As is often the case, probably the big 'news' in the release of the latest monthly mortgage figures from the Reserve Bank on Wednesday was somewhat lurking in the shadows.
It was the revelation that high loan-to-value-ratio mortgages to investors more than doubled between June and July.
Remember, for the purpose of investors, the current definition of a 'high' LVR loan is one where they borrow more than 70% of the value of the house.
We are talking about figures coming off a very low base. In June the amount of high LVR mortgages advanced to investors was $204 million. In July it was $446 million.
So, coming off a low base, but coming off a low base in a trampoline-like manner nevertheless.
As of May 1 the RBNZ removed any high LVR lending restrictions on the banks for at least 12 months.
I went on record as disagreeing with the decision.
I haven't changed my mind.
What are the figures saying?
And I think the RBNZ should take a close look (and they will, because they do) at the latest mortgage figures and what these might be telling them.
There's a lot of moving parts to this story.
Much depends whether the RBNZ believes that the strong uplift in activity post-lockdown is merely a result of pent up demand and therefore will blow itself out.
Certainly that's what most economists are currently thinking - although it is very noticeable that virtually all the major bank economists are pulling back from the fairly dire predictions made earlier this year of what would happen to house prices later this year and into next year.
The current thinking is that generally the current upsurge in activity we are seeing will tend to dissipate and prices may well then drift more from early next year.
And I don't necessarily disagree with that. That could be what happens. It might not be though. And LVR limits - or lack thereof could be a big part.
I think there's clear warning signs in the data we are seeing at the moment. In the housing market, heat generates more heat. It becomes a frenzy.
It's getting warmer...
As I just look around me at the moment, I suspect we are seeing fairly subdued levels of activity in Auckland (not least because we are all half-locked-up again), but things are getting pretty warm elsewhere in the country. And I don't think that's necessarily a short run thing.
The irony was not lost on me on Wednesday that on the one hand I was penning an article about the mortgage deferral scheme being extended out to 12 months, while later in the day I was relating how New Zealanders climbed into (a record for a July) $6.6 billion of mortgages last month.
It may well be that in the housing market as in elsewhere in the economy we are seeing the distinct emergence of 'two speeds'.
When you think about it, that is always going to be likely when faced with circumstances like we have at the moment.
We've got some parts of the economy really struggling. We still don't know quite how bad the job losses will get. How well we can control the virus or otherwise will continue to be a big part of that.
But on the other hand, we can look at huge amounts of stimulus being poured in. We can observe interest rates falling ever lower. Some people will be doing WELL.
The role of low interest rates
On that last point - the low interest rates - it's a double-edged thing.
It means investors get absolutely rubbish returns on bank deposits. BUT those same people can (bank permitting) borrow money at super cheap rates. Remember also that the RBNZ is likely to take interest rates even lower, based on its current thinking. Borrow, borrow, borrow. And do not worry.
So, if Mr Bank is in a good mood and you are able to borrow a shedload of money, then why not? And what would you do with the money? Well, buy a house of course. If you are an investor, thanks to the RBNZ dropping the LVR restrictions, you can once again (bank permitting) borrow up to a high LVR level.
Surely this is already happening. And it will happen more.
The end product of super low interest rates is increased competition for the purchase of assets - with said assets therefore squeezed and forced up in value. Asset bubbles if you like. (And please DON'T object to the use of the term 'bubble'. Remember because something is a bubble it does not mean it will immediately burst. Bubbles can keep growing for a long time - particularly if interest rates are non-existent).
The haves and have nots
What we may well see then is that those who have money will go out and get an investment property. This could be the opportunity for 'the haves' to spend up large now and do a bit of serious land-banking. Gobble up the great opportunities and leave others with the crumbs, for now and into the future.
For people who would like to get into the housing market in the future - that could be a very bad thing.
As the current data from the RBNZ shows, first home buyers are right in there at the moment, getting a good share of the mortgage market. At the moment.
