By Greg Ninness
A 1% rise in mortgage interest rates could force house prices down by almost 10%. A 2% rise in mortgage interest rates could force house prices down by almost 18%.
This is why rising interest rates are likely to have a much bigger impact on housing affordability than the changes to the tax treatment of residential investment properties recently announced by the Government.
Most of the discussion around the effect of rising mortgage interest rates usually focusses on the resulting increase in mortgage payments and the ability of borrowers to make those higher payments, plus the flow on effects that has on other household spending and the wider economy.
What is often overlooked is that rising interest rates also affect the amount people can afford to borrow, and that has a fundamental impact on house prices because it directly affects how much they can afford to pay for a home.
Let's say the most someone could afford to borrow to buy a home was $500,000.
If the mortgage was for 80% of the purchase price, the most they could afford to pay for a home would be $625,000.
The payments on a $500,000 mortgage at the average of the two year fixed rates charged by the major banks in May 2021 (2.52%) would be $914 a fortnight, assuming a 30-year term.
If mortgage interest rates increased by 100 basis points (that's a 1% increase in ordinary parlance) to 3.52%, the maximum amount the home buyer could borrow and maintain mortgage payments at the same level would be $440,000, a reduction of $60,000.
Assuming the amount they had for a deposit remained the same, it would reduce the maximum amount they could afford to pay for a home to $565,000, down by 9.6%.
If mortgage interest rates increased by 200 basis points (up 2%) to 4.52%, that would reduce the maximum amount the house buyer could borrow by $110,000 and the amount they could afford to pay for a home to $515,000, a decline of 17.6%.
Those percentage figures hold true for all price brackets.
So someone who could afford to borrow a maximum of $700,000 to buy a home for $875,000 at current interest rates, would only be able to afford a $791,000 home if mortgage rates went up by 1%, or a $721,000 home if mortgage rates went up by 2%.
If the maximum they could afford to borrow was $900,000 to buy a home for $1,125,000 at current rates, a 1% increase would reduce the amount they could afford to pay for a home to $1,017,100. A 2% increase would reduce the amount they could afford to pay to $927,000.
Those are significant reductions and they suggest rising interest rates have the potential to cause a reasonably substantial reduction in house prices.
Interest.co.nz has been recording the monthly averages of the two year fixed mortgage rates offered by major banks since the beginning of 2002. The last time they were at 3.52% was in February 2020, while the last time they were at 4.52% was March 2018.
So mortgage rate increases of 1% to 2% are not unrealistic.
The peak since 2002 was a lofty 9.64%, achieved in March 2008.
However it’s important to note that the calculations above are for people borrowing the maximum amount they are able to. Typically they are more likely to be first home buyers.
Those people who already have a home but are looking to move up the property ladder would probably have a bit more wriggle room to cope with rising mortgage rates and may not be as severely affected as those buying their first home, although their borrowing capacity would also likely be crimped to some degree.
So the reductions outlined above should be regarded as “up to” figures, i.e, a 1% rise in mortgage rates could cause house prices to decline by up to 9.6%, while and 2% increase could cause them to decline by up to 17.6%.
And the fall in prices could be greater at the bottom end of the market than the top.
On top of that the market will continue to be affected by changes in household incomes, the balance of supply and demand for housing and the general performance of the economy.
So what effect rising interest rates end up actually having on house prices will have to come out in the wash.
But there’s certainly potential for the impact to be significant.
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97 Comments
Total value of NZ housing stock is approximately $1.45 trillion. 9.6% of that is $140 billion - more than 34% of the total market cap of the entire NZX (~$408 billion). The plunge protection team will not stand by and allow that level of wealth destruction.
At some stage there will be nothing they can do, NZ is different but not that different.
I would disagree on this. I would rather say New Zealand is no different than other countries such as Japan and US when it comes to hard correction risk. Massive QE, close to 0 OCR rate and LVR removal caused 30% housing price increase in a year, soon we will find New Zealand's housing market and economy may not be as resilient as we thought. You just can not pump assets price like that.
We actually agree, this was precisely my point in contrast to those who blindly believe prices can run to the sky forever ;)
I think our Reserve Bank and government (whichever party is in power) will go further than officials in other countries to protect the housing market. I don't think they'd hesitate to destroy the stock market, or the currency, or employment rates, or anything else, to protect it. In that sense, we might be different. NZers don't give a shit about 'markets' in general, just one market in particular.
If they drive employers broke or offshore, and therefore staff unemployed via mass inflation in order to protect the debt ponzi, who will pay all the tax, and make the residential mortgage payments...?
Not I said the broke company managers and directors.
Not I said the unemployed worker.
Not I said the profit shifting global corporate.
Then who.....
The Reserve Bank, of course!
If things get dicey, Adrian'll dig around in his pockets and make up the difference between what the banks expect and what households can afford to pay.
So the govt will borrow to pay people to receive enough benefits to make the normal tax take...tui. Sounds like a fiscal debt spiral with the end game being a banana republic.
