A new look at mortgage deleveraging

Households have paid back $21 bln more than they borrowed for housing in the past four years

10th Mar 12, 11:59am by David Chaston

The New Zealand mortgage market has shown consistent signs of deleveraging since 2008.

Deleveraging happens when borrowers pay back their loans faster than they take out new ones.

We have been monitoring the deleveraging effects in the New Zealand credit markets by following the monthly release of data by the Reserve Bank.

Our chart series for rural lending, business lending, consumer lending, and lending for housing have all shown sharp slowdowns. In fact, all bar housing have shown declines - clear signs of deleveraging.

A bank's loan book grows when more new (or extended) loans are added than paid off.

Paying off loans can take the form of making regular principal repayments, lump sum paydowns, or outright settlement of the loan balance. That loan book grows by adding new loans, or topping up existing facilities. It also grows when the interest due is charged to the outstanding loan balance.

Assuming the vast majority of borrowers are current in their payments (and they are), each payment will be for more than the interest charged.

But one additional feature the RBNZ data reveals for housing loans is the interest rate for each the terms, variable or fixed.

This allows us the opportunity to calculate and exclude the current interest component from the loan balance.*

This then reveals the true extent of how households have deleveraged since 2007. In the four years since January 2008, New Zealand households have paid back banks $21.7 billion more than they have borrowed. (It is only the interest charged that keeps these mortgage loan books from shrinking.)

The cumulative effect of paying back more than is being borrowed is mounting up fast, and is one reason why banks are awash in cash and are very eager to lend. Deposits are growing much faster than lending, and if it carries on like this bank earnings will come under sustained pressure.

* True, there may be some interest-only loans, and a handful of borrowers who are paying down less that the interest being charged to their loan, but these elements will be tiny and immaterial to our analysis.

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17 Comments

by Wolly | 10th Mar 12, 1:34pm 1331339648

This is to be encouraged.....a bit of real good news in the midst of the fluff...maybe Kiwi are starting to learn.

"if it carries on like this bank earnings will come under sustained pressure"...let's hope it does carry on....however I suspect there will be a jolly good old bubble blowing effort by the powers that own the economy...they will not stand by and see their fat profits shrivel.

by mich | 10th Mar 12, 1:56pm 1331340989

Good stuff! Thank you.

"banks are awash in cash and are very eager to lend". Of course they are \sarc\. Time to INcrease the reserve ratio, no? Savers are still being robbed; the price of (creating) money (against non productive assets) is still to low.

by Hamish | 10th Mar 12, 7:10pm 1331359857

Hi Bernard, David, anyone else on the interest.co team. Next time one of our politicians bangs on about how New Zealand needs more foreign investment/capital as a justification for selling off more of New Zealand to overseas investors, maybe you could put this picture in front of them, i.e. 'banks awash with cash' here, and ask them why overseas capital is more desirable than a steadily building pile of N.Z. cash right here?

by steven | 11th Mar 12, 6:53pm 1331445190

Good Q, I suspect its down to margins....retail is a far higher margin than Govn bonds.

That begs the Q why dont the NZ depositors buy such bonds for the good of NZ?

;]

regards

by skudiv | 11th Mar 12, 4:02pm 1331434954

Are you talking about real value, or nominal value? I understand how you calculate the mortgage deleveraging, but I assumed paying back more then you borrow would actually have a negative impact on total housing credit. Or are you saying that the consistent growth in housing credit is comming from people charging interest payments to their loan? It looks like housing credit has been only growing.

http://www.interest.co.nz/charts/credit/housing-credit

Business loans have deleveraged, and are now (re?)leveraging.

http://www.interest.co.nz/charts/credit/business-credit

by David Chaston | 11th Mar 12, 4:50pm 1331437854

Housing credit has only been growing because of the interest charged to these mortgages. That currently amounts to about $880 mln per month.

The chart in this story removes that current interest element to reveal the net principal component.

(When interest rates were higher a few years ago, the monthly interest being charged to all banks mortgage books was consistently over $1 bln per month and reached its peak at $1.139 bln in October 2008. That means the current low interest rates are saving households about $260 mln per month or saving some 22% of what it was in late 2008. In 2008, banks charged mortgage borrowers $13.1 bln. In 2011 banks charged mortgage borrowers $10.6 bln. )

by Wolly | 11th Mar 12, 5:01pm 1331438512

The 30% decline in cash flow must explain why the banking bosses went without fat bonuses since 08...not.

You have to agree David, the banks sure have themselves a cash cow with little risk....and protection from govt and RBNZ...what more could a banking boss want!

by steven | 11th Mar 12, 6:50pm 1331445040

Im not sure the risk is that small...Im praying Bollard's living wills gets in before it goes pear shaped....

Otherwise at the point it blows the banks are insolvent and the bank bosses are jobless (I hope) and then of course you and I foot the bill.

regards

by Money Man | 11th Mar 12, 5:28pm 1331440096

I think you are only looking at one side of picture here.

While the banks charged the interest as stated most (not all) was returned to NZ savers as interest payments, many of which comment on this site about the lower interest they are recieving on their savings / deposits.

The banks only held a margin (albeit creeping up)

by steven | 11th Mar 12, 6:47pm 1331444843

So, sorry to re-iterate there is no growth overall in NZ in new mortages or the capital sums? Can we break this up by region?

Also not sure if it matters but any inflation adjustment?

The banks are awash wih cash and they are willing to lend at crazy LVRs....so why dont they pay back overseas debt?

Suggests to me that ppl are behaving more reasonsibly than banks and the likes of SK etc would have us believe, thats good in my book.

regards

by steven | 11th Mar 12, 7:45pm 1331448322

Do we have anything similar for CCs?

and HP?

regards

by skudiv | 11th Mar 12, 9:45pm 1331455525

Cheers

by Roger Witherspoon | 12th Mar 12, 10:26am 1331501209

Excellent David.

by SimonP | 12th Mar 12, 11:01am 1331503289

Great article with some good news. What I would like to know is how much of that debt is backed by property (probably most of it), the implied LVR, and what would it be if property prices dropped by 30% (to pick a number at random :-). Somebody commented on another thread that our currency is backed by property, what would happen if land was not as valuable as we thought it was?

by scarfie | 12th Mar 12, 1:30pm 1331512257

http://www.rbnz.govt.nz/keygraphs/Fig4.html

http://www.rbnz.govt.nz/keygraphs/Fig5.html

M0 to M3 are available on interest.co.

Look at the E series for total overseas liabilities which I worked out last year to be just over M3, of which 3/4 was towards housing and a further 8% personal debt. So about a third of the total value of our total housing value is indebted.

by KH | 12th Mar 12, 11:28am 1331504932

The bank margins are not the interesting story here. It's about folks that's interesting.

What is interesting is that the mums and dads have changed viewpoint and decided not to work on debt anymore. And as the cumulative outcome mounts over the next few years the current trickle will become a torrent. Paying interest will not be the biggest expense in your lifetime.

Thats not the New Zealand we have known.

I would like to see some stories about how that would be.

by KH | 12th Mar 12, 11:41am 1331505660

How would New Zealand look in 20 years if the Central and local Government, soft funding touches all, stopped borrowing like there was no tomorrow. Just like the mums and dads have. Could be good.