Here's our summary of key economic events over the weekend that affect New Zealand with news China is struggling to revive consumer interest in spending and consumption.
But first, this coming week the key focus will be on the RBNZ Monetary Policy Statement on Wednesday. A feature of the past month has been the volatility in the financial market pricing of this upcoming rate decision. Financial markets have had little conviction, shifting their pricing from 'zero change' to -50 bps cut. Currently they are guessing a -25 bps cut. But it is only a guess. We must remember, the new Government stripped jobs their mandate, leaving only inflation as they goal. And as we all know, inflation isn't beat yet. What we will all be looking for is whether the RBNZ committee thinks it is beaten on a semi-permanent basis. Two sleeps to know.
Also this week we will get the US July inflation results, both CPI and PPI. Analysts expect a 2.9% CPI and a 2.6% PPI there. Retail sales data along with industrial production data will also be released for the world's largest economy.
China will report new yuan loans for July later today, expected to be weakish, along with retail sales, house prices, and labour market data. In Australia, we will get the NAB business confidence report and a Westpac consumer sentiment survey, both probably tomorrow. And that will be followed later in the week by their July labour market data, expected to show only modest gains.
In China, their consumer inflation picked up from an ultra-low +0.2% in June to +0.5% in July. But food prices are still showing some deflationary effects. Although overall those food prices are up a tiny +0.2% year-on-year, that is only because of a +20% rise in pork prices (from very low levels a year ago). Beef prices are down almost -13% in the year, lamb prices down more than -6%. Milk prices are down -1.9% on the same basis. If you take out the base effect from some key items like pork, the deflationary threat in China is still very much alive.
And still in China, producer prices are still deflating, down -0.8% in July from the same month a year ago. That is the same fall recorded in June.
And Chinese July vehicle sales fell to just under 2.5 mln units or -2.4% lower than in June but +4.1% higher than the same month a year ago. China is the world's largest vehicle market. But those sales figures include exports. Domestic sales fared far worse, falling -10.1% on the year to just under 1.8 million units for a steeper drop than the -7.4% decline recorded in June. Wider than cars, others are reporting that consumer demand is weak in their categories too. The pall of 'value losses' from their housing 'investments' is weighing heavily on consumer sentiment there. It must be bad because their official consumer sentiment survey hasn't been updated since May, after it recorded a big drop from April.
In the US we should note that the US Fed is not shrinking its balance sheet as fast as it planned, with only a tiny -US$49 bln reduction in the past month. That takes it back to the level it first rose to at the outset of the pandemic four years ago. From its peak in April 2022, it is down -US$1.8 tln or -20% however. Progress now is slowing however.
In Canada, their labour market is marking time. Employment fell by -2,800 in July to 20.5 mln, a surprise because analysts expected a +22,500 rise. Still, the number of unemployed fell by -8,600. They also had a -0.3 percentage-point drop in their labour force participation rate, and that takes it to a two-year low of 65%, the lowest since 1998 if you exclude the pandemic.
In Russia, they are suffering the opposite through fast-rising inflation. In July it rose to 9.1% from 8.6% in June. Everything is rising faster there, especially food prices.
The UST 10yr yield is now at just on 3.94% and unchanged from Saturday. The key 2-10 yield curve inversion is still at -12 bps. Their 1-5 curve is still at -70 bps. And their 3 mth-10yr curve inversion is still at -143 bps. The Australian 10 year bond yield starts today at 4.07% and up +1 bp. The China 10 year bond rate is still at 2.20%. The NZ Government 10 year bond rate is now just on 4.30% and unchanged from Saturday.
The price of gold will start today up +US$4 from Saturday at US$2431/oz.
Oil prices are marginally firmer at just under US$76/bbl in the US while the international Brent price is now just on US$79.50/bbl.
The Kiwi dollar starts today little-changed from this time Saturday at just on 60 USc. Against the Aussie we are down -10 bps from Saturday at 91.2 AUc. Against the euro we are up +10 bps at 55 euro cents. That all means our TWI-5 starts today at 68.7 and up +10 bps.
The bitcoin price starts today at US$60,318 and up a minor +0.2% from where we left it Saturday. Volatility over the past 24 hours has been low at just under +/- 1%.
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Record-shattering numbers of young people leaving New Zealand
Wellington’s Sky Stadium can seat 34,500 people. If you took every Kiwi in their 20s who has left New Zealand in the past year and packed them in, you’d fill every seat – and still have a crowd of over 10,000 standing outside
Good luck to them - the current Coalition couldn't care less (edit - unless they are landlords)
How does the government insentivise them to stay? They are leaving because of a lack of affordable housing and cost of living issues. The government are not going to do anything drastic on either! It's an old man's club that wants the status quo with landlording and personal debt as the core. If I were 20 something...I'd be out of here too.
Landlord tax cuts, reversal of density rules in the posh areas, gutting of public service, reduction in infrastructure spending, reduction in KO spending, reduction in health spending, leaving water to broke councils, less public transport, increased CO2 emissions, speeding around schools, etc. All “anti-woke” things that sound great to older people that already own houses and won’t be here too much longer, but not so great for young people wanting a house or a family.
