By Jenée Tibshraeny
Reserve Bank (RBNZ) Governor Adrian Orr on Thursday told those tuned in to a virtual Institute of Financial Professionals conference that their sector had to use its balance sheet to support New Zealand’s economic recovery.
Orr noted the fact banks are making big profits while pockets of society are struggling, and now face higher inflation and interest rates.
“The financial system needs to step up and manage the vulnerable,” he said.
See this story for more on Orr’s comments, which this opinion piece responds directly to.
Ironically, the RBNZ’s efforts to boost inflation and employment and protect the financial system are what has put some households in vulnerable positions.
By slashing interest rates and temporarily removing loan-to-value ratio restrictions in 2020, the RBNZ encouraged households to take out mortgages. The predictable rush towards property boosted house prices to levels the RBNZ and Government finally admit are “unsustainable”.
High house prices made those who own property feel wealthy, encouraging them to spend and put the economy in a much stronger position than expected by pretty much every economist.
Higher demand, coupled with constrained supply (partly due to factors out of New Zealand’s control), are now boosting inflation and prompting the RBNZ to start hiking interest rates.
Inflation will hit the poor, many of whom don’t own central bank-inflated houses and shares, disproportionately hard.
Meanwhile higher interest rates will hit recent first-home buyers, with massive loans, disproportionally hard.
As for aspiring first-home buyers; they face an impossible uphill battle in the short to medium-term.
In essence, the RBNZ achieving its inflation and employment targets, and successfully protecting the too-big-to-fail banking sector and housing market, have come at a social cost.
One could argue the counterfactual might’ve been worse. We could’ve had higher unemployment if the RBNZ didn’t boost asset prices, ease mortgage servicing costs and prompt people to go out and spend.
One could also argue if the Government did more to support the economy, the RBNZ could’ve done less. The trade-off might’ve been lower economic growth and higher unemployment in the absence of the ‘wealth effect’. But the recovery could've been fairer and more sustainable.
‘What ifs’ aside, what we do know is that the divide between those who do and don’t own assets is now even starker than it was pre-Covid.
Add a dangerous virus to the mix, and things look worse. While there are a number of reasons why some people aren’t getting vaccinated, a lack of trust in the system is a common one.
If the system’s failed you in the past, it might be failing you now. To add fuel to the fire, if you’re unvaccinated, you now risk losing your job, as well as basic freedoms that will soon only be afforded to the vaccinated. You risk being further marginalised from society.
If Covid-19 has taught us anything, we know it isn’t their problem. It’s our problem. For one, Auckland cannot get out of lockdown until enough people trust the system enough to get vaccinated.
If we don’t reach high enough vaccination levels, our health system might get clogged with Covid-19 patients to the detriment of people requiring other kinds of healthcare.
It isn’t just the altruists worried about the consequences of inequality. The major bank chief executives, during a panel discussion at Thursday’s conference, mentioned the importance of social cohesion a number of times. They know social instability can quickly translate to political and economic instability.
Again, the irony is that the banks have facilitated and profited from an economic response that’s created wealth inequality.
For all the anomalies in Orr’s comments, he is correct in calling on the banks to step up.
They’ve received ample support from the RBNZ and Government, so the onus is on them to help struggling households and businesses that can eventually operate with Covid-19 in the community, get back on their feet.
Businesses rightly afraid to borrow to innovative or improve productivity over the past year-and-a-half might be more inclined to do so once their futures look more certain.
Banks do of course need to lend responsibly. But they have an opportunity to exercise calculated compassion, as well as reweight their lending books more in favour of businesses.
Experts in bank capital will have more informed views than I do on what the RBNZ could do to encourage this.
Making a shift is of course easier said than done. If banks lend more to businesses, they might lend less to households. Depending on how they tighten mortgage lending conditions, this will likely affect the less wealthy the most.
Banks can also reduce fees, stop selling rip-off products like credit card repayment insurance, ensure banking services are easily accessible by people who aren’t tech-savvy, and ensure customers are using products suitable to their needs.
If ANZ’s near-record profit for the year to September isn’t enough evidence banks can afford to use their balance sheets to support the public, here is a list of what public policy has (rightly or wrongly) done to support banks since the onset of Covid-19:
- The Government has de-risked banks by offering to write businesses relatively small, interest-free loans via the Small Business Cashflow Loan Scheme. Since the scheme was launched in May 2020, $1.85 billion of loans have been written to 114,373 borrowers. The scheme will remain in place until the end of 2023.
- The Government offered to underwrite 80% of bank loans to businesses via its Business Finance Guarantee Scheme. Lending of more than $2.4 billion was done via the scheme, which ended in June.
- The RBNZ is offering to directly lend banks up to $28 billion at a low rate (the Official Cash Rate) until the end of 2022 via its Funding for Lending Programme (FLP). Banks have drawn down $6 billion from this facility to date.
