Treasury has outlined the economic impacts of seven possible government responses to COVID-19.
Its findings appear to make the case for more government support, in addition to the $20 billion already announced (for wage subsidies, benefit increases, tax changes, taxpayer-underwritten business loans, etc), as they show the extent to which this support would cushion the economic blow.
Only two of the scenarios model the economic impacts with this cushion.
We will look at these scenarios first, as they are the most likely. Finance Minister Grant Robertson on Tuesday said: "Work on further significant Government investment to protect jobs, support cashflow, and prepare the economy for recovery is well advanced. The next steps in the Government’s plan to support businesses will be released later this week."
Furthermore, before entering lockdown, a law was passed enabling the Government to borrow up to $52 billion before the end of June for the COVID-19 response.
Scenario 1a: Shorter lockdown, less govt support
Under Treasury’s most optimistic “Scenario 1a”, New Zealand is at Alert Level 4 for a month, Level 3 for a month and Level 1 or 2 for 10 months. Borders remain closed to foreign visitors for up to 12 months. The Government injects another $20 billion into the economy (on top of the $20 billion already committed).
In this case, real gross domestic product (GDP) contracts by -4.5% in the year to June 2020 and -0.5% in 2021, before growing by 8% in 2022.
In nominal terms, GDP gets close to 2019 levels in 2021, and surpasses 2019 levels in 2022.
The unemployment rate increases from 4% to 8.5% in the June 2020 quarter and 5.5% in 2021. It falls back down to 4.5% in 2024.
Consumer Price Index (CPI) inflation falls from 1.9% to 1.25% in the year to June, before reaching 2% - the midpoint of the Reserve Bank's target range - in 2024.
Scenario 2a: Longer lockdown, more govt support
Under Treasury’s more pessimistic “Scenario 2a”, the country is at Level 4 for three months and Level 1 or 2 for nine months; the assumption being we dip in and out of Level 4.
In this scenario, Treasury assumes the Government provides much more support - an additional $40 billion (on top of the $20 billion already announced).
GDP contracts by -8% in the year to June 2020 before growing by 1% in 2021 and 10.5% in 2022.
Like the other scenario, nominal GDP gets close to 2019 levels by 2021, before surpassing this by 2022.
Unemployment climbs to 9.5% in the June 2020 quarter, 6% in 2021, 5.5% in 2022 and falls to 5% by 2024.
CPI is a bit weaker than in Scenario 1a and only lifts to 1.75% in 2024.
Comparing apples with pears
Treasury didn’t include scenarios whereby the same set of alert levels were compared to different amounts of government support. IE where only $20 billion of additional government support is applied to the more onerous alert levels of Scenario 2a, or a scenario where $40 billion of additional government support is applied to the less onerous alert levels of Scenario 1a.
More govt support vs no more govt support
Treasury did however project what would happen if no additional government support was provided.
Under a longer lockdown, the unemployment rate would skyrocket to 17.5% in the June 2020 quarter, 9.5% in 2021 and fall to 4.5% by 2024.
Here's a table comparing the two scenarios detailed in this piece that include more government support, with scenarios where there’s no additional support (“Scenario 1” and “Scenario 2”):
Treasury didn't include scenarios whereby New Zealand remained in lockdown for even longer and the Government provided more support. One of its seven scenarios considers six months at Level 4 and six months Level 3 without additional support. Yet there isn't a corresponding scenario applying additional government support to these alert levels.
Throughout its work Treasury assumed:
- Alert Level 1 reduces output by 5-10% from normal
- Alert Level 2 reduces output by 10-15% from normal
- Alert Level 3 reduces output by 25% from normal
- Alert Level 4 reduces output by 40% from normal
Secretary to the Treasury Caralee McLiesh said: "I must emphasise that these are indicative scenarios, based on assumptions and estimates subject to considerable uncertainty. They are not official Treasury forecasts or the Treasury’s view of what will happen...
"Actual outcomes will depend on a range of factors, including the success of containment measures and the economic response, both in New Zealand and internationally."
Unlikely scenarios including no more govt support
To turn to the unlikely scenarios that don't include more government support, this table summarises their assumptions:
This table summarises the outcomes:
See Treasury's paper in full here.
190 Comments
Rod Carr had a thoughtful comment re the shortfalls of GDP, on Nat Radio this morning. I was impressed, coming from one of his background.
Otherwise, this exercise isn't worth the paper it's printed on, or the time they took presenting it. We are simple past GDP, and we are looking like we are past the zenith of globalism and global growth (though much of it the last decade took more debt that it returned).
We need to construct the new 'economy', the new paradigm. It is local, it is regenerative, and it does not carry parasites.
We need to reduce our numbers, together with our aggregate consumption. This should be obvious to anyone with even a rudimentary understanding of maths and physics.
To allow our numbers to keep expanding will result in far more suffering.
You have chosen to spin this as sinister like many who would like to propagate the status quo.
References please - if you go to the end of my most recent piece here, you'll find a few. Perhaps a referenced rebuttal or two after you've read through the list? (Most are in my bookshelf; happy to loan them....).
Until then, opinion is just that. Good luck with yours.
