to pay a dividend), not by throwing money at people who really cant afford to be buying million dollar homes, and dipping into shareholders capital to cover the losses when those borrowers default in their tens of thousands. Orr should join the Labour party, his level of understanding how listed businesses are run is on par with Jacinda’s.
IMO the last thing we need to do at the moment is getting more people into big debt buying expensive houses. This increases personal debt in the country, and now we also have quite high government debt due to Covid. I heard Simon Bridges say that Covid is adding o$80,000 of debt onto each household in the form of public debt . This is on top of the private debt many homeowner have with the money they borrowed to buy their shack. I think we would be far better placed if we hadn't let house prices rise so high. But this is a by product of a lack of supply due to record immigration, and cheap money due to low interest rates.
If people borrow money then they have to pay it back, and they have to understand that conditions can change , even a black swan event like this, and borrowing is always a risk. Do these people who have lost their jobs have insurance that will cover their repayments if they lose their jobs and can't get a new one? I thought banks made this a requirement of getting a loan?.
"Courageous and forgiving" - well of course they need to be. The banks have backed themselves into a smelly crack here and they will need to be both unless they are prepared to lose a lot. and the question may will be how much do they want to lose, a little or a lot? I suggest that as the economy recovers most of their distressed mortgage holders will recover and continue to be able to pay them off. The banks actions here are critical. they can precipitate a steep decline (which will effectively be shooting themselves in the foot) or manage a soft one with minimal damage. It is really up to them.
Adding to this; I suggest that COVID19 has come as a rude shock to many bankers around the world. They will have to acknowledge that banks are not omnipotent in human affairs and that some things can happen to us that are beyond their control and uncaring! We could hope for humility, but that might be asking for too much.
"The banks actions here are critical. they can precipitate a steep decline (which will effectively be shooting themselves in the foot) or manage a soft one with minimal damage. It is really up to them."
The banks actions will depend on the rate of economic recovery (which is dependent upon government policy). The slower the rate of economic recovery, the slower the reduction in the unemployment rate.
If the unemployment rate remains high, then many highly leveraged borrowers may be unable to meet their debt service payments. A borrower may be able to buy time by deferring debt payments.
The banks can defer mortgage payments for a period of time, however the longer the borrower is unable to make debt payments, then the mortgage balance will keep rising until the LVR reaches an unacceptable level by the bank. At that point, the borrower has run out of time, and the bank may demand repayment.
For those 113,000 or so customers who have reduced their debt payments, the clock has started and is now ticking ...
There will also be business customers (small and medium enterprises) who have used their properties as collateral for business loans. If the businesses fail, the banks may demand sale of the properties for repayment.
Absolutely, the clock is definitely ticking. But how the banks respond is crucial. One factor continues to amaze me though is that the Government and RBNZ continually seem to forget that the banks are private business's. Government institutions seem to think that they have a string and that if they pull it, the banks will do what they want. COVID19 showed that that was not the case, the banks would not step into commercial loans simply at the behest of the Government. Thus how they respond now becomes very important because if they move too far in the wrong direction they can cause the entire economy, and ultimately themselves a lot of damage. But moving softly and gently cannot last indefinitely either.
As a consumer though, i hope the Government has taken note of the banks action pre-COVID19, and during, and will put in place some legislation to prevent us from being this vulnerable to bank driven bubbles again.
I recommend you watch the following video, its pretty long but it pretty much outlines the bigger picture of whats going on. Your never going to see any of this in the MSM.
https://www.youtube.com/watch?v=9-rsQT4HScA
"Be Forgiving ". Sounds like if someone cannot pay his mortgage, just pat him "nice doggie" & send him home. All's forgiven. Hmmm! I am not so sure whether its ok to say that when one is dealing with others' money. But, personally if its my money out there in the bank as savings deposits, I would not be so charitably-inclined.
As the Chinese proverb suggests: may you/we live in interesting times..maybe it is time for Kiwibank with a little bit of Govt financial support to buy back BNZ...
If China makes life hard for our US arm twisted Aussie neighbours, we perhaps should rejig our banking system.
I don't understand. What do you mean by 'regulating credit creation'? That's crazy talk. Crazy crazy crazy. More money is better. It makes house prices go up. Then everyone is happy and votes for you. Then when things get sticky, you reduce interest rates and create even more money! Genius!
How to win the election. Print 200 Billion. Give it to Kiwibank and other NZ owned banks. Create a Freddie Mac NZ. Refi the entire NZ owner-occupied mortgage book at 1% fixed for 10 years. Capitalise the trading bank break fees into the loans. Aussie banks can scrap over the investor market.
Debt deflation is a theory that recessions and depressions are due to the overall level of debt rising in real value because of deflation, causing people to default on their consumer loans and mortgages. ... The theory was developed by Irving Fisher following the Wall Street Crash of 1929 and the ensuing Great Depression.
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