- The RBNZ had, up until July, bought around $55 billion of New Zealand Government Bonds and Local Government Funding Agency bonds from investors via its Large-Scale Asset Purchase (LSAP) programme. Both the FLP and LSAP provided banks with liquidity, and helped suppress interest rates, which incentivised borrowing and house price inflation - to banks’ benefits.
- On the flipside, the RBNZ has required banks to make extra provisions for bad loans. It’s also put restrictions on banks’ dividend payments. These will remain in place until July 2022.
*This article was first published in our email for paying subscribers on Friday. See here for more details and how to subscribe.
135 Comments
Wishful thinking, but it ain’t gonna happen. The banks act in the interest of their shareholders, not the customers. The banks borrow short-term and lend long-term. When the short-term rates and the medium-term risks rise why would the banks lower their guard just in time when they know the monetary easing is about to end. It is immature to expect they will step up, however, I understand it politically correct to say ‘they should do more'
At the risk of sounding controversial…
it appears that it wasn’t ORRS reaction to the pandemic first time round (removing LVRs, low cash rate etc..), isn’t what hurt the economy, it’s the speed at which they reacted once it was recognised they had overcooked it. I find it frustrating that NZ has a very old fashioned view on politics and policies. It’s the governments job to do what’s best by the people, regardless of what the majority (home owners) want in the popularity contest that is NZ politics.
It looks like (and I’m hoping) that nature will run its course on our god awful property market and some sanity will be restored with inequality.
Crash the whole thing!. Sack ORR, most incompetent public figure in history. I’m sick of greed and unsophisticated politics/policies. It’s like we are 30 years behind every other OECD country. Where’s the friggin DTI that the country is screaming out for?? It’s bollox, just do it!!
The reality is it will RISE even further and if your really lucky it will fall back over winter to the CURRENT prices and flatline for a few years. Its going to take a major Black Swann event now for a major correction that will have to be totally outside what the RBNZ can control. Make no mistake this will be bad for everyone.
Um, why not 50%? TBH I think 80% would be better, don't you? Then I can finally afford to buy a property after holding off for so long. The big question would be would I actually go through with a purchase then or would I have different reasons not to buy (eg. renting is cheaper, it'll fall further, don't want to catch a falling knife, economy is in the gutter)? Then if the property prices go up again come back here to b*tch/moan about the price jumps and back to begging the government to restrict people from doing what they want with their money :D
Renters have nothing to lose.....for many of younger people in their 20's, a period of unemployment and a 50% fall in house prices is a much better outcome for them than the status quo of financial repression.
Landlord types with large amounts of debt, have everything to lose in the hypothetical situation mentioned above.
Out of interest - have you lived through a property crash before and understand the psychology of the market as its unfolding?
Credit tightens, people can't get loans, buyers with cash sit on the sidelines because they don't want to catch a falling knife, knowing they can buyer even cheaper in a few months time...
To simply say that investors will jump in and buy properties to prevent prices from falling....well ok that's fine, but its not the psychology of a market in reversal. You probably won't want to touch the market until you think its hit rock bottom. And everyone will start thinking...where is the bottom...is it a 20% fall? A 30% fall...50%? At what point do you enter without having your fingers cut off?
You are 100% correct. In a falling market there is FOOP, fear of over paying. Briefly, I'm aware of the issue and set trigger points for singular events I.e oil shock, terrorist event, assassination of global state leader. Whilst COVID-19 wasn't on my radar, awareness of an avian or swine flu in the next 25yrs features. At 25% drop, cash goes in. At 30% cash goes in, and so on in 5% increments to 40%. Its worked well previously eg March 2020. Yes, as an impoverished student I learnt hard lessons in 87 which subsequently paid dividends. For property we (a group of like minded friends) are struggling to define what our entry would be. 2 factors will be the degree of the fall and rapidity. Honestly, whilst I think a correction of a minor magnitude is coming and we won't buy, we would be positioned to purchase should it be more significant. Significant? As per Japan, Spain and Ireland.
How many more Jobs would there have been if the money that we are wasting biding up the values of each others homes, were invested in real productive wealth producing businesses and industries? How much higher would our wages be? How much lower would our spending on social welfare and benefits be? How much less mental illness and deprivation?
I cannot find the current level of borrowing on private houses. They seem to have stopped publishing it. I wonder why? In 2011 it was 170 Billion, 2016 217 Billion and now I seem to remember that it is well north of $300 Billion. Imagine this money directed into the productive economy.
Thanks for the tip, C22. Found the right page. It is actually C32, I suspect that C22 may be an old series. For Sept 2021 the total is $320 billion.
https://www.rbnz.govt.nz/statistics/c32
The increase from 2017 to 2021 was therefore $103 billion. Imagine that plus the corresponding equity invested in our productive economy!
You could not make this stuff up! We are governed by complete idiots! God help us.