Also, as people keep pointing out, the term 'first home buyer' doesn't necessarily imply fresh faced early 20s people. There's a lot of seasoned folk in their 30s (some who have returned recently from overseas) earning good incomes who can afford to mix it in the housing market in terms of prices.
But as the RBNZ's most recent data on debt-to-income levels of mortgage holders shows, people are getting more stretched to buy houses.
That's only going to increase, if there are increasing numbers of investors out there able now to more easily access borrowed money and to bid up the prices.
The FHBs are not seemingly being squeezed inordinately at the moment - but they might be in future. And they could get locked out. Or worse they might over-stretch and land themselves in trouble.
Decision time
The RBNZ has got some thinking to do, I believe.
Okay, if it thinks what we are seeing now is a short run blip that will fade out, leave things as they are. And I suspect that will be the approach.
Personally I think there's signs that we are going to see yield-hungry investors start to really dictate the terms again - and that could lead to big distortions in the market and future problems.
I think the choice is pretty clear on this. The path of least regret would be to bring back - now - some form of LVR limit on investors. Hey, the 30% deposit rule would be fine, I think.
Leave things to just drift, however, and the market might just get away on us here. That's what housing markets tend to do. They've done so in the past.
79 Comments
The complete removal of LVR was a head-scratcher for me. If the rationale was purely to deal with those who would slip into high LVR territory as the result of mortgage 'holidays', surely dealing with this specific circumstance as an exception would have been a better idea than a blanket removal?
The complete removal of LVR was a head-scratcher for me.
I thought it was completely logical. Leaving LVR intact would have badly affected the banks' business. They need to keep churning out debt an ever-increasing rate. Also, the ruling elite (govt and central bankers) know that if the debt train stops, all kinds of nasty consequences can arise.
When RBNZ removed the LVR I thought it was all about bank balance sheets and assumed that in the current economic climate, there would be no chance of the banks increasing lending on less than 20% deposit anyway.
HOW WRONG WAS I??? Banks have massively increased their high DTI lending.
I asked a 2nd tier mortgage broker this week how banks were behaving (and whether they were tightening criteria or loan amounts) and he said no tightening per se but they were being more "picky". If you are not creditworthy, forget it, but if you pass the scratch and sniff test atm, fill yer boots.
When RBNZ removed the LVR I thought it was all about bank balance sheets and assumed that in the current economic climate, there would be no chance of the banks increasing lending on less than 20% deposit anyway.
OK, think about it then. They know that they have to keep the debt train running as I mentioned above. They're terrified of the consequences if it doesn't. They don't explicitly address than in public as not to scare the sheeple. Watch what they do, not what they say (unless you can decode it accordingly).
I was agreeing that balance sheets were important, hence also why I assumed they wouldn't want to engage in higher risk lending in the current climate. Considering that the world is expecting a recession worse than the GFC, it's fair to assume banks would want chunkier LVR's to protect themselves. Usually banks will preserve themselves and reduce risk exposure in these circumstances. So why aren't they?
*have they have assessed the chance of defaults or 10%+ drops in prices as negligible?
*have they have been given some assurances that the above scenario will be avoided?
Makes you wonder, will the Aussie banks be to NZ and its government as the European Central Bank was to Ireland (or the troika to Cypress)? Threats leveled, and demands made that the government take on the consequences of unsustainable debts held by the Aussie banks?
One hopes for a government more Iceland than Ireland, in such a case.
What you're just described is exactly how monetary policy causes inequality.
Those closest to the cheap money tree get all the benefits as lower interest costs get capitalised into asset prices, while those who don't own assets, or who don't qualify for the cheapest leverage - get left behind.
Erm unsure what distinction you're trying to make here Believer1980. Although there are other factors that certainly cause inequality, monetary policy in it's current form directly causes inequality because it has different impacts on people's wealth as a function of how many assets they own and their current debt levels.
