Journalists, Bernard Hickey and Jenée Tibshraeny, discussed the news of the week on a podcast posted on Bernard's blog, The Kākā.
They discussed the surprisingly strong June quarter inflation figures. Bernard argued the temporary inflationary pressures we are seeing due to COVID-19 will eventually fade, so there's a risk the Reserve Bank (RBNZ) might raise interest rates too soon.
Bernard is firmly of the view goods and services will in time be able to be transported around the world with fewer hiccups, making it cheaper to trade again. There’s also still room for globalisation, digitalisation and "appification" to do more to structurally reduce the cost of goods and services.
Jenée presented the argument made by ANZ chief economist Sharon Zollner and Tripling T Consulting managing director Sean Keane, that the first interest rate hike in seven years will have a particularly large cooling effect, as 80% of mortgage debt is due to be re-fixed within the next year, and higher interest rates will affect an enlarged pool of debt.
She questioned whether the RBNZ moving to tighten monetary policy would disproportionally knock consumer and investor confidence - potentially irrationally, or whether it would have little effect because people believe the RBNZ and Government will ultimately enact policies that protect wealth. She believed the view the property market is too big to fail could create a moral hazard.
Bernard and Jenée talked about how the RBNZ is ahead of its counterparts around the world in transitioning from loose to tight monetary policy. Bernard worried about this.
They discussed the latest Real Estate Institute of New Zealand figures showing house prices are still increasing, but at a slowing rate.
Jenée believed it was too soon to say what impact the removal of interest deductibility on investment property and extension of the bright line test were having on house prices, as the tax changes were coinciding with the reintroduction of loan-to-value ratio restrictions, a typically slower winter season and rising interest rates. Housing supply is also ramping up, although the cost of building new houses rose a whopping 7.4% in the year to June. There are a number of moving parts.
Finally, Bernard and Jenée discussed the $2.5 billion carrot the Government is using to try to get councils on board its proposal to amalgamate the management and ownership of the country's water assets in four new entities.
They talked about the pros, cons and politics of this.
They noted how on the one hand it could be good to depoliticise costly investment in, and maintenance of, water infrastructure. But on the other hand, they recognised the legitimate fears councils have that amalgamation could results in a loss of jobs and localised knowledge and control.
You can listen to the recording here.
27 Comments
I've heard Hickey make this claim a couple of times now, that households are only spending 6% of disposable income on interest + principle payments. I realise that this figure comes from the RBNZ but there must be something I'm not quite understanding here. That seems exceptionally low.
From David Hargreaves article some context around the 6% figure do your math from these numbers for FHB
https://www.interest.co.nz/opinion/111334/david-hargreaves-has-some-tim…
"In May, the latest month available, first home buyers in this country borrowed $1.757 billion in mortgages. This was distributed among 3205 mortgages, giving an average size of $548,000. Okay, so assuming a one-year fixed rate of circa 2.2% for a 30-year mortgage our FHB would be paying $2081 a month.
Last time I looked, RBNZ housing interest costs (not principal) were deducted before determining household disposable income so it seems odd. However I also suspect that he's using the gross RBNZ figures that includes the approx 33% of NZ households that don't have mortgages as a base which will understate the debt for those that do.
And don't forget, this is measuring the load on the economy overall, not the load on a recent FHB. The RBNZ number is the total mortgage servicing cost of everyone (data from the banks), divided by the total disposable incomes of everyone (data from StatsNZ via the IRD). Readers are wrong to think this is a measure related to a typical house purchaser, because it isn't. Most households don't have mortgages (some are renters, more than half have paid off their home loans). The RBNZ tracks this for overall national economic Financial Stability reasons.
Yes David, not the typical recent house purchaser but probably the typical home owner based on the proportion of NZers that have freehold houses or very high equity. These figures are still a good indication of the overall ability of the housing market to withstand interest rate rises.
In defence of readers, and given your clarification above, it's a bit misleading of Hickey to claim in the interview that "homeowners, on average, are paying 6% of their disposable income in interest and capital costs", especially in the context of rising interest rates.
RBNZ claimed around two-thirds of households have no mortgage debt, but nearly 40 percent of new mortgage loans are to borrowers with DTI ratios above five, in the May 2019 FSR - page 7 (13 of 48) PDF. Household debt as a % of disposable income looked like this.
It's kind of a rubbish claim anyway? Ok so renters don't have mortgage debt, but most of them with be living in a house that is mortgaged, so their rent will be going to pay that mortgage. They can't reasonably choose to be homeless.
If a landlord owns their property outright, and has mortgages on 3 properties they rent out (due to interest deductibility as an expense), do any of the 4 households in this example "have mortgage debt"? Or does only the 1 household of the landlord have mortgage debt, and the other 3 not, but if all were owner occupiers in the same position it would be 3 with debt and 1 without?