That's Darwinian thinking, not Gaian. Lovelock could have named the theory the "synergistic and self-regulating complex biotic system", or something similar - just as Rachel Carson could have named her book something other than Silent Spring. I like that he chose Gaia, as it implies something beyond our understanding; and indeed so much in biology/ecology (virology being a disciplinary subset, of course) is indeed beyond our understanding.
Gaian thinking would not suggest we allow Covid to run rampant, but that we learn just how interconnected the world is and that, humans are not necessarily in charge. Rachel Carson's advice of some 50 years ago, is more relevant now than ever;
https://quotefancy.com/quote/1009268/Rachel-Carson-Now-I-truly-believe-…
I think we'd all like to know how you manage to live without consuming any resources, since you obviously don't place yourself in the parasitic category like the rest of us. Lets start with the device in front of you and consider all the economic and industrial processes that went into providing your means of communication.
I am carbon positive (trees which I do NOT claim credits for), energy self-sufficient, mostly food self-sufficient, and consume a minimum, which is a conscious and ever-present consideration.
Not much use to a growing economy, granted, but then, that's the idea.....
Heh. Like stuffing the entire top of Mount Lyell (TAS) through the crushers, flotations, separation and smelting to produce a significant chunk of the copper used for the telephone and power systems of the early 20th century world. Went to Iron Blow in early March - awesome sight - and this 60's film shows what was going on in its heyday. We are all squatting on the shoulders of giants......and miners...
Thanks, pdk - so glad you got the top comment on this one.
It's just so simple to me - GDP matters not one iota. What matters is employment - it's the ultimate wellness indicator.
Just read that BK has gone into receivership - 2600 employees doing an 'old world' job; delivering a product that makes us lazy/obese/unwell. Give me those 2,600 workers for only one week and I'd have eradicated all pest plants from the margins of the Hutt River. And all over NZ we have similar ecosystem restoration jobs/projects just waiting for large numbers of people to be thrown at them.
I'm assuming that the government will be paying for that.
The comment is circular, your ultimate wellness indicator dips and you celebrate it. These people need paying jobs to earn an income, feed their families, and pay taxes to help pay back the massive government debt being created.
"Old world" jobs are there because consumers make those purchases. They would buy at McD's, KFC, the local bakery or fish and chip shop instead. Celebrating their demise is mean, and won't make change happen more quickly or feed those 2600 families. They won't all find jobs in Fruit and Vege or organics stores.
I agree with giving people the opportunity to make a community contribution while the state supports them, major public works were completed this way during the depression. A question though, will you 'insist' that the unemployed do this type of project work scheme in return for their government support payments?
There's the irony. Migration has been part of the economic story in NZ and Australia partly under the guise of needing people to fill jobs. While this is somewhat true, there has been next to little thought, planning and provision for the necessary infrastructure to support this growing population. In many ways it's been a lazy way to economic "success". Now the chickens are coming home to roost via the current backdrop.
Unfortunately I suspect that as soon as the borders are open the government (regardless of colour) will ramp up immigration in order to drive demand in the economy. It worked for John Key and it’ll work again. However, as you say it’s the lazy way but who wants to work hard when you can make money by property development and speculation as has been going on since the formation of the New Zealand Company in the 1800s.
Unfortunately I suspect that as soon as the borders are open the government (regardless of colour) will ramp up immigration in order to drive demand in the economy. It worked for John Key and it’ll work again. However, as you say it’s the lazy way but who wants to work hard when you can make money by property development and speculation as has been going on since the formation of the New Zealand Company in the 1800s.
Yes I expect you're right. I'm pro-immigration as long as it runs in parallel with development. It's not just about property btw.
I'm pro-productivity and pro-quality of life. If immigration can help achieve those aims all good if not then no thanks.
BTW - If immigration and development are all good, how do you think NZ would/would have fared in this current Covid-19 crisis if immigration had led to a much larger and denser population in NZ? I am of the opinion that the reason why NZ, Australia, California etc have fared so much better than North Italy, NY is more a function of low population density than good leadership. Hence, maybe a smaller/low density population has benefits that we shouldn't be too quick to throw away as we chase greater economies of scale through immigration driven population growth and development?
I concur on both points. There is going to be a structural shift away from high density living with all that entails - communal area's, crowded public transport, pubs, restaurants, gyms etc etc. I've set up a gym at home and can't see myself ever going back to a corporate gym or an F45. Sweating, coughing, sharing gym equipment - that's a hard no from me.
NZ has once again shown itself to be a desirable destination in an ever more crowded world. If I'm living in a high rise block in London, NZ is looking pretty damn good right now.
NZ has once again shown itself to be a desirable destination in an ever more crowded world. If I'm living in a high rise block in London, NZ is looking pretty damn good right now.
Sure....if you have any money. Most people in Anglo Saxonia barely have 1-2 months' income to draw on. That's why we're in this mess.
Te Kooti: as a babyboomer over 70 I'm clearing out my garage to create a very basic home gym; the doctor said i need to go to a gym to strengthen my torso to relieve my back pain. I tried the local gym at oldies rates but it's too much hassle. Even if I was younger it wouldn't be my scene.