Making people feel wealthier because their asset prices increased and making them feel like they have more disposable income because servicing costs decreased is precisely why lower interest rates can be used to stimulate economic activity. And since we don't all own a house in Herne Bay these effects will be felt to a different degree to different people. Inequality isn't the goal but it's a side-effect and it's an acceptable one for the central bank.
Central banks don't care about inequality (except in so far as it because a social stability and therefore economic & currency stability issue). All they care about is financial stability and inflation (and now employment under Labour). That's their job.
I think RBNZ has understood that Banks themselves are very scared of lending to all and sundry in this Covid circumstances and that Banks have strengthened their internal processes to ensure that adequate LVR is maintained on individual loans, taking into account each borrower's profile, income, servicing ability, etc.
Earlier in the boom times, the Banks were kind of reckless and did not bother about all these factors.
Now things have changed. So RBNZ has exited the guideline setting regime. Not a bad move, in my view.
Interest cost outside Auckland now on 2 year loan about 30% lower than year ago and prices up about 15%. So cheaper. However, sales outside Auckland are 25% lower in 2020 than they were in 2019 which Bindi of course did not mention this morning.
Interest rate cuts are not sufficient to make up for price rises and hence rise in deposit. So, price rises above wage rises cut sales. Big surprise but RE industry of course only wants to trumpet prices
Ironically ignoring fact that fewer sales year on year is slowly cutting throat of many Agents
There is a lot of “chatter” regarding J Powells big announcement tomorrow. Many are suggesting that it will include a new benefits payment system via their own cryptocurency which would bypass the banks. It has been suggested that this would put money in the hands of beneficiaries which they would have to spend in the economy. If they don’t spend it they lose it.
A reasonable idea Albert but if the investors are professionals, and a lot may be, then the loan becomes a "business loan" and therefore the unencumbered asset value (total collateral if you like) makes it very easy to convince the bank it's a low risk loan. Excluding the equity in an owner occupied house might slow them down but once an investor has 1 or 2 near freehold rentals it just gets easier to purchase subsequent ones. Pretty hard to stop.
Not having any LVR restrictions seriously puts our banking system at high risk of customers defaulting on their mortgage payments. At the very least we should have LVR restrictions for Landlords who put pressure on First Time Buyers buy buying up the more affordable stock. Other more responsible countries like the UK have "Buy To Let" mortgages which have LVR restrictions that help even the economic playing field between FTB's and Property Investors.
The banking system is not at risk. You and I will have our dollars inflated away to nothing, to bail out the banks, before they are "at risk".
The laws of physics do not apply to banks. They can make money from nothing with the flick of a pen then lend it out at interest. If somehow they still manage to make a loss, the central bank flicks its pen and bails them out.
Joe Briscoes wears all the risk and cost in this tidy little arrangement.
Really it just a huge scam. It's crazy our economic system is setup and enables banks to do this.
1) Create imaginary 'credit' and lend as freely as possible.
2) Charge interest on imaginary credit.
3) Use interest profit to buy items produced by the actual productive economy.
They're the ultimate leech. It's a shame they're slowly bleeding society dry though.
You guys keep repeating this "magic money creation" thing but i'm not sure its as straight forward as that. From my assessment this is how debt and money works;
1. as far as we know, debt has always existed. Debt is simply a promise to give someone something in the future. "Can you give me a flint tool today, so that I can use it to go hunting Caveman Bob"? "Sure, Caveman Dave, what's it worth"? "10% of the meat I hunt Caveman Bob"? etc. There is a time lag between the product that is being used vs the product that will be given in exchange. Every month a person who is paid in arrears is essentially giving their employer a line of credit, they are providing the service and not receiving remuneration for it, until a later date. This is not a problem provided that Caveman Dave is good for the meat or your employer is solvent at the end of the month to pay you.
2. banks have been given permission to pull money forward from the future to give it you in the present. When you repay the loan eventually, the money is retired. Banks are trusted by RBNZ and the government to make a professional assessment of the likelihood of someone being able to repay the amount the borrow plus the interest. But it wasn't new magic money, it's the money they assessed that you would be able earn, pulled forward in time. Debt and fiat money is all about trust. Hence why they are called promissory notes.
