The Reserve Bank is conceding that about 25% of the country's outstanding mortgages by value were stress tested by banks at lower interest rates than are currently prevailing.
RBNZ officials, including Governor Adrian Orr and Deputy Governor and head of financial stability Christian Hawkesby faced probing questions on the RBNZ's latest Financial Stability Report before Parliament's Finance & Expenditure select committee on Thursday.
In that latest report the RBNZ had disclosed that around 25% of the current outstanding mortgage stock in the country had been taken out in the period between late 2020 and late 2021 when house prices were high and interest rates low. As of March 2023, RBNZ figures indicate that there was $347 billion outstanding in mortgages in this country. So quarter of that would represent a touch under $87 billion.
National's Finance Spokesperson Nicola Willis said she was “very worried about the financial situation of a large number of New Zealanders".
"...Am I right that about 25% of mortgage lending hasn’t actually been tested at rates as high as they are now?”
Hawkesby replied that he was confident about the resilience of the financial system and confident about resilience of the household sector.
“We are conscious that there are pockets of borrowers who are more exposed than others.”
National MP Simon Watts pushed further and asked whether Hawkesby could confirm that the 25% of loans stress tested in 2020-21 are now outside of their stress testing limits.
Hawkesby said: "That’s what the data shows, yes."
Willis said there was a growing number of New Zealanders, "100s of thousands" who are in debt arrears who aren’t managing - particularly those people in negative equity “who did actually what the Reserve Bank was telling them to do in 2020-21 and went and borrowed at low interest rates and kept the economy stimulated and now they are in negative equity, may need to make a distressed house sale, are in significant financial distress".
"So do you think it is fair to say that the decision to stimulate the economy as hard as the Reserve Bank did has led to financial distress for a group of New Zealanders?"
Hawkesby said the RBNZ "stand by the measures we took in 2020. It was an extraordinary time.
“Through that time it was really about cashflow and confidence to cushion the blow from an unprecedented global pandemic...”
Later Hawkesby clarified about the tests that banks do and said these "have a buffer". Because a rate begins to exceed what the customer was tested at this doesn’t mean they can’t service mortgage. What will happen will be that there will be a shift in spending patterns.
Willis responded: “But at the same time, the data shows us that more people are going into mortgage arrears, that more people are going into other debt arrears - because we know that the last thing to go is the mortgage. People will not pay their credit card, they will not pay their rates. The mortgage is the last to go.”
She noted comments made by the RBNZ in its Financial Stability Report that cashflow pressures are growing and the 'buffers' are likely to be tested.
“Aren’t we in the worst scenario possible here? We’ve still got a roaring cost of living, with high inflation - eating away at the buffers - we’ve also got a significant amount of borrowing in the economy that is now having to accept a much higher interest rate than banks ever tested for.
"Doesn’t that mean that there is a real squeeze on, yes, a small group of New Zealanders and yes, it may not completely threaten the stability of the banking sector, but there is a real squeeze on a significant portion of people who borrowed big during the covid time?”
In response Hawkesby mentioned the current strength of the labour market as a key factor underpinning the ability of mortgage customers to cope.
Willis: "So, what happens if that [labour market] comes under pressure? Which every economist says it’s going to in the next few months? Are we in for a really dark winter?”
At this point Governor Orr responded: "What you are talking through is what we would expect to see in the way in which monetary policy tightens spending behaviour.
"Spending eases and then interest rates can decline. Likewise borrowing eases. So what you’ve explained is really the natural feed through of tighter monetary policy impacting on spending decisions and behaviours and then that itself easing inflation pressure.
“So what we are seeing is what we are hoping to observe - which is less spending to better match the supply capacity, inflation pressures easing and the economy working its way through the current environment.
“So, I would characterise it as business as usual with monetary policy - except with a background of a very resilient financial system and remarkably low unemployment historically."
He then clarified on "stress testing areas".
"I think it’s important to note - the word stress is used - but that is an indicator on when households need to think about other adjustments to their spending behaviour. It’s not a point around when you have to hand the keys back to the house.