Is further explained here https://thekaka.substack.com/p/dawn-chorus-why-rate-hikes-wont-stress
only spending 6% of disposable income on interest + principle payments.
Can only refer to the aggregate distribution of h'holds paying off mortgages. However, it does sound odd and the skew in the distribution must be towards those at the end of the mortgage life cycle.
If I understand Bernard is implying that mortgage holders only pay 6% of their disposable income on servicing mortgages when the RBNZ figures are based on average disposal income of all NZers versus servicing costs of those with a mortgage e.g. if 1/4 of NZers own their home and have a mortgage = 24% of mortgage holders disposable income goes towards servicing a mortgage (the 24% reducing to 6% when 50% of population are renters and the other 25% own their homes mortgage free).
From a national financial stability view point not a big deal. However, from a mortgage holder debt and house price stability standpoint the 24% versus the 6% servicing cost is worrying (especially if they're about to double).
This is CPI table that examines the weighted average of prices of a basket of consumer goods and services, such as transportation, food, and medical care.
It doesn't include expenses like rent, which is 40 to 50% of salary in NZ, if we include that than we will be above Guinea & Hungary.
https://tradingeconomics.com/country-list/consumer-price-index-cpi
Country Last Previous Reference Unit
Venezuela 1195583 930306 May/21 million points
South Sudan 18325 17812 May/21 points
Sudan 8639 8118 Dec/20 points
Bulgaria 7280 7295 Jun/21 points
Brazil 5770 5740 Jun/21 points
Zimbabwe 2986 2875 Jun/21 points
Moldova 2713 2700 May/21 points
Hungary 1426 1418 Jun/21 points
Guinea 1319 1310 May/21 points
Syria 1091 949 Dec/19 points
New Zealand 1082 1068 Jun/21 points
This Govt and RBNZ strategy put us in a list of financially failed & bankrupt nations.
Some time it feel like we are living on moon and have to pay the price for each facility extraordinarily. Pathetic
Maybe, but sharing stage with nation under civil war for decade like Syria & Sudan doesn't justify by any means.
I believe property price is not factored in, if that will be included we definitely beat most of the above mention nations, as NZ rank number 2 in international house price growth.
I think that the stimulation measures well and truly need to be wound back urgently because they have very much overstimulated the economy in response to Covid. The inflation which admittedly could be in part be temporary because of one off covid effects, is still breaching the upper bounds of the control band and the speed and momentum of getting there were very rapid. It is not as if they are unwinding things to strongly deflationary settings. In absolute terms and from an historical perspective we are still in the stimulation zone. Remember deflationary is 7-8-9% interest rates. How quickly we loose our perspective.
There is also the factor that our CPI measurement is totally rigged and in no way reflects the huge increase in house prices that FHB are facing. At a whole of life level this is practically every bodies largest expenditure and it is barely reflected in the CPI. If it were correctly measured our inflation rate would have been off this planet for years and the government may have done something far more meaningful than just passively leaving to the RB OCR. As I have said before I am certain that this last burst of house price rises will be the last straw that broke the camels back and remove the last vestiges of hope from young Kiwis, who are about to leave the country in droves. This reason alone is more than sufficient to start winding things back aggressively.
Predicting house price moderation is anyone's hill to die on in New Zealand. It's the lost cause of economic forecasting.
Local and regional authority intransigence seems to be the great anchor of New Zealand politics. For all the progressive government legislation enacted authorities are ready to drag them down and bludgeon it to death with bylaws. The discourse at CCC shows the level of resistance to expect:
https://youtu.be/wFKkbYavzJ0
Oh god. How depressing. The government needs to take this away completely from these ------. and set some very general rules that enable people to build houses without getting trapped in all this local government crap. eg. you can build on any land provided that you deal with sewerage this way including septic tanks if the section is big enough. Water and everything else at a bottom line, you can sort out yourself if there is nothing available. build up from that point local bodies if you want to provide better services. The initiative needs to be completely removed from these people because they have none.
Either something like that or legislate that all councils must ensure that there is at least 1 years worth of residential land sales available to the general public (as opposed to being trapped by house building companies) to choose from at all times or else they will come in over the top and designate areas of land to be subdivided withing a fixed time frame and the councils must provide basic services or the government will do that at the councils costs. Or alternatively in the case of Christchurch legislate that anybody can erect a temporary on Hagley Park until sufficient affordable land is available.
$2.5b is chump change for a 'controlling' shareholding partner(ship) holding. That is about 25% of the total amount of council debt across the country.
Isn't a legitimate Controlling Partnership 33%?
There's still plenty more 'wriggle' room in this 'hostile' corporate takeover to go.
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