The big drive to Aus is the income difference, but I suspect many of the government’s policies are not helping.
All western governments?
Charted: Growth in U.S. Real Wages, by Income Group (1979-2023)
Consequences:
More Problems for Boeing - NASA Exposes Poor Quality Control and Insufficiently Qualified Workforce at Boeing Rocket Manufacturing Facility NBC News would report in its article, "NASA inspector general gives damning assessment of Boeing's quality control in new report," that: "In NASA's development of its next-generation megarocket, known as the Space Launch System, it gave Boeing the contract to build the rocket system’s powerful upper stage. But according to the report, Boeing’s quality control systems fall short of NASA’s requirements, and some known deficiencies have gone unaddressed. What's more, the workers on the project are not, as a whole, sufficiently experienced or well trained, according to the inspector general." Link
As the boomers retire, there's a massive deficit in skills and experience in many of these sorts of fields.
Industry tries to band aid this, by becoming heavily reliant on rigid systems and procedures, but you still really need skills and experience. Many of the people in oversight roles now, don't even have this.
It seems (at least from my interactions) that it is a wider cultural change over the past 30 years.
In our quest to gain even the smallest advantage in anything we break down everything into such specific components we no longer see the forest or even the trees. We are looking at a specific leaf on a specific branch.
Individuals are now so hyper-specialised as to be functionally useless outside of a single task.
As with you, not sure how you go back. I suspect a fundamental break in the current system is required in order for everyone to blink and start seeing the forest again. i.e. the wider collective goals.
Actually I think that is just smoke. I think the younger generations with those skills are being attracted to the private companies. Take a look at the photos of SPaceX's staff. they all appear young. Might be what is on offer, or the level if innovation available to push out boundaries. NASA doesn't have a good record, and the combination of poor risk management and too rigid thinking (too many older skilled people?) is possibly putting people off.
MICHAEL HUDSON: Yeah, the Dot-com Bubble crashed.
Now, Apple decided that it really wasn’t going to be very much of an AI company anymore. It gave up on AI. Almost all of Apple’s earnings have been spent either on raising the dividends or on stock buybacks. It said, “As a company, our aim is not to make new research and development”. It’s no longer part of the AI revolution.
Apple said, “So we’re just going to use the inertia of the income that we have had just to buy our own stocks and to push up the stock prices, and not do research and development, because if we do research and development, then that’s going to reduce our earnings, because we’re spending our money on new capital formation, and that’s the opposite of making money financially”
If you spend money on new research and development and capital formation, then you fall behind. The result is that, Apple, like other American companies, are falling behind China and socialist countries that are not using their firms to increase stock prices and make financial fortunes, but to actually create new technology and new production. So you could call it services that I think by now China will be including that in its GDP and their national income.
You mentioned Intel. Well, Intel has been in agony for the last half year, because the Biden administration has said, “China is our number one enemy; you must disinvest from China. Don’t sell it computer chips, because some of these computer chips may be used for a military purpose, and they can help Russia. And we want to defeat Russia, so that we can then go and attack China”.
Well, Intel said, “Wait a minute, one-third to 40% of our market is in China. If you prevent us from selling our chips to China, we lose the big market there”.
The Biden administration says, “We don’t care if you lose. This is a fight for the death. Either the Western neoliberal civilization will vanquish all the rest of the economy, and make the whole world unipolar, or the rest of the world is going to pass us by. This is a fight to the death. You have to disinvest and not sell your products to China”.
Well, Intel just lost its biggest market. And the United States tried to block it from selling maybe to nearby Asian countries, like Singapore, that would buy chips and then sell them to China.
So of course Intel has gone down. If you’re going to take away the Asian market from U.S. information technology, or computer chip companies, or high-tech companies, then they’re not going to have the money to invest in new technology.
If these companies decide to let their financial managers run them to make financial returns and high stock prices by paying out their earnings as dividends and stock buybacks, instead of research and development, then of course China and Asian countries, South Korea, and other countries, are going to pull way ahead.
So the U.S and neoliberal economies have an idea that, fortunes, which they call wealth, are to be made financially, not by tangible, industrial investments. Fortunes are to be made by de-industrializing the economy, and living in the short term, not by industrializing the economy with long-term economic growth.
Essentially that is the problem that is facing economies. And I think that is why, Warren Buffett realized, well, the apple run-up is over now. It has announced to the world that it is not going to participate in the expensive research and development that is needed to become a world competitor, and to out-produce the main U.S rival in information technology in China.
So that is really what happened on Monday (August 5). Link
The ex Boeing engineer said that Boeing used to be a company of engineers who made aeroplanes. Douglas Corporation used to be a company of finance people who made aeroplanes. When they merged, the finance people won, and everything went downhill in terms of being sensible in terms of quality, and making money in the short term was the first and only priority. It sure explains their recent issues.
Exactly right. This is not an old skilled vs young dumb thing. It is the direct result of companies becoming financialised behemoths that focus on short-term gains, share buybacks etc. Companies now expect fully qualified engineers to be provided to them via state educations and student loans. People used to become engineers through apprenticeships etc - learning on the job over years from people that had done the same.