“Banks don’t want the houses back, they just want to know that customers can manage and work through alternative decisions, some of which we believe through monetary policy will be less domestic spending. Which is what we need to see."
105 Comments
“Banks don’t want the houses back.” Aye true, but very many are not just houses, they are homes with family, households. Always grating how those in high places, especially with comfortable financial circumstances themselves, tend to disregard anything other than say the “book value” of any one asset.
You use of "averages" suggests you need to understand much, much more about a) distribution curves (it is NOT a normal distribution curve as you suggest) and b) how a table mortgage works as far as how much interest you pay vs capital in the early years, and c) how much housing equity has been built up with older mortgages. (That's my polite way saying you have no idea what you are talking about when you say "its not really an issue for 95%+ of mortgage holders".)
So basically the average mortgage at $300k could see their interest costs increase by $200 per week if they come off a 2% fix onto a 6% fix. Hopefully these "average" mortgage holders did not fall for the temptation of leveraging into a rental property or 2. If RBNZ C31 is anything to go by, the amount of lending to investors that far exceeded FHB could be indicative of this.
Exactly. How many people hold multiple "average mortgages"? My landlord is due to refix, and I calculated their costs, when taking the interest deductibility into account, are rising by 2400/month on our place alone - let alone whatever they have on their own house.
Setting aside that it's hard to find a fixed term mortgage at 6%, having your interest costs rise by $230 per week (using your figures) is just the beginning. My house insurance costs have risen by 28% (say another $10 per week) and I'm holding my breath on how much my rates are about to go up by. Then there's all the other routine outgoings that are being hit by inflation at the moment.
Landlords are being particularly hard hit. Many have seen their loan costs rise by over 100%, while the expense-deductability is reducing (increasing the amount that Landlords are paying in tax). If you're renting, your landlord is shielding you from a lot of these inflationary pressures. Why? Because they can only increase rent once per year and when it comes time to review rents there is an effective maximum limit which is the market rent for a property.
After watching the report presser in full last night, I was also uncomfortable with the 'she'll be right' narrative of Team Orr. Here's some of my observations:
- The words 'resilient' and 'resilience' were peppered throughout their responses, regardless of who was speaking. Those who understand propaganda tactics will know what is going on here.
- The presser starts off with Hawkeye stating how the RBNZ does not target house prices. OK. Cool. No accountability.
However, I roughly estimated that 70-80% of the questions from the journos were related to the bubble. And Team Orr constantly refers to their actions that are designed to nudge behaviors as related to the bubble.
Do they think people can't smell the BS?
- The affordable vs sustainable construct was next-level nonsense. But it didn't even come across as overly technical that could only be understood by those with econometric-level math. It was waffle dressed up as technical expertise. The younger guy started to stumble when he spoke on this and Orr in all his fake confidence did little to impress.
You would think a journalism course/degree would have a paper on how to deal with waffle, bluff and bluster and those media present could, as a group, push back at such dribble.
Just my opinion but Jenee and Bernard know the score. Some of the other journos also were asking good questions.
The RBNZ may not have an explicit house price mandate, but they do have a financial stability mandate. This is why they will never, ever acknowledge systemic financial sector risks like the ones we're currently facing. They can't. If they did, everyone would panic and it would instantly become a self-fulfilling prophecy. The best they can do is give mealymouthed responses to reporters and try to avoid the question. They don't really have a choice.
How many times has Jay Powell used the word "robust" to describe the US banking sector over the past few weeks? They're currently experiencing their biggest banking sector failure since the GFC; by some measures even larger, and it doesn't look to be over yet.
My issue with what has gone before isn't the stimulation of the economy with money over Covid. It was turning a very knowledgable blind eye to the way that would artificially influence market forces in the property market. A DTI or other balancing measures would have mitigated much of the problem we now face. I am also not buying into the narrative that nobody at the RBNZ could see any of this coming. Unintended consequences occur but Orr is guilty of not protecting the stability of our economy by trying to shield the property market from the stimulation.