Now, I don't think you'll see a long-lasting shift from corporate gyms because, from my observations, the youngish people that frequent them seem to be part of 'a body beautiful' cult. They go to the gym to be seen and admired (so they imagine) and wear the fashionable sportswear. This is where they gain their self-esteem, I'm sure. They seem to be looking at themselves in the plentiful mirrors a lot of the time.
And they take it very seriously. Humour is frowned upon. Conversation is frowned upon. They all seem to be so self-absorbed but occasionally they will snatch a glance to see who's admiring them. All in all I found it pretty weird.
I wouldn’t rule out National, if they want the poisoned chalice, falling knife, what have you. The evil that men do lives on, the good is interred with their bones. Come a grim winter, unemployment at 12-20%, tax hikes, public sector bleating, we’ll see what voters remember about these extraordinary past few months. The cold hard stats may well show that a few poor elderly souls died, while a generation has been damned. Hardly an election winning record.
Even in the US (and I never thought I'd say this!) what is needed is continuity in governance/administrations. I think the last thing we need is to let those that made the hard choices associated with this viral-turned-economic crisis not be responsible for the recovery. All we'd get then is what happens here with every change of administration - i.e., for years all we hear is it was the last governments fault.
More than ever, I believe it is not a time for excuses.
As my mother used to say: you make your bed you lie in it.
Whatever happens from now on it is going to be bloody awful. We simply have to have the best heads available trying to lift NZ's economy back out of the Depression-level toilet it has fallen into. Given the obvious-to-all talent vacuum in the coalition we simply have to change govt, or Labour need to get rid of most of their list MP's immediately and replace them with people with actual ability. Fine if you don't like Simon, but his charisma or lack thereof is a far less important factor than overall governmental competence.
I'm not sure what the point of modeling 6 months at level 4 would be. If we got to that point our economy would look like the USSR in 1984.
More concerning though is the optimism that GDP will rebound so strongly in 2022 in some of these scenarios. It doesn't seem to grasp the level of dislocation that's happening across the globe and particularly in China where factories are idle.
It will be interesting to see where the govt is intending to let loose all of this additional stimulus. In guessing a large part may simply be welfare claims as Ue rises after the initial job support program runs its course and companies have to start laying folks off.
I don't comment much, but that 2022 GDP growth number spurred me to do so. That is an outrageous assumption, even taking into consideration at the different scenarios and support investment levels.
How could anyone in their right mind forecast a 7.5 point swing in GDP in one year? On the downside that type of swing can happen due to a lock down, but on the upside business can't exactly just turn a tap on, even with open borders.
Looks like a distinct lack of sense checking going in these numbers.
I agree. They need to be called out on this. Ridiculous.
As is there assumption of returning to 5% unemployment so quickly.
I've seen how Treasury work, and it's not in a particularly objective or non-political way to be frank....
From what I have seen in the last few years (and I have at times been close to the action), there is a distinct lack of free, frank and objective advice from government agencies. Rather, advice is delivered to meet Ministers' wishes...
Past performance is no guarantee of future performance.
One problem is we never had a plan. After Mers,Sars, Aids, nothing, Zilch,Nada, no plan for a response to a worldwide epidemic even though they come around every few decades.
I suspect lockdown will be extended for two more weeks while they keep working on 'the plan'.
I can see some areas going to level three, but some areas may be locked down for another week.
they really need to start antibody testing
the main cities and Queenstown seem to be the problem where you had a higher proportion of people arrive from overseas and denser populations
I can see some areas being able to come back as far as Level 2 fairly quickly. But inter-regional travel will be an issue. the centres where there are clusters will need to stay at level 4 until community transmission stops. and this is where societal behaviour needs to change dramatically.
Historically people haven't been too concerned if they were coming down with a cold or flu. They'd still go out to all the places they'd normal go to. they'd cough and sneeze over everything, wipe their hands on handles and surfaces and so on. Schools, gyms and supermarkets are shocking places for spreading viruses. Societal behaviour must change to if you are coming down with something - anything, stay at home! Isolate yourself. Do not share your bugs with your workmates/colleagues, neighbours, friends or others! You may be responsible for their death if you do!
What antibody tests? What country have been able to roll these out? Governments keep talking about them but so far they are MIA. Gernmany announced before the Easter break that they were about to make an attempt on the antibody tests but we've had no data back on that yet. Frankly, if the German's can't do it, we have to consider the fact that population wide antibody tests might be a way off.
https://www.ft.com/content/fe211ec7-0ed4-4d36-9d83-14b639efb3ad
the USA have started them
https://www.msnbc.com/msnbc/watch/covid-19-antibody-testing-study-begin…
You do understand that tests are not the same thing as rolling out antibody tests for an entire population don't you? This is entirely my point. Governments around the world keep referring to antibody tests when they haven't even proven that they have reliable, efficacious tests yet. America is doing tests, Germany do actually seem closer to a roll out. Did you even check my link?
We will have the same issue with the vaccine. Step 1. create a vaccine that seems viable in a lab Step 2. randomised control trial, hopefully a longitudinal one Step 3. have that research peer reviewed and the research replicated and verified in other labs in other countries Step 4. begin mass production of vaccine step 5 work out how to roll out he vaccine. (stage 4 and 5 will be complicated by resource competition and politics).