One has to wonder why the RBNZ thought boosting house prices as a stimulation effect via the housing wealth effect was worth it. The RBNZ's own research suggests that consumer spending increases 2.7 cents for every $1 of house price gains. That didn't justify the "Throw the kitchen sink at it" panicked policy response from Orr.
https://www.rbnz.govt.nz/-/media/reservebank/files/publications/analyti…
Tom, nothing controversial there at all. What Orr is saying, is that he and the Government have screwed things up, so privately owned companies should bail them out. However, these days a decent number of politicians have never had a proper job, and would never get employed outside of parliament on the salaries they earn as a poli (just take a look at the whole Labour cabinet. How many of them have had a job other than (a) in politics or (b) as some sort of Union administrator?). They will always do what's best for them, and what keeps them in power and at worst, in Parliament, on salaries that are way overinflated compared with their ability.
Good point raised Jenee but irony is still rbnz and government are not ready to admit their folly and rectify.
Still measures could be taken to control the ponzi and try to change the perception that in NZ only economy is Housing.
Will require determination and major effort by both and possible only if are serious.
HouseMouse is right. At the broke end of the cycle govts always destroy the currency to delay deleverage as long as possible. The damage is done and international trends are pointing to the collapse in confidence being well underway. Our little rulers will talk and act a bit, but it barely matters, even to us.
Carinaz, HouseMouse,
I think the government has taken measures to end the housing runaway train,
- Banning foreign ownership
- Capital Gains Tax (in the disguise of the bright line test
- End of interest tax deductibility for investors
- LVR's and DTI's (although slow at being approved)
The thing is, it takes time for something as large as the NZ RE market, that has had a bull run for 30 years to change and many (maybe you too) are too impatient to see the change.
IMO THE NZ HOUSING MARKET IS COMING TO THE END OF ITS 30 YEAR BULL RUN
Yvil,
They take one step forward and than get phobia by themselves or through buraucrats who knows the pulse of politician to say the right thing which will prompts them to manipulate / dilute and take two steps back, if not more. Best example is removal of tax deduction in rental income, took the step and in end got cold feet to exempt new build - shifting speculation on new build and also allowing many to use the loophol left open to be manipulate.
Foreign buyer were banned in first two moths when were new otherwise, if left for later would have been delayed and diluted.
BLT already existed and extended but has loophole and hardly 2% or 3% pay tax ( one example, if have two house, sell first the house that you stay as family home and move into other house, which was earlier rented or vacant and after six months can sell that house too...must be many other ways to avoid...check with accountant).
Also know a colleague who bought an investment house for $620000 in mangere area and after spending $50000 sold in few months for 1.225million and YES do not mind paying tax as his reasoning is that even in business have to pay tax but have to slog and where can one make so easy and fast money that also so BIG in such short time.
LVR, why was it removed in the first place as at that time need was to protect existing home owner and not to boost ponzi, which was evident as had to reduce interest rate, so we're they so ignorant that were not aware what removing LVR do, specially when had to drop interest rate to near zero.
DTI : Where is it ...has Mr Orr announced, NO is playing with time. Earlier Mr Orr thought that no politician will ever give him DTI tool so kept asking for it and to his surprise when got was taken aback and since than is playing with time as he has no intent otherwise why delay, What consultation is he talking about ( to support ponzi took action overnight), was he not prepared. WHEN YOU ASK FOR A TOOL LIKE DTI, YOU HAVE TO PREPARE / DO HOMEWORK TO REQUEST.
Now, banks have announced but is only to influence Mr Orr, who needs no convincing. Bring it as a policy / law.
Being impatient...house price went up by 10%...20%...30%.....100%.....and that too in a very short time and YOU HAVE THE AUDICTY OF STILL BEING CALM AND FOLLOW THE POLICY OF WAIT AND WZTCH.
If the ponzi stops it will be ..as you said 30 years run and nothing to do with reserve bank and democratic dictators of our time.If left to them.....
Yvil,
Jacinda Arden current thinking is same as that of John Key and Bill English that " housing crisis is a Good crisis"
Is she the same lady who in 2017 .....check below
https://www.reddit.com/r/JacindaArdern/comments/oxpdyl/flashback_2017_i…
Houses were unaffordable when median Auckland was $800000 And today is 1.3 million and still has ....
Think Yvil and Jenee please use the above link to show to PM and ask her, if she still feels the same and has it got good, bad or worse under her.
Yvil, if you think that banning foreign ownership, CGT and the other measures the Government have taken will slow up or drop property prices to a significant degree, think again. Contrary to the opinion of the Labour Government, foreign ownership in NZ was negligible. CGT only happens when you sell, so people just won't sell. Which leads to a shortage of property and rising prices. Good one. CGT has failed to control house prices in Australia, UK, USA, France, pretty much wherever it's been implemented. It's just a tax collection device for an avaricious Government (and it never raises the amount of tax they think it will). End of interest deductibility. Except on new builds. With inflation getting out of hand, you can guarantee that real estate will keep pace with it. As it always has. So, current inflation is 4.9%. House prices will reflect that. And if it goes higher, then so will house prices. And that doesn't take into account continued demand. And then there's rents. Rents will jump to cover the cost of no interest deductions and any other losses they impose on property owners, then the Government will whine about a problem they have caused.