Worse JFoe they then put a manager in charge of the engineers who has been recruited to meet management diversity targets, now think about this, how many mid/senior female engineers are there? And that manager is obviously managed by another from the professional management classes.
Back in the day junior engineers liked tot listen to snr opinions, Nowday's these mid lever Mgrs do not participate in conversations around Asynchronous messaging strategies in multi threaded cloud applications. With neither tech or domain knowledge these mangers do nothing but piss talented people off.
JFoe, the smartest leave quickly to join startups, or simply code remotely in Queenstown.
I think this is a fault of capitalism, that short term Quarterly results become more important then long term company resiliency and ability... if you give snr managers this target and a bonus they will drive your company into the ground to achieve it. OKRs are important.
You would think that countries could have a decent plan around infrastructure... but the 3 year cycle of crazy and an RMA process that takes 4 years means nothing ever gets done.
BECA is a great company, its not all bad out there.
I think this is a fault of capitalism, that short term Quarterly results become more important then long term company resiliency and ability...
The invasion of finance into every aspect of society is stripping the meaning and human factor from it. Communities get pulled apart, business becomes cut throat and every generation loses more empathy and the ability to communicate effectively. Unfortunately in all of this, national unity, utilitarianism, pragmatism and accountability have declined to an unacceptable level, and a reversal is needed. This however, can only be driven by the people and not enforced or regulated into being despite what our central and local governments may think.
Exactly right. This is not an old skilled vs young dumb thing
I'm not saying it is. The psyche has changed to desiring to work away from the coal face. We make roles like marketing, HR, finance etc more appealing than holding a tool.
We've done this for decades, hence with the boomers going, there's few to replace them, even those in their 30s and 40s.
We had the second lowest graduation rate (~8 percent) among the OECD in engineering technologies, only behind Australia which has a much higher ability to attract workers that it cannot train internally than us.
Germany (25 percent) and Japan (19 percent) lead the pack. Bring up these facts next time someone tells you our current situation is due to our population size and geographical isolation.
If the "situation" is a low graduation rate of engineers, then you're dead right, size and geography aren't the problem, is miss-allocation of education. Not limited to engineering either, we pump out lots of grads, but also have skills shortages lists for migration.
Size and geography hurt other "situations". Like, why you'd expect Japan and Germany to relatively need so many more engineers.
As a small, isolated country on the Pacific Ring of Fire, we not only require more skilled engineers and scientists in general but also long-term thinking in our capital markets than most other parts of the world.
The current situation has been a result of decades of policy failures such as cutting funding for skill training, taking a neoliberal stance on industrial policy and infrastructure financing and the countless f*&k-ups on housing.
We have also sold off many great NZ Businesses to Aussie and others, then Head Office here is disassembled, and all the "important decisions" move offshore. Obviously where diversity targets are to be meet, we here in NZ help keep the averages up.
If you are young and talented do you want to work in a backwater?
Sure there are some well run corporates, but in one large sector we are just a big mortgage book here with a sprinkle of agri lending etc....
Have not seen very much innovation in banking over the last decade, lots of crowing about how good the "app" is, would suggest you need this today, its not innovation.
Any innovation at all these foreign owned companies is more likely to strengthen the balance sheet of the Aussie parent.
If I was young I would be off.
You could look at the microeconomic trends to explain that phenomenon. The populace in the West were sold a pipe dream that the plan to ship off "dirty industrial" jobs to Asia and Eastern Europe was so the economy could move on to high-value services.
In reality, a lean balance sheet allows companies to focus on QoQ results boosting share prices rather than worry about meaningless pursuits like fixed capital investments and training local workers. It also allows the government of the day to underspend on infrastructure, education & training, etc. and instead offer election lollies to their voter base.
The wealth and wage distribution would be much more balanced if corporations invested in onshore productive operations and trained local workers.
We’ve had stupid house prices for decades. Why the sudden change?
Agree though; not sure if anyone watches selling houses Australia, but Brisbane houses seem like a bargain compared to Auckland, with better weather and income. I do think that many young people were put off by the Aussie anti woke (particularly racism and environment), but now we are in the same camp then why not move?
We’ve had stupid house prices for decades. Why the sudden change?
We had a pandemic, 2 years of shut borders, skyrocketing asset and consumer prices, and the job markets now turning to custard because more money is going to banks instead of local businesses.
Not many places escaped much of that, but when things suck where you are, anywhere seems better and there's little barriers to go to Aussie.
Reversal of the interest deductibility changes for landlords and removal of the first home grant are probably 2 very big signals to young people that we don't want them here. While interest deductibility is just reinstating pre-Labour conditions, the carrot of hope for a somewhat fairer housing market was dangled and subsequently yanked away. Straw that broke the camel's back.
Couple that with the sweeping narratives from Boomers that they're lazy, stupid dope smokers with zero common sense and all the issues with home ownership stem from I-Phones and $1 avocados. Why would they stay?
They are leaving because of a lack of affordable housing and cost of living issues.