The same process has been happening with the virus testing and we have all seen how flawed that process has been and how unequal each countries capacity to ramp up mass testing has been. The same delays, scientific processes, bottle necks, politics and practicalities will happen in arriving at a viable mass population antibody test.
You seem to be assuming we might be close to having one. When you find some *actual* evidence of that, let me know.
One of the big problems is that those that have recovered tend to show very low antibodies, some levels even undetectable. Not to mention the number of recovered that become reinfected. And this isn't even starting to look at the long term effects on organ damage, in particular liver, kidney, heart and of course lung. Long way to go yet.
Hence in South Korea, patient case presented with multiple 'false negative'.. been released, then the bugs showing sign of 're-activation' this is almost regular with ageing patients as body organs decaying process. Here's the clue as how 'complex' the vaccine for this will be: the analysis of antibodies consist of multiple fighting mechanism, means? - this bug is clever enough, to warrant young body reaction on producing multiple counter measures, just in order to neutralise it - Imagine this bug as modern modern battle ship, got heaps of counter measures. Heavy to fight it - eventually can be overcome with plenty casualties, one undeniable parameter is 'Time' - combine down of it, the more loss money.
https://www.health.govt.nz/system/files/documents/publications/influenz…
we failed at stage two early on so now at stage three
New Zealand pandemic planning is based around a six-phase strategy:
1 Plan For It (planning and preparedness)
2 Keep It Out (border management)
3 Stamp It Out (cluster control)
4 Manage It (pandemic management)
5 Manage It: Post-Peak
6 Recover From It (recovery).
I never claimed it was a response for SARS or similar illnesses, just pointing out that your claim that we had 'no plan' for a worldwide epidemic was wrong.
We do have a plan, developed for controlling an influenza pandemic based on the learnings from H1N1. It may not be especially relevant to the current disease, but given the similarity between flu and COVID-19 it's a good starting point.
It would be less useful for something like ebola or zika, which spread differently.
I have some experience working with this plan, from my old DHB days.
The things you are talking about are all valid interpretations of the points 3 and 4.
For example one way to view it would be:
Point 3 would cover Covid L1 and L2.
Point 4 would cover Covid L3 and L4.
The problem we have is twofold.
1. We didn't stop it at the border, like the plan suggests. Realistically we will never be able to test for a new virus at the border. So our only option is to lock the borders straight away.
2. The Govt didn't look ahead to 5 and 6 before enacting Covid L4. They now need to find a way to sell Covid Level 3, as a recovery mechanism rather than an active management tool. Even though that is likely to conflict with the official Covid L3 directions.
It's specifically a plan for influenza (a virus that vaccines exist for and humanity has a lot of experience with and understands the pathology and treatments well) and specifically has 6 steps like that because they expect the early steps to fail but acknowledge that the more you can do in the early steps the less overall impact there would be. Thus the later steps exist because once step 2 fails you move to step 3, then to step 4 etc.
For COVID-19 we've decided that the virus is too serious to allow us to move to step 4, so instead are putting in all of our chips on step 3.
A common failing is to think of the economy as a machine, which is subject to controls - levers and dials - which can be twiddled or pulled with well-understood results.
It simply isn't. What we characterize as an 'economy' is the aggregate result of millions of transactions between individuals, firms, 'little platoons' (the plethora of voluntary and uncommanded associations that folks generate), Governments, localities, resources, and other countries.
While some of this is counted, regulated and observable, much isn't. Ideas, innovation, tinkering, and thinking have generated most prosperity that we now enjoy, and much of That went completely unrecognised until it erupted (disrupted?) into the counted 'economy'.
That also makes a nonsense of the notion that 'economies can be re-constructed' as though they are a building, a dam, or an object with a BOM. To the extent that analogies work, economies are closer to an anthill (cubed) than to a machine. And there's no recipe for 'constructing an anthill' because there's no central intelligence, let alone central planning, involved. There's a bunch of ants....This is neatly laid out in Steven Johnson's 'Emergence'.
So Treasury and the other entrail-readers have no way of seeing or modelling aspects such as:
- The possibility that older, skilled workers and business owners simply take a very long or permanent sabbatical. They've gotten used to a world where suddenly they are not beholden to customers, IRD, MBIE, Worksafe, TLA's and all the other overheads, and they may have discovered that they quite like it. That puts quite a dent in aspects like apprenticeships (who will mentor 'em?), productivity, niche products or raw materials, and other activities that are deep down in the BOM.
- The possibility that actually-but-not-immediately-essential services or businesses have been so damaged that they won't re-start, or are sold on at fire-sale prices to new owners who take years to achieve the same levels of output or productivity. Either way, there's a big dip in the offing.
- Part of any reconfiguration (itself a bottom-up process) will lie in choice of trading partners. China has shat in its own nest via deceit, delays and imperial moves; so there will be a tense time as NZ still exports food to them, while at the same time gently disengages imports to some extent, and that as the aggregate choices of thousands of individuals and businesses rather than Gubmint fiat.