ZERO accountability is the policy of this Govt & RBNZ, whether it is housing affordability, Inflation, child poverty, Covid elimination strategy, hijacking people's freedom, not strengthening covid medical response & reducing business confidence.
The only things this govt is good at are loosening financial policies & lockdown, no real experience or skill is needed to give away freebies (from taxpayer money) & lock the doors.
It's quite clear that all the house-price whiners out there are like the Nazis blaming all of Germany's problems of the 1920s and 1930s on the Jews.
The whiners all have short memories and conveniently foreget that it was governments prior to Ardern's that unleashed a tsunami of largely unskilled immigration upon New Zealand without, at the time, providing for increased housing and infrastructure needs. The RBNZ is, likewise, not to blame.
And Ardern, in case you haven't noticed, has had the small matter of having to run what is effectively a War Cabinet fighting the Chinese Covid-19 virus and the Indian Delta virus whilst being constantly undermined by grandstanding attention-seekers like Brian Tamaki and David Seymour both of whom are cult leaders: Tamaki for those from the lost and rudderless underclass; Seymour for the lost and rudderless conservative middle-classes now that National his disintegrated.
And a 'counter-factual' (I would prefer the word 'alternative') could be that if everybody had united and followed the rules then we would have been operating at full speed constrained only by all those basket-case countries out there.
So Delta got out into the community because everyone didn’t follow the rules?
And if immigration is the problem, how come prices have kept rising despite a flat population?
And if Arden’s Government wasn’t the problem and it was just immigration, why didn’t stop immigration immediately after coming into office?
Ardern’s cabinet is hopelessly incompetent compared to both Labour and National Governments of past.
If you've ever seen Brian Tamaki and his 'black-shirts' protesting about lack of freedoms on some issue by marching through Wellington streets as I did a few years ago you could have sworn you were watching some Nazi wanna-be. Tamaki is supposed to be running a church; that's what he professes to obtain tax-free status for his organization anyway. But instead of tending to his flock he is grandstanding on every non-religious issue that presents itself, especially if he can obtain media attention.
If he looks like a Hitler wanne-be, and he behaves like a Hitler wanne-be then he is a Hitler wanne-be.
Streetwise, "effectively a War Cabinet"? You surely can't be serious? Its a pandemic, not a war. Though I guess that's exactly the sort of rhetoric that has made Ardern and Labour a laughing stock around the world. What is a matter of fact though, is that the Government have been inept at best, and at worst, negligent in their handling of the pandemic.
Labour was hopelessly (and outrageously) slow to order supplies of vaccine. The result that there were countries that were nearly finished vaccinating their populations before we bloody well even got the vaccines!
Labour failed abysmally to get our hospitals into some state of preparedness. Even after borrowing billions. Our ICU capacity should have been organised for the eventual arrival of the Delta variant which Labour KNEW was coming.
Labour couldn't organise a piss up in a brewery as evidenced by the abject disaster they have made of managing the international border. Along with that, we have NZ'rs that are double-vaccinated that haven't been allowed back into the country because of the unwindable lottery system these clowns have created.
The only reason we are still locked down, is BECAUSE of Labour. If our hospitals had been prepared, we would have been able to go about our business as usual.
Very thoughtful and well written as always, Jenée. We must not underestimate the multigenerational damage that’s been done to the fabric of our society. Something needs to happen to rectify this, and the less desirable options don’t bare thinking about. It occurs to me that people today are so protected from downside risk in all facets of life, but all this does is to prolong the inevitable and ensure a much more aggressive natural rebalancing. Like many of life’s big lessons, we seem to wilfully forget the end of the moral hazard story until it’s staring us in the face once again. Unfortunately, it’s the new entrants Orr speaks of who will be made an example of, but it needs to happen.
Thanks Jenée.
The major bank chief executives, during a panel discussion at Thursday’s conference, mentioned the importance of social cohesion a number of times.
Crocodile tears.
The social cost of banks turning record profits is what's known in business as an "externality". It's a cost, but it's somebody else's cost, so it doesn't factor into decision making. Their job is to look after their shareholders, not the general public.
Asking banks nicely to please consider social costs is a joke, especially after the horse has already bolted. Who is the regulator here, and who are they working for?
Excellent Jenee.
Orr has no idea. The house price fiasco has been New Zealand greatest social disaster which will reverberate for generations. Even our lefty "never mind we have a benefit for that" government can't see it.
The pitch has been to "improve the economy", you would think that's to help New Zealanders. But no. Our citizens have been screwed by that.
I have been calling for two years for Orr to be sacked. Now I have changed my mind - he should not have such an easy way out, and he should stay to pick up the pieces of the disaster resulting from the RBNZ's dumb and shortsighted ultra-loose monetary policy of the recent past.