3. money is created by central banks/governments to facilitate the exchange of goods and services in the economy, they are just tokens of value, they try and match the supply of money tokens to what they think will be required based on assessments of productivity and inflation. This has been wrong many times.
4. debt only becomes a really big problem when there is more money promised in the future, than can actually be made over the time frame agreed. This happens when productive growth drops below what was expected or when something destroys valuable things that were assumed to exist in the future.
5. if we are screwed its because gov/central banks and retail banks made a poor assessment of future wealth and productivity, failed to set money aside for stuff that gets destroyed(black swans) or messed up the money supply. Deflating currency is the magic trick if anything, because it takes a little while before people realise that their goods and services no longer match the money tokens in the system.
6. Central Banks and governments like to think that they are puppet masters pulling strings and that if they give us the right signal, we will get really jazzed about the future, invest, become more productive, create some inflation and get ahead of the debt. But the current amount of debt in the world is almost certainly massively higher than we can repay so the options will be default, debasement or maybe some debt jubilee.
Indeed but historically, this has more or less always been similar and how we conducted exchange of goods and services. If you look at early cuneiform tablets, the vast majority of them are just records of who owes what. Endless piles of clay tablets stating "X agrees to pay Y, for 3 bushels of wheat by the end of the harvest, in exchange for 1 jar of oil today" etc. 5000 years ago. Obviously the exchange rate between the goods changed dependent on supply and demand. Some of the agreements would have been settled, some of them wouldn't. Some would have resulted in debt bondage.
A debt/trust based system of exchange was inevitable as soon as we became a social species who specialised and engaged in division of labour. The evidence is there. If you have a paleolithic person, spending hours in the dark, in the back of a cave creating art, it follows that this person was not starving to death, but equally, would not have been able to spend the required hours hunting and gathering, so *someone* was providing food, water and clothing for them. Someone, or someones, lets call it the tribe, agreed to do extra hunting and gathering to free up this person to paint, because for whatever reason they valued the painting enough to do that. Same goes for flint knapping, which took hours and hours or work, and would have required specialists. So this strongly indicates that there were relationships of trust that allowed for people to consume goods and services with delayed "payment". This is debt. Usury is when there is interest on that debt.
Anything can function as money, provided everyone has faith/trust that it is worth what we as a society agrees it is worth. Fiat money is based on the faith we have in our state and governance.
The problem with money is always debasement or over/under supply. Coin money suffered the same issues of debasement and over/under supply as fiat money. The Roman's debased their coins and screwed their economy plenty of times. They had to re-mint at higher values to try and reestablish faith in their currency ( usually after wars or profligate Emperors, not to mention epic trade deficits in the late empire). These things happened in cycles, much like our own business cycles. The Spanish caused massive inflation across Europe in the 16th century because of their transport of huge quantities of gold and silver to Europe from South America. The sudden increase lessened the value of the gold and silver, because they flooded the market and no debasement required! They then became a net importer because they constantly bought from other countries with all their gold and silver causing a huge trade deficit, everything eventually became more and more expensive (more money chasing the same amount of goods) until they ran out of precious metals to pay for all the inflated goods! People keep talking about metals and metal pegged currency as if it is some kind of panacea but it isn't. Most of Europe had to keep coming off the gold standard throughout he 20th century because it wasn't a system that could adjust quickly enough to global trade and total war but there were plenty of previous centuries when it was a problem too.
Every single store of value has proven problematic throughout history because the store is predominantly a feature of human psychology. There has never been a time without debt and debt too is always imperfect because of human psychology.
Even the first store of value that was pegged to something that everyone wanted (the original Lydian coin which was pegged to 220 grains of wheat), would still have been imperfect because if there was an under or over supply of wheat, the item nominated as the pegged store of value couldn't adjust to the supply/demand issue quickly enough. If your population is starving because of insufficient wheat, you can throw all the pegged coins around you want but it won't fix the supply/demand problem, which is why we eventually arrived at floating fiat currencies. Because the currency can move up and down in value according to human psychology and supply/demand. The problem is that they can also be debased and the supply/demand manipulated via interest rates.