A lot of water to go under This bridge. Final word from Richard Fernandez: the most likely result of all of this will be systems run for the benefit of their componentry, rather than for the maximal optimisation overall. And globalism-compatible, not globalism-dependent. The title: Planning the Great Escape from House Arrest, and from Communist China.
Good to see that Japan is going to pay for some production to return to Japan from China.
https://www.japantimes.co.jp/news/2020/04/09/business/japan-sets-aside-…
Well said, although you do give the 'Gubmint' some hope when you say 'because there's no central intelligence.' They will think you were talking to them.
But it would be insulting the intelligence of ants to compare them to political systems.
I think the 'Jelly Fish economy' would be a better analogy and description, where a group of cells with different jobs come together and without knowing who is meant to be doing what, function as one. And where the mouth is also the arsehole.
You list some of the negative aspects they can't model, but what about some of the positive? Maybe during the lockdown someone invents the next big gadget in their garage?
I don't think anyone, even treasury, think their model is guaranteed to be correct. But I imagine it is more likely to be correct than you or I guessing...
My comment was more about getting analogies more relevant, and about the fundamentally emergent/epiphenomenal nature of economies, but you make a very good point. One positive aspect that won't be interpreted as such is less mindless consumption. I.e. when the aggregates are counted, they may be smaller, but that would be in part because we have all established a saner hierarchy of Things we Need. It's easy to think of entire sectors or businesses that we wouldn't miss: aftermarket mag wheels, aromatherapists, Kinder toys, it's a really long list. We may well be surprised about the individual buying choices made in the future. Ah, The Future....cue Leonard Cohen....
Whatever the scenario in all one thing is clear that Airline, Tourism and Hospitality industry, International Student, Immigration (Few which are pillars of NZ Economy) will be worse for for next year if not few years as a result we have to prepare for a rough ride for few months to start from.
House market willfall but hopefully should not crash and that will depend on unemplyment level and how much small business are able to absorb the impact
Sure, some FHBs will be roadkill. They made the decision to purchase in this market, they can live with the consequences like everyone else. If we see a return to reality for house prices and the end of property owners as a protected class, generations of FHB will be better off.
"They made the decision to purchase in this market" wow my bad for wanting a roof over my head. I'm not a property investor, I haven't benefited to the tune of billions in tax free gains from pumping up the price of basic access to shelter. Hard to read this as anything but 'tough shit for being born were you were, here's another massive financial setback while you pay out super for boomers, out of taxes from your low wages while you pay down a massive student loan.
If you think crashing the housing market is going to do anything but drive a whole generation of kiwis offshore, think again.
Did you see what happened in Ireland? (which some argue we have many similarities to and which some say John Key was emulating?)
https://www.stuff.co.nz/business/property/85960352/blowing-bubbles-that…
I have found it quite amusing to read through the quotes from Irish property spruikers of the time, and compare it to our own in recent years. Check this link out.
Also, "5 Years of The Irish Times Headlines Related to House Prices"
Before deciding to purchase, you will have either thought seriously about the possibility of a correction and been prepared for it, in which case you will probably be fine, or else you are a moron who made a very poorly considered financial decision. If you fall into the latter category, caveat emptor buddy.
As for driving kiwis offshore, our housing unaffordability has already done that. A return to affordability will more likely see skilled kiwis returning home to raise a family and contribute here. It would be a massive boon to this country in a time when we are likely to need it.
Ah yes, we're all prepared for *checks notes* the totally unprecedented national shutdown of almost the entire economy. Spare me your insults, it's clear you're just looking for graves to dance on (which is the actual, real life consequences of what you're so gleefully looking forward to happening). I'll probably be fine, but I'm not so blind to my own privilege to assume that my reality is the only one that exists and using it as a platform to insult people who were looking for a stable roof over their heads. Those utter bastards.
I'll go back to trying to support my friends who did everything right in life like waiting until they could afford houses to have families and who are now racing against biological clocks while older generations give them hospital pass after hospital pass while screaming dementedly about bootstraps at anyone who dares question why they get free money whether they need it or not. As you were.
How about you spare everyone else your transparent concern trolling? Like I said, if you've thought about and prepared for things like higher interest rates, serviceability on a single income, having an adequate savings buffer and how easily you could sell the house if you needed to, you will probably be fine. It's taking a basic level of personal responsibility for probably the biggest financial decision in your life.
It's those that haven't taken any personal responsibility and instead expect society to revolve around protecting the inflated value of their houses that I won't bat an eyelid at when they go to the meatworks.
GV 27,
What can you do under your current circumstances?
REINZ data showed that March 2020 median house prices for Auckland reached an all time record of $950,000, so you are likely to be profitable on your property purchase assuming you paid market value for your property. Depending upon market conditions, you may be able to get an attractive price for your property after the lockdown.
If you believe that property prices are going to fall substantially, remember, you still have the choice to to sell and rent when the lockdown ends.
If you choose to hold on, and in future comment about having sustained large losses on the equity value in your house or being in negative equity, then that will be a consequence of your choice today.
That is entirely your decision.
Choose your scenario and act accordingly.
For owner occupiers, a reminder of the impact of leverage (it amplifies property price changes both on the up and down):
Scenarios of impact of leverage on equity, assuming an 80% LVR for owner occupier, for a recent $100 property purchase, $20 initial deposit, mortgage $80.