The ones that have left my company are leaving because of the direction the government is taking. Anti-environment, pro-vested interests (Big Tobacco, fossil fuel, landlords, property lobby, trucking lobby, mining lobby), divisive rhetoric, anti-evidence, promotion of woke/culture war narratives, short-term decision making over longer term benefits (ferry decision). Under Labour they thought the direction was right even if the execution was poor, under the coalition they disagree with the direction.
Significant tax and housing reform will be the only thing that turns this around. There is simply little reason to stay in NZ if you can’t afford your future, the jobs and experiences are far too good overseas.
It’s not just the young this applies to. There are lots mid-career that are moving too.
Ironically, the solution is probably happening in plain sight, right before our eyes. Fewer mouths to feed. Less consumption, that we are unwilling to do for ourselves. We just won't go on an economic diet, because we are frightened of the consequences.
Have a look at the birth/natural replacement rates across the Globe - all of them. And degrowth appears to be headed all of our ways at speed.
"Even China's 1.4 billion population can't fill all its vacant homes" etc. There's going to be wasted Debt backed produce, everywhere, as the number of consumers pretty much halves. On top of that, we have today's ageing consumers dying at an ever-increasing rate. That's Life. So just like aphids on a rose bush, nature is doing the work that we refuse to do, for us.
The big issue being that today’s ageing consumers don’t want to work past 65 but want to live to 100. It just doesn’t work without population growth to pay for it. It’s a massive pyramid scheme that needs to retain its triangular shape by adding people to the bottom to make up for having more people at the top.
It's not just young people. My job is currently looking very 'insecure'. Having had discussions with the wife we are seriously looking at a move to Aus. Lived the majority of my life in NZ, very passionate and love the place, outdoors etc however watching the breaking down of our country over the last 6 years or so has in fact broken me.
Having family connections in Aus makes it easier and a lot to do with giving the kids more opportunity and options but so sad that it has come to the point that we are even contemplating this. Would love to be optimistic about our future here but I feel too much damage has been done with little chance of any party making the big changes required to turn us around.
It's crazy isn't it? Govts getting concerned about people not buying enough stuff. Oh, we need the people to consume more energy and materials... for the good of the economy?!? What is this 'economy'? Why does it need to grow? Because growth is everything? It sounds good? We need our GDP to match other countries etc?
I mean, look at GDP. What is it? Our main measure GDP(P) is a measure of the surplus generated by businesses (profits basically).
Now, how do businesses make a surplus? All businesses collect more money than they pay out.
How is that even possible? If all businesses collect more money than they pay out, who is losing? Ah, the banks are pumping millions of dollars of new money into the economy everyday. That's where the surplus comes from.
Is that new bank credit money for productive investments to make our lives better and easier? No, stupid, we use that new money to bid up the price of houses and land. The housing ponzi is the mechanism we use to create a cash surplus. It's how we increase our GDP. In fact, when house prices are falling, and bank credit slows, we go into recession.
Ok, so what does that mean for monetary policy - does the OCR need to go up or down this week, by 25 or 50pts, or maybe November? Oh, for heaven's sake...
Rising GDP(P for Production) is the main GDP measure that you will see in the news every quarter. GDP(P) is basically a measure of business surpluses. Business surplus is a measure of how much sales have exceeded operating costs over a given period. There are basically four ways that businesses can all collectively run a surplus:
- Domestic savers spend down their savings (onshore savings reduce)
- Banks pump more money into the economy than they take in repayments (bank credit creation)
- Govt spends more than it taxes.
- Offshore savers (collectively) buy more from us than they sell us (offshore savings reduce)
Bank credit creation (2) is the dominant 'source' of profits in NZ and nearly 90% of bank credit creation is for mortgages.
GDP(E) depends on expenditure - it's basically a measure of how much stuff is consumed. This measure is used for other purposes.
It is important how GDP growth is created in a certain country. The US govt drives consumption by spending more more than it collect in taxes because it has the worlds reserve currency. Looking at the latest US treasury auctions there is still a strong appetite for US $ nominated debt. Cautious well developed goods and services economies with a significant trade surplusses like Taiwan, Switzerland, The Netherlands, Singapore, Denmark (and a couple more) extract money from offshore savers keen to buy their products. Running big current account surplusses make some countries who are driving their having big deficits very jealous and are vowing to set up trade barriers and tariffs. New Zealand has obvously chosen to drive consumption by creating bank credit through its housing ponzi which is showing the first signs of reaching its end of shelf life.
Yes, that's spot on. Obviously, the original idea was that currencies would float and adjust to create balanced trade. But, nope, some currencies (and Govt Bonds in a given currency) are just too desirable. So, NZ Govt Bonds are very tradable and considered safe, so we can run a trade deficit and our currency is still worth loads more than other countries that send low-value primary goods to (genuinely) advanced economies. What a world.
Thanks for that Jfoe, It didn't really clarify my thoughts with that answer. Perhaps I phrased my question incorrectly? Could it be measuring GDP growth and growth in debt are effectively the same, or 90% the same? The increase in profits is coming from an increase in money supply, which is created by banks selling debt?
When pudits are frothing about increasing GDP, they are actually frothing about increasing indebtedness, because that is the souce of the dollars being measured?