The US seems to get away with it as they are 25% of global GDP and the Reserve Currency. We. Are. Not. Either.
They don't even need tax take! The Reserve Bank makes the money, remember. Nothing to stop the RB from buying *all* the bonds (a la Japan), so the Gov't has plenty of money. They can then make the banks whole.
I genuinely don't know whether this would break the system or not. Of course it should, theoretically, but it seems like no one in the markets gives a toss whether gov't debt is actually repayable or not -- unless you're on the wrong side of the US politically (like Venezuela) or make the mistake of formally defaulting (like Argentina0 instead of 'restructuring' and pretending you can repay.
To be perfectly honest I am even wondering why would anyone use the word "market" in "New Zealand's housing market". Given that it is not market anymore, but totally influenced and controlled housing "set of activities or something else but not market". In this current setup, price can (not agreeing it should) potentially go up endlessly by 30-50-200% a year , all depends how much more QE is added into the system. So , no really market activities here
'Wealth' destruction
Wealth destruction on paper/vapor equity....is a risk position. Sell now....or wait. You are speculating that house prices stay where they are or going higher. If you live in it and have low debt you don't really care. If you have lots of interest only leverage you will care very much. What to do.....
It is not wealth destruction, as in the first place there has never been any real wealth in delusional house prices that have no correspondence whatsoever with economic fundamentals.
It is just a return to economic reality, once it happens. The NZ housing Ponzi has already lasted too long - and the longer it lasts, the worse the overall risks once it starts imploding.
Sigh. Unfortunately, thinking the NZ housing market (and share market) follow some sort of economic fundamentals anymore is a romanticised view of how it should be. Like thinking mortgage credit comes from people's bank/term deposits. We're well past that point, they have nothing to do with fundamentals anymore.
Housing is worth over $1T. The Govt and Reserve bank can't let it implode or its curtains for the entire economy. They've already proven during COVID the Reserve Bank will keep interest rates low and print as much money as necessary. The Govt will also borrow as much from them as possible to keep things afloat.
The more they print, the more asset prices inflate and the gap between the have yachts and the have nots is only going to grow.
It's curtains regardless. Basically because we did not build wealth and then use that wealth to buy houses.
We did it the other way around - deluding ourselves that high house prices = a wealthy economy.
John key thought like this - I wonder when he's handing back his knighthood?
JK is a royalist so hell would need to be as cold as Wellington for that to happen. It is a shame we are not investing overseas in this season of a powerful NZD, at least we have restarted investing in the NZ Super Fund, Labour can be thanked for that.
Rather like telling and alcoholic to cope is to drink some more...
At some point, the ability of ANY GOVERNMENT to cover the cracks is removed by forces not under their control... ask any other Tin-pot dictatorship that's gone down similar routes
mealsonmeals,
So what you are saying is that when other countries start to raise their rates, NZ will stick with an OCR of 0.25%. Presumably that would see our $ fall; good for exporters, but bad for importers. That would have an adverse effect on retail prices, just as inflationary pressures mount.
i am one of those with assets; property and shares and I certainly see interest rate rises over the next couple of years. I think we could easily see oil at $100 a barrel. i am raising my cash holdings in anticipation of a sharp correction in asset values though I have no idea when. I have advised my sons to pay down their mortgages as and when they can.
Good advice for your sons and smart to increase cashes holdings now. It's hard to time the market precisely these days. But what we can do is to try to keep the risks well managed.
ditto. Everyone bemoans cash (including myself) as it doesn't get any real return. But, and it's a big 'but' it allows you to move when an opportunity arises. Waiting patiently, this year, next year....March 2020 was a great example of an opportunity to convert cash to shares.
Yeah, agreed. After March 2020, I've put a good chunk of money into shares. Now I'm sitting on a pretty good return.
the next oil shock will blow things up - ditto the first heatwave mass death toll - assets will be measured very differently including cash - regards Dr. DGM.
No doubt rates can/will probably go up. But any rate rise is a result of inflation which in essence means the cash your holding is going to be worth less than it is right now. How high can the Reserve Bank afford to raise the mortgage holders of their $1T asset class is underwater? Not very high. If the economy falters what are they going to do? Lower rates, print money, borrow.
As always it makes total sense to reduce debt. But holding cash to time the market is pretty challenging, isn't it? If you'd kept cash in the market (property or shares) since before the pandemic you'd be in a much stronger position today than you were before it.
But everyone is stress tested...tui. Those underwater would likely be removed from the system in a reset unless their income is solid. After all, that's it function of a reset, somewhat like winter, to cull the weak. At that point whether you get gassed or not depends on your bank, whose actions more or less depend on what the global banking food chain is doing at that time.
Wealth protection team will most likely open borders to migrants with cash to prop it up and locals can move to motels if they are lucky otherwise cars.
And a third to half of that $1.45 trillion is non-value-added costs, ie only exists because of monopoly restrictions that cause house prices to be unnecessarily higher than they should be, and add no extra amenity value.