A) Scenario - property price rise:
1) property price rises 5% to 105, mortgage 80, equity 25, so 25% gain in equity value from 20.
2) property price rises 10% to 110, mortgage 80, equity 30, so 50% gain in equity value from 20.
3) property price rises 15% to 115, mortgage 80, equity 35, so 75% gain in equity value from 20.
4) property price rises 20% to 120, mortgage 80, equity 40, so 100% gain in equity value from 20.
5) property price rises 25% to 125, mortgage 80, equity 45, so 125% gain in equity value from 20.
6) property price rises 30% to 130, mortgage 80, equity 50, so 150% gain in equity value from 20.
7) property price rises 35% to 135, mortgage 80, equity 55, so 175% gain in equity value from 20.
8) property price rises 40% to 140, mortgage 80, equity 60, so 200% gain in equity value from 20.
9) property price rises 50% to 150, mortgage 80, equity 70, so 250% gain in equity value from 20.
10) property price rises 100% to 200, mortgage 80, equity 120, so 500% gain in equity value from 20. (i.e if property price doubles every 10 years as repeated by property market promoters)
Remember, the owner occupier must be able to hold on under ALL economic environments (including any potential significant reduction in household income).
B) Scenario - Property price falls:
1) property price falls 5% to 95, mortgage 80, equity 15, so 25% loss in equity value from 20.
2) property price falls 10% to 90, mortgage 80, equity 10, so 50% loss in equity value from 20.
3) property price falls 15% to 85, mortgage 80, equity 5, so 75% loss in equity value from 20.
4) property price falls 20% to 80, mortgage 80, equity is zero, so 100% loss in equity value from 20.
5) property price falls 25% to 75, mortgage 80, equity is NEGATIVE 5, so 125% loss in equity value from 20.
6) property price falls 30% to 70, mortgage 80, equity is NEGATIVE 10, so 150% loss in equity value from 20.
7) property price falls 35% to 65, mortgage 80, equity is NEGATIVE 15, so 175% loss in equity value from 20.
8) property price falls 40% to 60, mortgage 80, equity is NEGATIVE 20, so 200% loss in equity value from 20.
Which will the owner occupier regret most:
1) missing out on future potential gains in equity?
2) potential actual loss of their invested equity or even potential negative equity?
No, because negative equity locks you into a property for years or decades.
People who own a single property gain minimal benefit from appreciating prices unless they choose to exit the market or downsize, as they buy and sell in the same market. They do lose out if their equity disappears and they are unable to move house (or the bank forecloses on them).
Example out of Ireland
https://www.independent.ie/business/personal-finance/property-mortgages…
Wouldn't negative equity come with higher interest rates? Also, while it's likely if you keep paying the mortgage the bank should leave you alone I can imagine there would be that niggling feeling that you might get a letter one day from the bank, your number has been pulled from the hat and they now want you to stump up some extra capital or sell.
Yes that's right, carded interest rates might not go up but imagine when it's time to refinance and the bank goes "uhhhh, you're at 105% LVR" and they decide to price the added risk back into the equation. Increase principal payments or "means tested interest rates"?
Banks don't want foreclosures but if someone is in negative territory and their bank statements show them to be capable of stumping up an extra few percent on the mortgage what are the banks going to do? "Well sir, because you're deemed "high risk" we were reluctant to issue you a letter of offer/finance however due to your credit history we've made an exception. 2 year fix @ 6% p.a."
"Good thing banks test serviceability at higher interest rates then right?"
Yes, but that doesn't allow for the current scenario - significant loss of income. That's what happens in an economic downturn.
That is why the banks fall back on the house value and sale as the backup repayment plan for the mortgage with LVR's of 70% for investors and mainly 80% LVR for owner occupiers.
If unemployment remains high, then expect defaults on mortgage debt payments after the mortgage payment deferment period ends, which will lead to potential mortgagee sales.
Couldn't agree more, but sadly NZers just don't know enough as why the neoliberal F.I.RE economy has been embedded in every politicians & ruling/decision makers elite, that's why all those 'unprecedented economic measures' - socialising en masse the loss. Here's a clue for you:
https://www.scoop.co.nz/stories/HL1507/S00101/the-fire-economy-new-zeal…
https://www.youtube.com/watch?v=MGrBCtOt4Qs
I have never seen unemployment at these levels 13%, it implies carnage to the housing market as mass defaults occur, most of it via Property Investments, which will end as Ariadne did, and we will never hear another advert on the radio for Ronovatioons, Propellor property or Property Aprrentice ever again..... you will see 7% residential yields again, but not in a good way for current owners....
Yields this high will be required by those taking the risks....
Banks may well discount rental flows to 50% for income checking purposes....
I am fairly certain that if we did another couple of months of national lockdown the socio-economic dislocation would likely begin to outweigh the virus if the overarching goal is to "save lives". All measures have limits, if we can't eradicate the virus we will need to reach for Plan B.
This seems a bit understated, 'Alert Level 4 reduces output by 40% from normal'
I would argue a lot of service based industries are seeing a 90% + decrease in output, as only limited services and goods are available to purchase - and mostly via supermarkets or online
Rubbish in = Rubbish out
Farmers are still producing , its more service sector hit, although I too would see a level 4 reducing output to 25% of normal levels....