Yeah I sort of agree. A lot of the financially naive have committed off the back off some pretty average advice. I think we need to point the finger at the property spruikers like TA and AC who create a frenzy with all the BS “safe bet” and “property never goes down” BS they push. The boomer generation are particularly bad in this area too in my experience.
tomjones, I was going to give you a thumbs up until you called Tony Alexander a property spruiker, he is not. I'm not sure how well you know him or if you subscribe to his weekly "Tony's View". His analyses are thorough, timely and fairly neutral. Yes he has been predicting housing to go up for many, many years but that does' make him a spruiker, it simply makes his predictions correct. FYI he is no longer predicting house price rises in NZ!
I also subscribe to his premium newsletter and find good value. Many think he’s a spruiker because he said the market would boom 2014-2020 (and it did). He has been pessimistic about the market and downside risks for some time now, and his analysis is, with regard to residential housing at least, on the money for mine. This idea that he says property prices only go up is crap.
Well written.
There's more to it than your piece covers; you know that, but you can only write so much, until many readers will turn off. And you managed to roll-in The Virus, and some of it's added complications, without antagonising your readers. That's a skill that I must lack (given the responses to my obviously poorly-put posts on that topic, yesterday!)
Someone has to ask the Hard Questions in news conferences and in public, and I guess that's you!
Adrian Orr September 2020:
Banks must be 'courageous' and continue lending to customers in the tough times
Didn't he get what he wanted?...
Quantitative Easing has been very effective in lowering borrowing costs for households and businesses.
It will take time, however, to know how households and businesses can and will respond to the stimulus, and how it will affect inflation and unemployment.
Ah yes that stimulus that he created, what has that caused?
https://i.stuff.co.nz/business/opinion-analysis/300098412/adrian-orr-ba…
I accept that Adrian Orr and Whoever is PM at any given time; the RBNZ & 'our' Government, are only doing 'what they have been told to do' by a much larger collective group of economies, that have far more to lose than we do if The System fails; far more.
It's the only way to explain the obvious change of passion to recalibrate our both our economy and society that Key and Ardern showed before their election, and what actually happened afterwards. Orr will likely be in the same boat.
But at what stage do they say, "Hang on. This is all wrong for New Zealand" and, like our nuclear-free policy, have the courage to act in our primary interest? Perhaps the answer is "The can't, because they know there is no way out". If so, that is the cumulative effect of 40 years worth of policy failure at the top of our Government, and that is going to be of no consolation to New Zealanders across the social spectrum. And do you know who is going to suffer the most? Not the poor and downtrodden - they have very little left to lose, but those who think they have it sussed. Big shocks and financial pain are coming to the many who think they'll be protected by the failed Government policy of the last several decades.
"Quantitative Easing has been very effective in lowering borrowing costs for households and businesses."
Lowering borrowing cost for housing as no money or percentage was minimum that went into business and why would it when Jacinda Arden comes out personally to assure that come what may under her will not allow house price growth stop and is supported by RBNZ who never misses an opportunity to promote ponzi.
Good piece.
There is no doubt that low interest rates (alongside a range of other factors) drove house prices up. When you make a 'sure thing' speculative asset 20% more affordable, prices are going to increase by at least that amount.
However the data does not suggest that low interest rates encouraged spending or borrowing in the real economy. Look at how much debt people paid down and how much extra people saved during the same period. It was clearly Govt fiscal policy that fired the recovery - high velocity cash in the pockets of spenders.
The tragedy here for me is that misplaced confidence in the impact of monetary policy (reducing OCR) has caused huge wealth inequities and achieved next to nothing else. The same delusion is now seeing the OCR being increased, which will make zero difference to inflation (might even cause it) and will drive more wealth from borrowers to savers - increasing inequities!
The last time Westpac threatened to divest its NZ business the Beehive went trembling in its hole.
Nothing will change, delaying dividends with a publicly known earnings only pump its share price.
Banks answers to shareholders- every societal marketing statements made publicly is in pursuit of that.
Not much said about the impact on small businesses that didn’t get their leases renewed or kicked out under the construction clause in their lease because the landlord is cashing out, or developing the property into residential.
Then of course the new landlords are going to want to raise rents to cover the stupid 3-5% yielding purchases they have made as interest rates rise. So more small businesses will leave CBD areas.
I know of at least 3 in my small circle. 2 closed up for good (highly skilled trades people, decades of experience, whom teach / train, advise, you can trust), the third company relocated further from the CBD.
A lot of these commercial premises have been purchased by real estate “experts” cashed up from the residential sector, no doubt with a residential mindset.
More social fabric impacted. A justified sacrifice for the greater good?
Great piece.
And I like how you acknowledge the impossibility of buying for FHBs (or at least the 'average'FHB) in the short-medium term. Articles by some other authors on this website consistently underestimate the challenges FHBs face, with some pretty rose-tinted assumptions it must be said.