Yes, Govt deficit spending and new bank lending add to the money supply (tax and loan repayments reduce it). However, it also matters how quickly money moves around (and how much is stashed in savings).
For example, imagine 5 businesses lined up in a row. Let's say the bank lends me $5,000. I buy something from the first business for $5,000. Let's say they make $2,500 on that sale. They then spend that $2,500 buying something they need from another business. The 2nd business then buys something from another business... and so on. All of those businesses are making a surplus and if the money keeps moving around, the surplus generated by that $5,000 will be significant. If however the first business takes their surplus and stashes it in a savings account, the chain has stopped and the surplus will not get any bigger.
So GDP depends on additions to the money supply, how quickly money moves around the economy (the velocity of money), and the savings rate of participants in that economy. So, theoretically, you could still get GDP growth without an increase in debt.
Thanks again. You probably won't read this because its old news now. That velocity of money thing seems like double accounting to me? I don't see how that adds to GDP, because it's exactly the same debt sourced money being recycled. The 5000 debt is still there, it's just being spread around. The businesses you purchased from may not have direct exposure to debt obligations , but you still do, without having the 5000 any more. The new business has 2500 to spend, but that is still the same debt sourced money that you no longer have. Perhaps this is how he system is meant to work, but it seems GDP is totally meaningless as a measure of anything except total indebtedness.
Economics isn't necessarily about consumption, but the way it's mostly deployed in Western developed nations it is.
But yeah, people love consuming, hate when they can't, but the dynamics of consuming more than you produce ultimately make you broke.
A reversal of that setup, will be extremely unpopular, and the country would empty faster than it already is.
Consumption is baked in globally -its not just a NZ problem. And as PDK keep repeating its all underwritten by energy supply.
Its going to be hard to change the attitude to reduce consumption and it get worse as govts increase cradle to grave support. the NZ economy would look radically different if there was no super scheme - I would argue it would be far more egalitarian and sustainable
The 1930's recession and the second world war changed many people's attitudes to save more, waste not and they had those "attitudes/beliefs" all their life. Not sure that's a recommended solution though.
Outcome - the party is likely to continue until one day it doesnt
That assumes the debt that goes to housing would divert to businesses. And people could afford houses (particularly new ones) without taking on as much debt.
Housing affordability needs to be resolved. The hard way (by severely addressing physical supply costs), rather than trying to engineer it via lending mechanisms.
Hmmmmm...
ANZ NZ lent $19.3 billion in new home lending over the year, down from $24 billion in the September 2022 year. Housing lending market share was flat at 30.4%, with ANZ NZ's total lending book rising $3 billion to $107 billion. Housing comprises 72% of ANZ NZ's total lending. Link
But from the point of view of the bank, it has acquired the security without giving up any cash; the counterpart, in its balance-sheet, is an increase in its liabilities. There is expansion, from its point of view, on each side of its balance-sheet. But from the point of view of the rest of the economy, the bank has ‘created’ money. This is not to be denied. Hicks (1989, 58)
We start with the idea of credit creation, specifically a swap of IOUs between a bank and myself involving a bank loan that is my IOU and a bank deposit that is the bank’s IOU. Nothing could be simpler, and yet the mind rebels, especially the well-trained economist’s mind, because this simple operation increases my purchasing power without decreasing anyone else’s. It seems like alchemy, or anyway a violation of some deep conservation law. Real productive resources are the same as they were before, and the swap doesn’t change that, does it?
Spending of the new purchasing power adds another layer of perplexity. If spending increases but real resources do not, then it seems logical that the increased spending must exhaust itself in higher prices—that is the intuitive appeal of the quantity theory of money. My purchasing power may increase, but everyone else’s decreases because their money balances buy less. From this point of view, the alchemy of banking seems like a kind of theft, something to be deplored in the name of economic science and if possible outlawed in the name of the general good. Link
The bank physically pays the vendor after the purchaser promises to pay the bank back later, and promises to let the bank have the property if he doesn't. The bank actually has to have the money lying around to pay the vendor. I have worked in finance and done such transactions on my own behalf heaps of times. The financier actually having the money for the vendor is the key part of the transaction.
physically? - please explain.
Furthermore: Banks don't take deposits and they never lend money. They are in the business of purchasing securities. When one gets a bank loan, the loan contract is a promissory note. The bank purchases that contract from the borrower. Now the bank owes the borrower money and it creates a record of the money it owes, which we call deposits - source.
That's incorrect. The bank has to have some financial assets (bonds, equity, reserve balances etc) to be solvent and trading, but this is never a barrier to lending. If a borrower is creditworthy, the bank will create brand new money and give to them (or the vendor of the house they are buying from).