India, Indonesia, Bangladesh, Pakistan (2 billion people)cannot afford an extended lock-down, more people will be dying of hunger then virus
He stated clearly on TVone interview, 12months then this will be over - it's the time for those being subsidised to use it, as lump sum to clear their loan debt - the main beneficiary of this subsidy upon subsidy? is the neoliberalism participators.. to light up F.I.RE economy - just have to compete harder for CCP money, as OZ, Canada, UK, USA will do the same - any respective NZ leaders knew, as soon as the border open up again for CCP, the soon capital movement back here again... with it's people movement.
He used a cheap (probably chinese) knock-off of those 3m command hooks to hang his clock.. after the tremor that hit the economy his clock has fallen off the wall, hit the ground, and both hands are pointing straight down, and the battery fell out, so they aren't going anywhere for a while.
He might well be an NZME casualty. Shameless property sprinkler. I see they’re scrapping their real estate magazine and cutting 200 jobs. Sad, I worked there when it was an internationally regarded publication, before it tanked into tabloidism. Awful rag nowadays.
"Treasury didn't include scenarios whereby New Zealand remained in lockdown for even longer and the Government provided more support. One of its seven scenarios considers six months at Level 4 and six months Level 3 without additional support. Yet there isn't a corresponding scenario applying additional government support to these alert levels. "
Probably because it isn't remotely feasible for the government to finance a shuttered economy for a year.
Winner - China. Loser - Everyone else.
I'd have two comments on this.
1. Everyone has a choice whether or not to support the CCP through buying China made products or choosing an alternative.
2. Chinas economy is utterly dependent on production as domestic demand hasn't yet caught up.
So if you wish to participate in bringing China back in line do so using your wallet. Simply choose an alternative to a China made product and whatever you buy check where is made. It's not that hard and with some participation we put the genie back in the box.
the biggest manufacturer of phones does not make them in china, or get components from there not surprised they don't trust them not to steal their IP
https://www.sammobile.com/where-are-samsung-phones-made
Waymad your insight into how economies evolve rather than constructed hammers home how difficult this economy will be to restore. No overseas tourists admitted for 12 months and yet for the past 10 years Tourism has been to growth leader.
Unless this government gets tough like our Grandfather's generation of the 1930's and forces people on to a "shovel" in return for a government handout their will be no way of productively putting most of the tourism and hospitality workers back into private employment.
Neo-liberalism has caused enormous pain for the lower classes over the past 40 years, but the real insidious enabler of societal destruction has been the state which took a softly softly approach to people who made bad life decisions (or their parents for them), and found no easy way to make a living. Nearly 90 years ago when welfare born in the 1930's a state rescue involved more "pro-activity " on the part of the recipient. A school leavers hand out would have been a kick in the pants, and not a check in the post. Our pampered Society has a long way to come back from --or we go the other way with MMT, and if we do so help us because there won't be enough producers to carry the rest on their backs. USSR, Cuba, and China all tried that to stunning results.
Cuba probably deserves not to be in that list.
https://en.wikipedia.org/wiki/The_Power_of_Community:_How_Cuba_Survived…
Cuba is probably the best indication of where we will go in a curtailed world. Powerfully led, sure, but intelligently led. Forget the ideological nonsense, this is about actions.
Cuba may do admirably in completely sh..tty circumstances that they have created for themselves. I have no doubt that if other countries were forced to live under such conditions they would have also been "amazingly" resilient. Who could have been more resilient than Iranians following the total decimation in hands of the Mongols and other nomadic raiders from central Asia? People will survive. The director of the movie will be equally impressed by the resilient of locals of the north pole who live there in such harsh conditions. However, these "resilient" entities have exactly been what humanity has been moving away for a very long time in its history now, except for very few who wish to go back to live in the most sustainable way: hunter-gatherer using only sticks and stones.
No, that is the answer to the wrong question.
That question is: Why do all folk try and improve their individual positions, when their collective actions are overall detrimental? Those escape-to-the-upper-decks types are missing the point that the ship itself is sinking.
Some of seem incapable of reading the Plimsoll numbers.....
What does 'healing' even mean - really just a woolly statement of preferences of a few % of humans. The unstated assumptions that go into saying things like that are essentially nothing more than ludite 'human bad' but in the absence of intelligent life there are no value judgments to be made, just stuff floating around in space. The planet doesn't care and doesn't have feelings. Absent humans there is vast climate mangling 2x every 100k years as we enter and exit ice ages (about 20-40 so far) with sea level changing by 120m. Asteroids, supervolcanoes, mass extinctions occur every few 10's of millions of years eradicating huge numbers of species and without the intercession of intelligent life all life on this planet is doomed in a billionish years anyway.
A high percentage of tourism workers were never NZers. So presumably they can go back to where they came from.
https://www.stuff.co.nz/business/101001499/tourism-confidence-is-strong…
From what I've seen Queenstown was supported by a low paid army of foreign 20 somethings.