The organisational culture within banks creates economic behaviour that tends towards 'beggar thy neighbor', despite facing many 'common-pool' problems. The very small number of competing businesses they have been unwilling to self-discipline or even engage in any meaningful polycentric forum. This is why RBNZ must be so deliberately prescriptive in policies.
DeFi can't come soon enough.
Muddled? Money or the bag [body].
"England’s covid-19 testing and tracing system failed to achieve its main objective—to break chains of transmission and enable people to return to a more normal life—despite an “eye watering” budget of £37bn (€44bn; $51bn), MPs have said.1
The damning report from the House of Commons Public Accounts Committee said that the contact tracing service was one of the most expensive health programmes delivered during the pandemic, equal to nearly 20% of the entire 2020-21 NHS England budget.“Its outcomes have been muddled and a number of its professed aims have been overstated or not achieved,” the MPs said."
Expecting the banks to step up to assist is either quaintly naive or stupid on orrs behalf . The banks are not responsible for taking advantage of the license they have been given by the reserve bank and government. The sole responsibility lies at the foot of government they alone have the power to amend both the reserve bank act or/and fiscal action .
The predictable rush towards property boosted house prices to levels the RBNZ and Government finally admit are “unsustainable”.
For honesty's sake, at the time the RBNZ removed the LVR's and cut theOCR by 0.75%, everyone and his dog thought property prices were going to go down, the "predictable rush to boost house prices" was only predictable in hindsight (sic). But yes in hindsight it was a massive mistake by the RB and I think the more recent large mistake from the RB was not to revert the OCR back to pre Covid levels, read increase by 0.75%, about 6 months ago, when it became clear to all, except the RB maybe, that they had massively overstimulated.
There is a crystal clear relationship between mortgage rate changes and the rate of house price growth. When rates are reduced, growth accelerates, when rates are increased, growth decelerates. If you plot mortgage rate changes year on year vs the annual rate of house price growth since 2008, you get a near perfect inverse correlation. There are of course a range of other factors at play (confidence, wages, tax settings, access to credit etc) - but most of these were tuned (and remain tuned) to supporting continued growth. Maybe the lesson has been learned for next time.
Why it makes me laugh when property investors say its the tenants who will suffer the most in a deep recession/depression.
Tenants have nothing to lose collectively. Property investors have everything to lose. And as you say if collectively wages fall and unemployment is high, the cash flow component of that asset price formula is heavily impacted across all of society/the market.
There are of course a range of other factors at play (confidence, wages, tax settings, access to credit etc) - but most of these were tuned (and remain tuned) to supporting continued growth.
This is revisionist history. 18 months ago every economist in the country was predicting mass unemployment, credit rationing, mortgage defaults and house prices tumbling. It was never ‘a safe bet’ at the time, it’s only ‘obvious’ in hindsight.
Reckon-omists were predicting those things because they develop their reckons based on flawed models in text books rather than the real world. The minute Govt resurgence payments, wage subsidies, extra benefits, and significant extra social spending stepped in, and 100,000s of mortgagees switched to home working on full pay, it was game on for house prices - and then Jacinda said she wouldn't let house prices fall, and then interest rates hit the floor for a sustained period. It was an obvious recipe for house price growth.
yep - it all depends on whether the other factors at play push up hard enough to overcome the downward pressure caused by the increased cost of borrowing. I don't think we will see falls if things stay as they are - not least because the bottom of the market is underpinned by Govt-subsidised rents.
Yes. Mistakes, misunderstandings and miscalculations happen. If they didn't, we wouldn't be here, and as you further suggest, 'something' should have been done about it a long time ago. That's what management is for - to have the courage and skills to fix things when they do not go according to plan or plain go wrong.
Hence, the obvious conclusion must be - "They meant for what has happened, to happen".
And that's the underlying problem for us all. The course they are following is flawed. That can only lead to social catastrophe.
(NB: The other alternative is that they don't have a clue what they are doing; don't know what to do and won't do anything reformatory. I don't know if that's better or worse than it being deliberate)
Ian our business groups got swallowed up into Business NZ and the banks controlled the narrative, capital flows and direction of the economy.( most staff, highest subs....follow the money).
Phil Oreilly and Kirk Hope.... both ex Westpac
National went along for the ride! They knew it wasn’t good for New Zealanders but hey when did they last get looked after....fallen memberships & all....best get corporate and Chinese money to fund the party....
What a scam!
The question. Is when will businesses futures look more certain? Can we have a road map detailing all future legislation that will have retrospective effect ( such as those rewriting lease agreements) as well as those that will fly in the face of accounting standards (interest not really an expense?) ?
What business..
Only business in NZ is housing business which has been fully promoted and supported by governor of rbnz and PM of the country, in fact she came out publicly to announce that under her will not ever allow house price to stop
The same is evident in bank lending.
Definitely Orr and Robertson are not so naive not to know where cheap and easy money will flow and if are stupid, should resign as should not be where they are sitting now.