The link between bank credit creation and bank capital was most graphically illustrated by the actions of the Swiss bank Credit Suisse in 2008. This incident has produced a case study that demonstrates how banks as money creators can effectively conjure any level of capital, whether directly or indirectly, therefore rendering bank regulation based on capital adequacy irrelevant: Unwilling to accept public money to shore up its failing capital, as several other major UK and Swiss banks had done, Credit Suisse arranged in October 2008 for Gulf investors (mainly from Qatar) to purchase in total over £7 billion worth of its newly issued preference shares, thus raising the amount of its capital and thereby avoiding bankruptcy. A similar share issue transaction by Barclays Bank was “a remarkable story of one of the most important transactions of the financial crisis, which helped Barclays avoid the need for a bailout from the UK government”. The details remain “shrouded in mystery and intrigue” (Jeffrey, 2014) in the case of Barclays, but the following facts seem undisputed and disclosed in the case of Credit Suisse, as cited in the press (see e.g. Binham et al., 2013): Link - https://www.sciencedirect.com/science/article/pii/S1057521915001477#s0085
https://www.theguardian.com/business/2018/oct/26/barclays-avoids-trial-over-6bn-qatar-rescue-package
People don't buy property because they think the cost of construction will increase meaning their old house will increase in value.
They buy because they believe the land under the house will increase in value.
We have only tried ideas that will probably not work. There are too many invested in the system to try something that might actually work.
People don't buy property because they think the cost of construction will increase meaning their old house will increase in value.
They buy because they believe the land under the house will increase in value.
It's both. Anyone should factor in "if I had to replace this old house, how much would it cost me" into their appraisal of a house.
So long as that number keeps increasing, old houses hold their value.
Yes cost of materials is a key aspect, but how? What’s happening with the government’s (good) idea of reducing the restriction on imported materials?
Having said that, probably only marginal improvements possible.
In my view the only way affordable housing can be delivered is by the government building it, en masse. Or perhaps even better, by funding community housing providers to do it. The latter is probably the better option. I don’t trust the ability of big government behemoths to do it well or efficiently.
You can build a house cheaper if it's designed the right way. Board and batten for instance, is a much cheaper cladding than say, plaster, or that fancy wide channel tin they like using at the moment.
But yeah if I was playing armchair leader, I would bankroll a nationwide affordable house build out that's done at massive scale. $1500 a square, something like that.
Not necessarily. I was thinking the targeting of the cost of housing. Limiting what banks can create/lend into the housing market would limit the value of housing stock.
A secondary effect should (not guaranteed) be a reduction in the cost of building new houses, as I think many of the building suppliers are clipping their tickets too much.
Redirecting funds to support or create new business is another issue and would perhaps need some for of a government initiative.
Options will depend on politics. But the fundamental issue here is that if we take any action to deflate the housing ponzi (LVT, DTI, building loads of houses, leave interest rates high for mortgages etc), our economy will contract considerably. Our apparent 'growth' is reliant on a steady flow of bank credit money.
My favoured option would be to absolutely take action to deflate the housing ponzi, and then use Govt deficit spending to invest in a massive electrify NZ project - creating a step change in our productivity and helping us to balance our current account deficit and insulate ourselves from global energy price shocks.
Ridiculously low cost electricity off the back of an initial state capital investment is how we can catapult ourselves forward. However, we still need to use our real resources very differently - we can't just flip from a few million petrol cars to a few million EVs (for example), or continue to throw millions of tonnes of plastic into holes in the ground.
There we disagree - 100%.
We will struggle to maintain the existing grid, in the near future. Nobody - but nobody - has figured out how to build a renewable (really a rebuildable) grid using a renewable grid; everyone has based it on high-EROEI fossil energy.
Goes for global trade, too.
"We will struggle to maintain the existing grid, in the near future."
We are struggling to maintain the existing grid now.....but that is partly due to the level of resource we are devoting elsewhere, often to discretionary and unnecessary goods/pursuits. The question is surely at this point how can we utilise our remaining resources to provide the longest period possible of sufficient energy provision to support a functional society?
Money is also created by doing the same thing more efficiently than in the past. i.e. at lower cost. (Hint as to why the electrification of NZ Inc would pay massive dividends.) NZ Inc's not so great at doing it cheaper (more efficiently) ... We tend to give up and import from countries that can.
If that's the way society works, its the way it works. It has evolved into the current state of affairs and it works right up until the point it doesn't. Nothing is going to fundamentally change for decades yet so get used to it. The people themselves are not prepared to change what's needed long term and nobody is really that interested in long term.
The vested interests have setup everything so that people serve the economy at all costs, rather than the economy serving the the people. They could not care any less about GDP per capita or productivity. The monster economy has eaten our young and our birth rates. Better feed it some fresh immigration. Heaven forbid the boomers might complain about house prices or the inconvenience of infrastructure being build.
US CPI at 2.9%. Why would they cut? They got inflation down quicker than us, but it’s been sticky and above target. Although they do have an employment mandate?
Our inflation rate is on a steep downwards trajectory and will be well under 3% once this quarter completes, hence Orr could cut.
China has supplanted the US as India’s top trading partner • India-China trade relationship is deeply unbalanced; India records US$85bn trade deficit with China • Indian firms get nearly half of supplies from China for electronics, machinery, chemicals and steel goods Link
Went to a few open homes over the weekend down in Chch.