To address financial stability risks, central banks need the effective tools.
Monetary policy is not the tool to address macro-prudential risks (monetary policy tools are tools to address the RBNZ's inflation and employment remit)
The extreme house price risks were preventable back in 2016 when the then Finance Minister did not give the RBNZ the tools they requested to address macroprudential risks.
RBNZ's DTI plans hit by Government changes | interest.co.nz
If a debt to income ratio of 5 was imposed back in 2017, then a significant amount of lending would not have been made (and house prices would have been less likely to have reached their record levels).
Based on RBNZ data, the lending commitments made by banks in 2021, that were on a debt to income of 5 or above were NZ$58.8bn (about 59% of total lending commitments made in 2021). For the period of 2019-2022, total loan commitments on a debt to income of 5 or above totalled NZ$99.8bn (about 32% of the total loan commitments for that period)
https://www.rbnz.govt.nz/statistics/series/lending-and-monetary/residen…
The higher the debt to income ratio for a borrower, then the higher the probability of default.
Now how many of these borrowers will experience significant cashflow stress, or default?
For some mortgages, the banks will allow some mortgage modification (such as extension of loan maturity date, or allow the borrower to go on interest only)
For other mortgages, the banks may require the borrower to sell the property. This will a key factor in determining the magnitude of house price falls.
Remember, that as at March 2023, there were 19,300 borrowers in mortgage arrears.
https://www.centrix.co.nz/wp-content/uploads/2023/05/Centrix-Credit-Ind…
Remember, that unemployment is currently low. What will happen when unemployment rises? How many more borrowers will be under cashflow stress?
"What you are talking through is what we would expect to see". What they are talking about is people loosing their jobs, losing their homes, not being able to pay for their children's education, or potentially even put food on the table. THIS is what Orr would expect to see, and THIS is a direct result of him making a complete mess of the monetary response to Covid. Yes it was unprecedented times but this man gets paid almost $1m p.a. to get it right. He got it wrong so Kiwi families suffer.
That comment really shows how he looks at us as numbers on a balance book, not as people. We deserve better than this clown.
No, we don't deserve better.
The ludicrous super-low interest rate property bubble was popular. Every political party was fine with it. Most voters were. Even the Greens are fine with radical upward redistribution of wealth when it's in the guise of 'saving us from a Covid recession'.
We really don't deserve better. Those of us who thought it was stupid at the time were a definite minority.
Spot on.
Wasn't there lots of congratulatory back-patting about NZ's ridiculously expensive housing market spanning many years? How many times was it said that it was "a good problem to have" and a "sign of our success" or something? The way those who predicted house price falls were ridiculed and called DGMs should tell you all you need to know about people's love of the bubble.
A small minority might deserve better - but that is the price you pay for democracy. The masses get the leaders they deserve.
Good point. But then again, the government that put MMP in place was voted in by the masses, right?
Personally, I think Democracy completely sucks. The only reason for supporting such a crap system is that there doesn't seem to be anything better around. (Incidentally, I have similar feelings towards Labour.)
Not quite correct, the government make-up today is more in-tune with what the 'masses' want. If they want that mix, thats what they mostly get (well if they make 5% anyway). If over 50% vote for a single political party under MMP, then they get a majority govt.
FFP delivered governments where often under 50% of the voters got to vote in a majority government. In fact it really handed power those that happened to live inside a handful of key swing seats.
The so-called 'masses' never really existed under the old system.
Nah. Few voted for minor parties. TOP should be in, if the Electoral Commission had been listened to by the major parties.
Will be interesting to see if more move away from Natbour given their ongoing disinterest in dealing with housing as anything much more than a vehicle for free wealth.