The real problem here is human psychology and our terrible ability to assess and prepare for the future. Banks are hoped to be the professional who are best at assessing future risk and earnings, along with their chums the credit reference agencies. Alas banks and credit agencies are also human beings and prone to the same greed and weaknesses as the rest of us. So then we have central banks who are supposed to keep an eye on that. But it doesn't matter who is at top of the hierarchy (Roman Emperor, Central Banker or Communist President) because they will always carry the weakness of human psychology and flawed ability to assess risk and overestimate their ability to address the problem.
This debt/money/fear/greed/optimism cycle has been going on for 5000 years. The psychology of a debt bubble probably hasn't looked much different over all that time either.
I agree with most of what you wrote but still have issue with the credit creation and subsequent interest charged.
There's also quite a few assumptions that banks make about the future which are currently being challenged. I may try to write but am writing for a cell (which makes a more nuanced and longer reply challenging).
There has been a lot of debate about where bank loans come from and how they are generated. Some of the notable theories are;
1. financial intermediation theory of banking
2. fractional reserve system
3. credit creation theory
Banking has changed and evolved over time but studies done by Werner strongly suggest that the current banking system is closest to the credit creation theory. He and others have done scientific research on what happens when a loan is created and show that it is quite simple (nothing as complicated as theory 1 or 2). When you are granted a loan, credit just appears in the system for you to spend. A liability on your bank account and an asset on the bank books. Here's a link to one of Werner's papers. https://www.sciencedirect.com/science/article/pii/S1057521914001070.
Central bank regulations vary country to country and there is a culture of risk/reward within the banking/finance system so not every country is exactly the same, although they are highly correlated as the GFC proved (much to the chagrin of the quants at LTCM). I think we can all agree, that the shadow banking system is without doubt a far bigger promise on future wealth than can be earned. So if anything did happen where all those promises came due, there would be the mother of all liquidity crisis.
Back to credit creation theory though, when you repay the loan/mortgage, the money is retired, the account and liability are settled. The interest you paid remains (as bank profits), however both the principal and the interest were still ultimately money earned by you in the actual economy, it was just spread out over a number of years. They were hours and years you worked. The principal paid is retained by the borrower anchored to the value of whatever it is you spent the mortgage on. The value of that can go up and down, but is not realised as currency until/unless you liquidate that asset.
The issue of credit creation theory and future earnings is quite well discussed here; https://voxeu.org/article/banks-do-not-create-money-out-thin-air
"a professional assessment of the likelihood of someone being able to repay the amount the borrow plus the interest. But it wasn't new magic money, it's the money they assessed that you would be able earn, pulled forward in time"
LOL
In other words, in your own words, it money pulled from thin air
And banks are ONLY interested in serviceability of loans (repayment system wide is the last thing they want) ... they know the game
There are many other steps including the introduction of CGT on residential property (not main home) that should be added to the list of practical options to reduce the interest in residential property as an investment asset class.
Others include penal rates charges for empty property, higher rates for second (holiday) homes etc.
The continued (albeit very slow) increased healthily homes standard is another.
If the end game is to make property more affordable for folks there are many practical measures we can adopt and agreed LTV limits for investors should never have been removed.
RBNZ would be doing themselves a huge favour in redressing the damage to their brand done to young people when they introduced LVRs to all buyers regardless of how many properties someone owned in 2013 by reintroducing LVR's on investment properties. Why they thought that was sensible at the time is beyond me. I guess they're expecting banks to self regulate, again, which has always worked so well in the past on both sides of the ditch.
Great article David and I agree with your view of reintroducing LVR's. Housing in this country is beyond a joke and I hope it gets more air time as a big election issue. That would be a double edged sword however as those that stand to benefit from the status quo are motivated to vote for the two largest parties who don't intend to change anything.