All were as dead as the proverbial dodo (in fact for two of them I was the only attendee, as far as I could tell from the sign in sheet). One was a potential downsizer place for my parents, the other a tired property in a very nice part of town that would be a "ticket" to get into a great area if you were then happy to spend $$$ on doing it up but most people buying in this area would be of sufficient means just to purchase a newer place already finished. Couple of other decent places as well but no interest at the open homes. Was getting worried I'd have a chloroform rag waved under my nose and wind up in the back of a Harcourt's van until I sign the paperwork, such was the air of desperation.
Only exception was a family-sized home in a good school zone that is priced with a clear asking price well beneath what you'd normally expect to pay for the area. The property has some clear compromises/issues (weird layout, dubious make-over quality, no decent garaging etc) but last time I saw such a crowd was at the Taylor Swift concert. Vendors have been shrewd in how they've done it up to appeal to millennial women who want everything white + scandinavian style wood effect (despite pointing out all the flaws, my wife - herself a millennial woman - was caught up on that) plus clear pricing in a good area so I think it will sell very fast.
And in your observations lies the looming problem - "a potential downsized place for my parents" + "Only exception was a family-sized home".
Who will your parents' sell their large house to if they luck onto a smaller replacement home? Larger homes aren't needed today as they were yesterday, so they are going to struggle more and more to find a new owner. Sure, there'll be the "knock 1 down and build 10" opportunities. But who will be the 10 buyers for the new stuff? Populations across the Globe are cannibalising each other for what younger workers there are, and as time pass, the replacement populations are going to have less and less to pay for anything as they increasingly come from far less wealthy countries to 'us'.
And in the reverse, my stepdaughter is hoping that we will buy her, now unaffordable, first home from her at the original contract price! (late 2021, of course! The Panic in the Market times of "The OCR is going negative!". And yes, she did have the benefit of my opinion, but....) That's what's happening. The ageing have all this stuff that the young really couldn't afford to buy. Fun times ahead.
Is she in a position to hold the property and "ride it out" (assuming that at some point the market will probably pick back up, and at the least she has a place to live in that she presumably must like to some extent or else it wouldn't have been purchased?)
I've got several friends in similar circumstances ... managing to time the absolute top of the property market, and now struggling with repayments etc.
If they have the same level of income a bank, (and especially they should have) would have accounted for some of that in a stress test and so they should be able to manage most changes with few accommodations. If they have rapidly dropped income then there is always the option to sell or rent the property as a whole or portion. Managing mortgage debt is far easier once you have it then it is to trying to acquire it. Even interest only loans or mortgage holidays are an option. Something rarer in other forms of debt.
But to say they are struggling would be a push as they would not truly be struggling unless they were literally staring at the potential for being homeless for more then months. These people have more options then they actually know and often refuse to accept the shifting positions due to emotional & education blocks e.g. lack of risk analysis, lack of planning/problem solving ability, fear of failure and unwillingness to change in lifestyle. Lets face it, having to sell at a loss and then rent is not the end of the world people make out to be. That is normal for many periods. In NZ it was actually common for single parents struggling financially to take on borders to help pay basic costs of housing, even in housing they had to rent, and we expect that still of them. Yet for those who buy a property, face highly predictable mortgage changes, and do not suffer a loss of more then half their income we say woe is me those unfortunate people need more sympathy. Yeah not happening until they actually face real struggles in life.
So like most mortgages where the deposit is often far less then the mortgage interest over the contract and goes up in flames as a natural part of the process of buying.. sorry it sounds like she is complaining she would have to pay more of the mortgage then the house is worth and is unwilling to look for solutions to manage a higher mortgage rate that is still far below the rate of most credit and small loans...
Some how she sounds less deserving of support then a beneficiary who had to get a loan to fix their only form of transport.
This is someone who never understood how mortgages work and should never have been considered competent to sign a mortgage contract. Perhaps guiding them through the process of selling is the best thing if they could not think of how else to resolve the mortgage rates changes other then to emotionally and financially abuse family to buy off them at the same cost. Otherwise there are tons of options to retain the property and pay for the solution themselves. It just sounds like they see family as the first port of call as a crutch before they do anything in life.
My eldest and her partner have done in their kiwisaver deposits having bought in the last 18 months. Despite warnings of a reversing market. Oh well - they can cover the mortgage, and in a rental starved area they are better off with regards to living costs and security of shelter for a young family.
Yikes.
So she wants you to bail her out at no cost to herself (so she does not have any effects from the short term equity lost) so you could suffer her consequences and risk. That is not a supportive family member that is someone looking to commit financial & emotional abuse (often directed at older parents just as much). If she had actual desperate need, & could not meet the mortgage e.g. medical illness like cancer, family members in crisis with new costs e.g. break up/unexpected child costs or long term injury forcing unemployment that would make sense as she would be unable to wear the mortgage repayments with a higher cost of living required to survive. Charity during a time of severe crisis to help family manage like supporting living costs or helping her sell it on the market can help. Even short term small loans that can be repaid in a couple months. But no. Anything else is just trying to avoid the consequences of risk & trying to improve her financial position at a detriment to family.