The construction business likewise has had such a huge flow of foreign labour coming in that we must assume as the economy slows many of these folks will have to relocate back home as there won't be work and NZ isnt a cheap place to live.
And these construction jobs aren't necessarily all at the low end of the pay scale. Engineers, tradesmen of all skills have all been flowing in since the Chinese money started to inflate the economy back in 2013 onwards.
Its gonna be a huge economic migration as the effects of this slowdown are felt.
Not 'my' insight. Just my wrapper around a lot of much more insightful and intelligent book-length thoughts, presented as an antidote to the mechanistic views which so often seem to underpin commenters' - er - Comments. Plus I attribute sources, and not willfully: everything I link is worth reading. Behavioural economics (ears on, GingerNinja?) has a lot to offer here as well. NZ has a history of maverick thinkers and doers, so to the extent to which they fly under the conventional radar, there are bound to be surprises to come in the aggregates......whatever's being Counted.
Neoliberal F.I.RE economy works by entering to the life of every politicians, bankers, central bank, ruling elites.. when the time get tough? - borrow more, loan more, subsidy more,.. keeps personal wealth up!
https://www.scoop.co.nz/stories/HL1507/S00101/the-fire-economy-new-zeal…
https://www.youtube.com/watch?v=MGrBCtOt4Qs
With the projected levels of unemployment to be reached, it'll be a fool who suggests maintaining our current levels of immigration. In theory it should be a fruitful environment for NZ First (if anyone still trusts them on Immigration) but National also need to sharpen up their act and ditch their image of being controlled by the Chinese lobby.
Don't forget we are also shortly to experience a reversal of the Kiwi diaspora.
No mention of what any of that means for the wider economy like house prices.
I hope the Govt.s response is going to be more than just throwing money gasoline on the economic firestorm.
I think that the biggest problem is picking who is the real heroes given the different types of sacrifices made.
Is it the essential worker at the COVID frontline, but getting paid never the less, or is the shop owner who closed down his successful business, that will never get to open again, and that was secured over his house?
And the banks get to pick.
Looking more at the small commercial landlords. Mum and dad investors have gone into commercial in recent years.
1) https://www.landlords.co.nz/article/976516471/syndicates-take-big-share…
2) https://www.nzherald.co.nz/property/news/article.cfm?c_id=8&objectid=12…
Every Artificial Intelligent voices can be heard from vested interest when $ to be secured: alcohol, hospitality, gambling, tourism, tobacco, vapeing, sugar industries etc. - 'When profit to be made? then it's not a problem, it's business.
What is the NeoLilberal addiction? 'money' from F.I.RE economy - therefore all these measures to en masse socialising the loss, but for how long? This bug hit hard in two fronts: (1)people movement (2)time - both means, Capital funds musical chair.
Jacinda looks very tired in the picture above and has clearly forgotten to take her Prozac. The reality of the situation is kicking in and seriously you wouldn't want to be in government right now. So we have 4 years of economic pain coming up. If I was National I would be wanting to sit out the next term in opposition and leave the mess to Labour to attempt the cleanup and all the stress and blame that is going to go with it.
That's because she knows the man beside her, GR, has nothing in his tool box to stop the pain about to hit, once the wage subsidy $ dry up. Letting people borrow cheap money to help them when they have no ability to earn (as no jobs) or business has gone bust ain't going to help with their forecasts.
I think it is rather more about the facts learned in the last wee while than just opinions. My neighbour works in the medical world and he is of the same view. NZ really missed a trick here as we are lucky in terms of remoteness and small population. Close the border and send anyone returning home into quarantine somewhere. It would be disruptive for a few thousand only and no need to tank the economy. Tourism aside of course. The mail is still very much out in terms of exactly the mortality rate, but in our little microcosm, all fatalities have been of very elderly people with pre-existing conditions. Sounds grim, but how many of these will have died anyway?
Yes, we all die anyway. And life at any age does not come with a guarantee of absolute health and well being. After 70 years most expect the risk of disease leading to death to already be high. It is always a certainty for each of us, so really how tragic is it at 80 or 90 years? Simply expected. " Stay home. Save lives." Does not apply when the elderly are leaving through the exit anyway.
German data suggests CFR=0.37% but that's with 30 ICU beds / 100K of population. Total lockdown may be counterproductive for attaining heard immunity. I dont know why the anyone is talking about "stamping it out" because that's just never going to happen. Actually it's quite possible that there'll never be a cure or vaccine. One thing seems to be clear, that a total lockdown is inappropriate.
I agree, if we let this continue then we will tank the economy which affects everyone, and when unemployment gets too high then SME's who are the engine of job growth die and crime + poverty go up
We need workers at work to basically support the country and to provide tighter controls around the highest risk areas, being mainly border control and protecting elderly people...
The mortality rate is very low for working age people and the main risk is from them spreading the disease
Examination of a German town has revealed lots of un-noticed infections showing only about 0.4% of even these infected die, it might be even lower as perhaps some immune systems shrug off infection immediately. That is low enough that herd immunity becomes sensible way out and can be done in a few months without overwhelming hospitals by infecting lowest risk section of population up to about age 50. With good treatment processes (and maybe drug therapies being tested now) probably only 10k dead. Worth it given alternative of terrible economic damage.
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