Therefore, perhaps it doesn't matter who wins the election as the feasting on property will continue unabated.
In addition to the LVR suggestion, the Big Brains at RBNZ could also consider tweaking the RWA ratios on investor-residential property. Heck, they could do it for Residential, period. It would start to address the present perverse incentive for banks to expand that least-risk lending to Buzz Lightyear territory.
But that would be rather Radical...so I won't be holding my breath for any moves on That or similar paths.
It's a bad look for sure. Too much of a repeated pattern to not be related. Gonna be some really unhappy NZX members, and Spark will be feeling a bit nervous I think
Once - bugger!, twice - HMMM!, thrice - WTAF!!!
Must say it's interesting these "hiccups" have happened since Sharesies venture into the US market was announced recently - coincidence??
It's already proven banks can't/won't self regulate, witness the "swaps" scandal a few years back. It'll be interesting to see if the Govt has the cahones to preempt the issue, but given they seem more reactive than transformational (unless you call turning a relatively simple issue into a trainwreck transformational) I can't see much changing.
This from Spark under managed DDOS protection:
As it’s managed at the Global Gateway that connects New Zealand to the world, malicious traffic is blocked at the point it enters the country – keeping it well away from your business and also eliminating any of your bandwidth usage.
These days, blocking a single IP address is not enough to stop attacks that come flooding in from many different sources to overwhelm your bandwidth or saturate your network or apps.
That is one vacuous, insipid corperatespeak statement from Spark. Right about now NZX and no doubt others will be roasting them. Allowing three shutdowns of a country's stock market is a big deal that requires some serious mitigation and repair efforts. Interesting there has been no media release from Spark yet
Regardless of what LVR is set there is still going to be an increase in house prices its the same old story being played out again ever since building of state houses was canned in the early 70s and the devaluing dollar since.
Auckland will always have a housing shortage because in simple terms theres more people coming into the city each year than houses being built ( Supply & Demand ) its nothing new just look back in history. People just need to prepare themselves for it instead of always complaining. If 1st home buyers purchased houses in Auckland back in 2009 I think they will all be smiling now instead of complaining about it now.
The Government has abdicated its responsibility to the people who elected it. Now, with rising unemployment and underemployment, is the time for it to override the Reserve Bank's independence, mandate both loan-to-value and debt-to-income ratios, and take whatever steps are necessary to eliminate housing price increases with the same vigour with which it seeks to eliminate outbreaks of coronavirus infection. The people of New Zealand do not need house price inflation: they need jobs and food on the table. More bread, less circus.
The Welfare Expert Advisory Group confirms that public housing receives a significantly higher level of support than those in the private sector. The report says that “a family could receive between $60 and $100 more per week of Income Related Rent Subsidy (provided to state and community housing provider tenants) compared with Accommodation Supplement (provided to tenants in the private sector).
The complete removal of LVR prudential limits makes perfectly sense: it is just one of the many irresponsible, one-sided and shortsighted steps by an out-of-control RBNZ, an institution which is completely ignoring the part of its mandate related to the preservation of a sound and stable financial system for the sake of desperately keeping the housing Ponzi inflated as long as possible, and in doing so fighting the forces of the markets, and ignoring the experiences of other central banks and simple common sense.
Housing seems far more expensive now that before the change in Government. So is there still a housing crisis, because I haven't seen it called that recently?
I would like to see a loan vs income ratio applied, so people don't borrow more than say 5-6 times their annual income. The current ratio of house value to peoples incomes is way too high in many areas, and IMO could become aa problem if interest rates go up by much in coming years.
Of course this argument assumes that investors bid prices up.
Untrue, of course.
Investors aim is to buy at the lowest price possible., and when the price gets above that they drop out.
Its the owner-occupiers who fall in love with the white picket fence and the roses around the door that bid emotionally, and who drive prices up to unrealistic levels.
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