Congratulations. You're so clever. Gold stars and all that. Right or wrong the level of content you exude for economic ignorance being appropriately punished is foul. You're talking about kids not eating food, living in stressed households which leads to emotional issues. This all comes full circle. Many people who will suffer don't deserve it. They trust that those in charge will not lead us to such treacherous waters. Ignorant? Yes. But do they deserve to lose their house? No. No one does. You being right doesn't help anyone. Ironically you are in a bubble yourself. I hope for your sake it pops like the property one
We were submitting to the RBNZ that what they were doing was completely irresponsible and was going to pump the property bubble up enormously. The response I got personally was "You are wrong to leave things as they are, we are right to pump". As it turned out, the exact opposite was true, I was right that the property bubble would inflate dramatically and probably explode afterwards - all because of their frankly inept decisions.
I aren't an economist. But it was clear to me then what loosening restrictions and pumping money into an already large bubble was going to result in disaster. And now here we are, with a potential disaster, still paying the same people to make the same mistakes on the way down as they did on the way up.
If I was as bad at my job as they are, I would have been fired never to work again in my field. These guys though, they get to keep their jobs. There is something very, very wrong here and nobody is willing to admit it.
Read their response to us regarding the LVR removal in 2020 here: Reserve Bank removes LVR restrictions for 12 months - Reserve Bank of New Zealand - Te Pūtea Matua (rbnz.govt.nz) to get the full measure of their idiocy.
Yes as I’ve said here before, my strongest memory from working in government agencies in Wellington, was that the workplace environment was a competition to see who was the best at being the worst.
Anyone who could see what was going on left, and those willing to corrupt their character to get to the top, stayed.
From the report: “The Reserve Bank will monitor lending activity and feedback from retail banks over the next 12 months as the economic impact of the COVID-19 pandemic becomes clearer. While we’ve eased the restrictions completely for the next twelve months, we will review the most appropriate setting for LVRs in a year’s time,”
So they RBNZ claim they will keep track of things to ensure it doesn;t get out of hand and then created the FLP, then did not increase the OCR coming to early 2021 when the flames hit the petrol and prices were going up drastically (I can remember something like 10k/week in Wellington at the time) even though they claim they were having full oversight of their decision. They then left the FLP to run the full course hence incentivising banks to lend as much and as fast as possible, and currently they are saying that we are all in for a hard landing due to external factors. This isn't being irresponsible, we could all see the inflation coming from 2020 when the wave of money came flooding over the country, house prices skyrocketed and post lockdown demand was through the roof. All they had to do was start ticking the OCR up from early 2021 to ensure the effect was a gradual and inflation wouldn't increase as fast, and I could have told them this with a couple of high school economics classes. We here who read interest.co.nz all know there is skullduggery and corruption at foot, and until the heads roll, if ever, we won't have any faith left for the RBNZ.
Exactly - it was like they were asleep at the wheel then suddenly woke up and decided to suddenly actually do something well after it was too late. Now they are doing the same but at the other end. Idiots. $800K salary to make a huge mess and take zero responsibility.
The real issue is the whole notion that monetary policy is THE tool to address price shocks and cost of living rises. Conveniently it acts to transfer wealth from poor to the already wealthy.
And the Reserve Bank has been deliberately set up to operate in an unaccountable manner. One of the many undesirable features of neoliberalism is the hatred of democracy behind the set up of most reserve banks.
For a comparison with Japan have a look at https://billmitchell.org/blog/?p=60811
It's going to be a bleak winter. The interest portion on an average house bought in q4 2021 for 750k was approximately 20k.
Fast forward to q4 2023, the interest on that same house will be 50k.
The interest portion is itself more than doubled.
Yeah I hope people got their woollies on.
Yeah - the additional newsflash will be that the house may well be only worth $325k now.. if anyone will still actually buy it.
So our FHB that was so proud to get on the market is now looking at 10 years to get the price back to where he started and during most of that time being unable to afford to have the family he bought the house for.