If a person is in charge of RBNZ and they are put in place to look after financial wellbeing of NZ, then they should be held accountable. The decesions they took were not in the interest of all of NZ. It only favored people who were already will off and gave them opportunity to make more money.
The social inequality results in dissatisfied part of the community and that results in some people taking drastic actions which increases crime rate.
Now is just not about houses but its about the future of the next generation and the growing children.
This government and current policies have failed them. I hope Karma gets them.
Exposing The Real Jacinda Ardern - YouTube
Look who is the Money Man now....and his illustrious illistrated Boss. Bank Role, BankRuptcy....Orr am I miss-taken.
You-tube, You decide.
Oh and while I am back on here....that Meta Character needs to take a dose of Meta-mucil.....so full of crap on Facebook....so going Meta-worldwide...for a different veriety of idgits.
Do have a Happy Halloween......us weenies are so naieve.
April 1998 – RBNZ Governor Don Brash warned rental property investors expecting unending and high capital gains would be disappointed: “Far too many people still see getting heavily into debt to buy a second property as the best way they can save for their retirement, even though, in my view, they will be disappointed.” House prices have risen 330% since he said that.
August 1998 – Brash said house prices were likely to rise in line with other inflation of around 2%: “Property investment is not a low risk activity in a low inflation environment, and urging people of limited means to borrow heavily to undertake it puts them at risk of serious loss in today’s circumstances.” House prices have risen 328% since he said that.
Sept 2003 – Reserve Bank Governor Alan Bollard said after house prices rose 14% in the previous year that rental property investors should soon expect real deflation: “I’m concerned that this could end in disappointment, especially for unsophisticated investors rushing to get on the housing investment bandwagon.” Prices have risen 218% since he said that.
Sept 2004 – Bollard said the success of housing as an investment depended on the prospects for capital gains in the coming years because yields from rents were so low: “A reasonable view is that house prices are unlikely to rise much further over the next two years, and some falls are certainly possible, particularly in some regions,” he said. Prices have risen 174% since he said that.
June 2006 – Bollard told central bankers in Switzerland that New Zealand house prices would start falling by the end of 2006 as higher interest rates took effect. House prices have risen a further 118% since he said that.
etc, etc ...
“Phil: Do you ever have déjà vu, Mrs. Lancaster?
Mrs. Lancaster: I don't think so, but I could check with the kitchen."
Based on past evidence, buying up rental properties is the way forward....so everyone get out there and buy up rentals to leach wages from your fellow citizens....then watch as we have to support those left behind with higher taxation...which oddly seems to be dodged by those benefiting from the status quo who would you believe it, never make a taxable profit....
This, is what Central Bank policy has done to asset markets across the Globe:
“If you believe the predictions by some that the Bank Rate could increase to 2pc or 3pc, that would be catastrophic for homeowners.....There were 131 deals below 1pc at the start of the month, falling to 93 last week with brokers now expecting sub-1pc mortgages to disappear entirely by Christmas.”
https://www.telegraph.co.uk/personal-banking/mortgages/homeowners-will-…
I've said it before (like a lot of others) but I'll say it once again; Orr has been an absolute disaster. Driving down the OCR and signaling that it would go even further into negative territory completely distorted NZ's investment priorities to the point where I just cannot see a rational correction occurring without some serious pain.
But it won't crash. Even though I believe the best thing for the social fabric of Nz would be 50% or more. I am a property investor and have got to the stage where I believe a 50% crash is the only answer. Else New Zealand will become a place with no young people because they can't afford to live here. No teachers, firemen and nurses. No policemen...It won't happen because when it starts the government of the day will once again open the immigration flood gates and the world who has been looking on in awe during covid will come flooding in. The mega rich from everywhere will be buying visas from our politicians, just like they always have, and they will be able to afford anything...The kiwi life will be thrown under the bus by NZs elite who understand that trickle down economics is actually, a flood into the capital balances of the elite. Where is that country in the world where politicians work for the peoples interests. I once thought it was NZ
Glad to here it, Jim. There is however to my mind a better answer. That kind of price drop (in fact even far, far less than that) would kill this place. We are just too heavily invested in this single asset class - and most (if not all) the small business borrowing is backed by a lien on the house.
Hence, my thought was to come up with a universal rent control formula such that rents would be made affordable without collapsing the market (and thus not putting small business owners and FHBs at risk).
Affordable (according to MSD) = weekly accommodation outgoings being no more than 30% of the median household income. That way, non-homeowners can save/work toward homeownership someday. And we wouldn't need an accommodation supplement any longer..
My formula for weekly rent maxima is: (CV/1000) - x% - and the variable for each area/region is adjusted to make the maximum rack rent equal to 30% of that median income.
So, for example, let's say the lower-end property value (CV) in an area is $500,000. Median household income in that area is $65,000 (gross). The variable thus is x = minus 25%. The weekly maximum rent for that property would be regulated at:
(500,000/1000) - 25% = $375/week maximum.