If anything I would say she should take the cut, sell the house for a loss on the market if she so needs to leave it or minimize the mortgage costs and then slowly pay off the remaining mortgage as she rents and saves for a new place. Or like many look to getting income from the property by renting it out while staying with family or renting a cheaper place. Since mortgage rates are still quite low in comparison to other loan rates she is in a far better position with that debt then say lots of hire purchases & money loans for necessities of living. In fact many times it is far easier to load up essential living needs costs (like for medical ops, essential transport) on a mortgage loan then it is to do it on credit or with small loan lenders. So lets not assume that simply being left with mortgage debt is the end of the world.
Perhaps she has grown up so insulated from consequences that the thought of facing any and having to make a decision to resolve issues is terrifying. In this family can help by normalizing the fact that mortgages go up and down, people do pay off debt, and houses can gain and lose equity in the short term... stuff she should have been fully aware of before she even considered a mortgage contract. Insulating children from these things does them no favors in life as they are just as likely to get in the same position again in a few years time as property, mortgage rates & housing markets change. Any fool could see the massive spike to the housing market intentionally made to increase speculation during 2020-2022 and that there would be economic shifts & changes to mortgage rates. If she is solely seeking to keep her financial position with no risk, no consequences of any loss it is abusive to put that on family. Insulating children when they are not in need really does lead them into worse positions esp when parents can no longer bail them out.
It is honest and would be far better to offer support when they actually need it rather then insulating children from financial dips they could resolve themselves. Lets be fair if you are in the position to buy all children homes then sure let them emotionally and financially abuse you. Otherwise let them learn how to manage a mortgage and risk for 1 time in their lives and they will be better at independence themselves in future.
If children had actual need e.g. medical illness causing unemployment that is an unforeseen and often unsupported event that would mean a significant loss of income on their part, that would be an actual impact on their lives and ability to manage actual effects to their physical wellbeing & future. Emotional abuse children commit against parents e.g. begging, anger, manipulation because mommy and daddy did not cover the cost of a house for me and I might need to pay more of a mortgage then the house price (surprise that is how mortgages work already) is really something they can survive and get over. The poor kids do it all the time.
In fact children of poorer people can be far more resilient & consequences are far more easy to overcome as they take more responsibility for their actions and financial shifts and do face more consequences of any changes in their lifetime. What is a bugger is the stuff people do not choose in life, e.g. medical, neurological, employment, relationship crisis etc which leads to needing actual outside support as it is not something someone can predict or do due diligence over. There are real physical barriers to affording living needs causing severe physical effects and insurance is denied on the basis of birth in NZ.
Insulating kids from predictable equity shifts and mortgage changes is really harming them a lot more in the long run. Especially as they could simply rent the house out and have most the mortgage paid for them already. It is just the fact they have been so insulated leading them to be significantly impaired in their planning and problem solving ability and led them to taking risks without understanding the potential consequences. It is mentally crippling them to not help guide them through resolving the issue on their own but to simply buy them out. Not to forget it also teaches them that emotional abuse against family works so the next time they can do the same and never ever have to make their own decisions to fix issues, or take on even more risky behaviour.
Even bailing out family with addictions due to medical issues is nowhere near as troubling. In fact by bailing out family with addictions, (often that originated from a lack or incorrect medical treatment in the first place), you can help them quit and give a fresh start to being more able to manage medically & have a better physical wellbeing. In addition with financial support, any emotional support added is far more powerful and can help in getting the medical care that was often needed in the first place. But bailing out family with bad mortgage planning is simply a way to further impair them, insulate them from their financial decisions, and allow them to abuse you. I thought we were all for personal responsibility when it is a matter of their own choices.
You gave the stepdaughter the best advice BW, and they threw it aside. You did your duty, now stand aside soldier, you must let their cards fall.
- Sad, but its life.
Stupid financial decisions MUST have a cost.
Moral Hazard must be followed through with pain, otherwise the same or more stupid decisions are made and no learning occurs.
bw: "Who will your parents' sell their large house to if they luck onto a smaller replacement home? Larger homes aren't needed today as they were yesterday, so they are going to struggle more and more to find a new owner."
Some people need to travel more. And while there, study a bit of the local property history.
Using London as an example - these big places, including McMansions - get turned from single big and oversized 'houses' into multiple unit dwellings. I did one in the UK. One big mess of a four story terraced house into three really nice apartments. All sold within days of listing and at a sizeable profit.
I've friend doing exactly this to McMansions on the North Shore. (As always - Council are a huge problem!) Just a word of advice: choose your McMansion very carefully.
Yeah I'm not much of a fan either. But I don't blame the vendors for doing it as you could just tell from sitting back and observing the "goings on" at the open home that the unending stream of 30-something women with 1-2 kids in tow were loving it (and I'm not saying that disparagingly ... style is a personal preference and if that's what you like, then no problems from my end)
"...saddling future generations with paying..."
With no thought of, "But what if they can't pay?" The answer of course is, "Well, that won't be a problem. I'll be the Chairman of XYZ Bank by then, encouraging my CEO to pump The System full of New Debt, to make all 50 million New Zealanders pay"
(PS: And the tragedy of that thought? That will be EXACTLY what she's thinking; more people = more growth = more taxes. It's all they have and all they know)
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