PS - had he waited a year or two he could have bought two houses for the same price and when interest rates finally drop - then the rental income on the second would pay the mortgage on the first. Early retirement...... oh the joys of patience
Yes. And add to that: all things being equal he likely would have been able to put aside more money into savings whilst renting, as opposed to having to keep up with the increasing interest portion of the mortgage repayments. I knew in NZ we're generally not great at saving but the recent FSC research showing only 53% of NZers can access more than $5k within a week in an emergency is a bit shocking. Being able to sleep peacefully at night is worth way more than whatever those with vested interests would have FHB believe otherwise.
Not true - two universal principles of housing market in spruiker speak from the gospels of the property investor association;
1. Best time to buy is ALWAYS yesterday without exception
2. There is NEVER any point trying to time the market - even if you’re in the middle of a speculative frenzy with 0% interest rates that may not be seen again for another 100 years.
Is anyone here familiar with what's going on under the hood of these stress tests?
I imagine banks are aware that if interest rates are rising, the most likely cause is going to be central banks hiking in response to inflation.
Therefore when asking "what will this person's finances look like if interest rates go up?", you would hope they'd factor in the accompanying rise in the cost of living - if so, it's just a question of what rate in inflation did they go with?
Interesting article but I'm beginning to wonder if trying to raise rates will be a bit futile because all is going to do is body slam a relatively small group of people who can least afford it. The rest have little or no mortgage to pay back, have fixed for 3 to 5 years when rates were low and are getting better and better paid on term deposits so they actually have more disposable income not less.
in our small town 45% of the houses are rentals so Im hoping the people who end up losing a lot of money are the ones with more than one house...that would be a just response to profiteering...but most likely those who panicked to get on the marvellous ladder will end up having to start again or worse...
Banks don’t want the houses back. Neither did they want CCCFA. However, the latter will drive the former for many of the 25% Willis identified. Banks are required to be able to justify extending borrowing even of existing customers. They can’t just roll financing over on the expectation of better times ahead. They have been painted into a corner to protect the foolish minority at the expense of the majority. Once more the law of unintended consequences to protect a few will hurt many. Churchill ‘Socialism….it’s inherent virtue is the equal sharing of misery’.
National's Finance Spokesperson Nicola Willis said she was “very worried about the financial situation of a large number of New Zealanders".
"...Am I right that about 25% of mortgage lending hasn’t actually been tested at rates as high as they are now?”
Translation: I am very worried about our party members rental portfolios, our great leader has 7 houses!
Hawkesby said the RBNZ "stand by the measures we took in 2020. It was an extraordinary time.
Psychologists use the term “gaslighting” to refer to a specific type of manipulation where the manipulator is trying to get someone else (or a group of people) to question their own reality, memory or perceptions.
Yes was thinking about this today. Central banks around the world have been attempting to gaslight the public to thinking that what is unfolding is their fault - despite it being central bank policy that has got us to this rock/hard place position.
Can imagine in a few more months that they will be telling the negative equity borrowers who default on their loans that they 'should have thought twice about taking on that debt'...despite pleading with the public and banks to borrow and lend (regardless of the longer term consequences) to avoid a depression as little as two years ago.
Insane stuff.
Given the trend going on here, they are going to get more and more desperate as time goes by to maintain so called 'credibility' and risk losing the trust and belief of the general public (if not already).
Hey,
could someone who thinks the RBNZ failed miserably at Covid response talk me through what their response should have been and how they think this would have played out now.
As far as I can see the system was fucked before Covid. I'm interested in how you think a different response would have got us to a different place and who would be better off. Just RBNZ response please not government legislative changes that are outside the RBNZ authority or mandate.
Any takers?
I think I agree with you. I mean the Fed was cutting interest rates back in 2019 before COVID, can anyone explain to me why that was a prudent move. Certainly gave reserve banks a lot less ammunition to work with when SHTF in 2020.
The whole thing with Keynesian economics I assumed was to spend during downturns and save during the boom times but to me it looks like nobody followed the second part of that equation.
Like genuinely correct me if I am wrong here as I am sure there is more to it but seems like reserve banks have been playing with fire well before 2020.
I think the initial panic was excusable. It was a time of genuine uncertainty.