The formula would apply to all rental properties, not just those in the lower end of the market. So, a high end property in that same area/region with a CV of $1,000,000 would have a weekly rent maximum of:
(1,000,000/1000) - 25% = $750/week maximum.
When CVs are revalued (once every three years), the variable calculation is amended accordingly, to meet that same no more than 30% of median household weekly income. Rent rises are capped at no more than once yearly at CPI.
Accommodation supplements would be withdrawn at the time of the enactment of the weekly rent maxima regulation. Probably give the market 6 months to lead in and you'd need to prevent LL from ending tenancies unless they sell up.
If enacted, how would that influence your decisions about your portfolio?
If you worked at a food bank - you'd understand my motivation. Not really interested in whether it's a well-liked solution - tough calls in a crisis often aren't.
What I am interested in however - is (if you are a property investor/landlord) how you would respond to such a regulatory action?
Sell all; hold all; or downsize the portfolio?
There are many solutions Kate. I could come up with half a dozen that will work. But NZ needs the punishment of a correction.. politicians and the RBNz need to feel both castigation and retribution. The property speculators need to get creamed. It has to be ugly to fix the problem. My portfolio is irrelevant, I have no real debt.. I will have the houses afterwards, they are bought and held long term... my real view being if you are dependent on debt, you don't really own... you are just the name on the title while someone else makes risk free profit. It is a ponzi.. and it needs to come to an end. Unfortunately the powers that be have the immigration lever and they will use it.
Completely agree Jim - having lived through the GFC in the US and watched the pain of a property bubble bursting…it’s something that needs to be experienced in order to be understood and then respected.
People in NZ and Australia don’t seem to get it - but why would you if you’ve never experienced significant falls in that market.
I recommend watching this. If you follow finance failure/fraud then this series is excellent. It talks about the S&L and the GFC in the US and globally. The Best Way to Rob a Bank Is to Own One https://youtube.com/playlist?list=PL5wue8oAUyGq1LJuid3NT1QIQUQ2kcEhP
You might find this series interesting in relation the GFC. It talks about the S&L and since in the US and globally. The Best Way to Rob a Bank Is to Own One https://youtube.com/playlist?list=PL5wue8oAUyGq1LJuid3NT1QIQUQ2kcEhP
Thanks, Jim. Yes, that's what I expected - great - you'd hold all your portfolio and accept the lower rents.
You'd be surprised how many landlords are in that same position.
I tested the formula on a sample over a one-month period (Dec-Jan last year) - and found that around 80% of the lower end rental properties have been owned by the same owner for well over a decade. A rental price drop of the magnitude required to make these homes affordable to rent wouldn't see most landlords like yourself who are in it for the long term sell up, as there is still plenty of profitability based on purchase price.
Thanks, I need more evidence that with such regulation there wouldn't be a huge loss of properties available for rent.
The reason I don't want to see a sudden sharp 'crash' is that it is not the well off (i.e., long term, sensible investor), like yourself, that will suffer.
This implies thinking something like "I have no mortgage, so I don't care how low the rent is, so I'll hold". Many property owners are going to feel like that, but it's not very sophisticated because it ignores the opportunity cost. Having no debt on a property does not make it costless to buy or hold it if the money would do better elsewhere. Obviously I'm aware that yields are crushed flat right now, so I'm not surprised the investors you sampled feel that way now, but they may wake up if conditions change. If you are going to advocate rate controls on the basis that investors will continue to rent their properties then I'd suggest you mention the assumption that alternative investment opportunities will continue to be limited.
That's a really good point, Rob. And in fact I would hope that alternative opportunities would not be limited - in other words, it would be great to see some property investors move their capital into more productive (job creating) sectors. Kind of a win-win about this policy that I hadn't considered.
https://www.stuff.co.nz/life-style/homed/real-estate/126626621/house-pr…
Hi Jenny, The above indicates how faulty and corrupt the system is as is tilted towards housing ponzi. Wrong analysis as suits vested interest and also government believes as they want to, though ground reality is otherwise.
Please ask empathy queen if you get an opportunity, does she still believes that house price should keep rising even if they have beaten the projected forecast by five years. Today we are standing on house price where we should have been in 2025 after massive 30% growth last year.
Does anyone reading comments have access to PMO or anyone as would like to hear what the empathy queen has to say on it ( though know that she has mastered the art of lying and manipulation).
Nothing will change, like nothing will change in a years time reading the comments on here. People are entrenched in their own views and there is a disproportionately high number of frustrated hand wringers on this site. Ever done research on buying a product ? all the reviews tend to be negative. People only take the time to complain that something is shit. When the product is great there is silence.
If you follow finance failure/fraud then this series is excellent. It talks about the S&L and since in the US and globally. The Best Way to Rob a Bank Is to Own One https://youtube.com/playlist?list=PL5wue8oAUyGq1LJuid3NT1QIQUQ2kcEhP
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