But they committed to years of cheap money. And when the feared economic collapse didn't eventuate, when in fact we rapidly had a boom, including the most rapid increase in house prices in history, alongside a gargantuan bubble in equities... did they change their mind? No.
They were utterly contemptuous of reality. Gotta stick with the program, even if it's wildly inappropriate. Deliberately stimulating into a wildly overstimulated market. Why? So houses are now at 12x income and there's unprecendented FOMO -- obviously what's needed is lower interest rates to stimulate the market, right?
I interpret that as a kind of institutional selfishness. We can't possibly be wrong, it's reality that's wrong! Stubbornness, egotism, groupthink, whatever you want to call it - they were willing to destroy society (and I don't think that's an overstatement) rather than admit they needed to change course. That's not excusable.
They should have scrapped the FLP mid-late 2021, started raising the OCR in with an initial 50bpts Q2 2021 to give a bit of a shock in order to begin mitigating the inflationary effects off the excessive money supply, and tick it up another 50 after followed by 25bpts. If they did, we may have seen a slower increase in the level of inflation, borrowers would have been, and been advised to be, more risk aware instead of the classic "don't worry mate, rates are just going to keep going down' that many people I know were sold up the river with, and ultimately this would have somewhat mitigated the level of FOMO for purchasers, slowing such drastic increases in house prices.
I'm not going to give a specific date, but if we put a notch at Feb/March 2020 as 'peak fear', when markets were frozen -- it was clear within about six months that stimulus (at least, the kind the RBNZ provides) was not necessary. Banks did not need encouraging to lend. Rates could have been higher. The FLP should have been shut down much earlier. Banks were shovelling mortgages out the door with no encouragement needed. DTIs and LVRs should have been strengthened, not loosened, given the DTIs were getting worse.
The consequences? Hopefully, prices would have been slightly restrained vis-a-vis what we see now. Households would have lower mortgage (and other) debt. And as we enter a global tightening cycle (which we can't avoid participating in to some extent), fewer of those households would be facing financial disaster.
We'd probably have lower inflation too, because the wealth effect/credit bubble created excess demand for many things, eg home renovations, pushing prices up because supply is limited.
So yeah, we could probably have lower rates now and not have to throw FHBs under the bus now to save the rest of us, if the RBNZ weren't so blindly stubborn two years ago.
I think the RBNZ should be abolished, let markets free, no bailouts, failures and foreclosures are fine. We are in a totally opposite world where it makes sense to ask how central planners should manage things. So I have no answer - whatever they do is just political (picking winners and losers) so there is no right or wrong.
Remember when the RBNZ put banks on notice that their systems needed to be ready for a negative OCR?
Did that perhaps give you a clue that the RBNZ was out of control?
To be clear - there is absolutely no precedent EVER for such a move. They had no idea what would happen. What would have happened would have be brand new. Was this Orr and his team looking to experiment with NZ's economy? Perhaps win world acclaim? It would have been about as absurd if the RBNZ announced they were about to experiment with taking stuff below absolute zero or exceeding the speed of light.
"Willis said there was a growing number of New Zealanders, "100s of thousands" who are in debt arrears who aren’t managing - particularly those people in negative equity “who did actually what the Reserve Bank was telling them to do in 2020-21 and went and borrowed at low interest rates and kept the economy stimulated and now they are in negative equity, may need to make a distressed house sale, are in significant financial distress".
"So do you think it is fair to say that the decision to stimulate the economy as hard as the Reserve Bank did has led to financial distress for a group of New Zealanders?"
If people did not do consider long term and went ahead and too out huge mortgage on over-priced house, is that the fault of the government (that NZ taxpayer might now have to bail out)?
The CCCFA has much to say about what banks should be doing when clients attempt to borrow too much.
For example, when all bank economists are saying houses are severely overvalued at 7+ times income and yet the banks continue to lend at such multiples? How is that compliant with the CCCFA?
Methinks there could be some ground breaking court cases that come from this. And not before time!!
Could be some great class actions coming soon. Popcorn could be in short supply.
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