The irony of not allowing wealth destruction on an asset amenity that does not exist.
It's going to make more sense for a November rate increase on OCR, if reserve bank are looking for dampening down market? A Feb hike will be to late for selling season.
Doubtful. The RBNZ is just trying to appease depositors & bond holders by its talk of raising rates. Its a bluff & they know it. They will keep finding excuses not to raise rates
Lol, why would bondholders be appeased if interest rates went up?
An increase in interest rates will marginally move the prices of the lower quartile housing market down; however, the effect may be transient. The demand for housing continues to outpace supply and the market will reprice the discounted part of the market accordingly quickly. An increase in interest rates only serve to create a transitory K shape pricing structure for a limited time before prices revert back to mean. During the transitory period, housing supply would be absorbed by cash up buyers who do not need loan maxima and upper quartile buyers may turn to the lower quartile as prices becomes very attractive comparatively.
The end result will likely backfire with the lower quartile ending up pricing higher.
> The demand for housing continues to outpace supply
Demand for housing has a hell of a lot do do with the cost and availability of credit used to buy them with.
The logic is astonishing!
In CWBW's world, everything is good news for housing. Just buy more!
I would disagree with the demand part of your argument, except for some exceptions open homes are empty, which shows a disinterest in buyers, likely due to the common believe that current prices are just too high and not sustainable. Nobody wants to get into a house if they believe raising interest rates will push the price down next year.
If the lower quartile drops in price then this will usually drag down the next quartiles as well. The logic is based on the concept of upgrading. First home buyer buys in the lower quartile- the seller (who was a first home buyer) uses his capital (house sale price - minus mortgage/ debt) to upgrade to the next level. The seller of the house the upgrader buys then does the same thing. So if the first home buyer pays $50K less then the second home buyer has 50K less available to spend on his next house and so on.
ie
First home buyer was planning to buy a $700K house but now can only spend $650K - because the first home buyer can only borrow $500 instead of $550K - after the interest rate rises.
Second home buyer has a 300K mortgage- instead of having capital of 400K - he now only has $350K capital (650-300) - he too can only borrow $700K instead of $750K (pre interest rate rises) so now he can only buy a house of $1.05M and not the $1.15M he could buy at pre interest rate rises.
and so on it goes - dragging down the market in all quartiles.
The estimation is for every .25% increase - borrowers borrowing capability declines by 20K-25K
lol - now I know how socialism takes hold - the bourgeoise lose their minds.
House prices are rising on a weekly basis touching new height. RBNZ and Government doing nothing and also experts / media raising hypothetical questions and solution....if this happen that will happen.....but in reality no action or questions being raise as to why no meaningfull action to control the ponzi that is on top spot in the world.
Sometime back they to deflect talked about DTI....than what......
I enjoyed your analysis but I can see a small flaw. The "test rate" banks use to determine the maximum size of a mortgage doesn't actually move directly in line with interest rates. Consequently the effect of OCR changes are diluted.
My thoughts exactly.
Also for many buyers it's the deposit that's the problem, not the servicing.
Not the servicing... yet... but three decades of debt servitude to work through...
Yep - banks currently using 6% for affordability test? I don't think this will change if OCR goes up 1 or 2 per cent, which questions the premise of the whole article doesn't it?
your incorrect - the banks use a 1.5-2.0% lift on the "floating/variable rate" - not on fixed rates. If the OCR lifts and the variable rate also lifts then the bank will accordingly lift the affordability rate they use. This has nothing to do with banks feeling sorry for "borrowers" or wanting to lend more- they are required to keep adequate buffers as part of their capital requirements that the RBNZ enforces (with big fines for not maintaining it) and shareholders expect (no shareholder wants to see their bank go broke).
RBNZ have been clear that they will be introducing debt serviceability tools, so banks are using larger buffers to accommodate that. They may well inch up a bit if the OCR increases, but it won't be point for point.
Interesting, my understanding from talking to our banker a few years ago is that it was a fixed target rate established by the bank and recalibrated at their discretion.
Where did you hear this? AFAIK banks use a fixed rate which they adjust when they feel like it. I don't recall hearing of floating rates changing a few months back when there was talk of the banks test rates changing.
See quote on article just posted: "... banks have not dropped mortgage serviceability test rates "that much", despite much sharper falls in mortgage rates. RBNZ data show the weighted average serviceability test rate is still up around 6.3%. This compares to a one-year mortgage rate of around 2.3%."
I had heard from brokers that serviceability tests were still between 5.5% and 6.5% - RBNZ data would appear to back that up.
That question wasn't addressed to you. ikimpaul was asserting thats it some margin above flaoting rate, which sounds like bullpucky to me.
Yes - I made it all up- or did I.
As you can clearly see the banks in 2019 were using a buffer of 2.5% above the interest rate. All banks use the assumption of the floating rate when they do the loan assessment- as that is usually the highest rate and the mortgagee is not required to set the terms of the loan ie take a fixed rate term until they settle the loan. Last year APRA and RBNZ both agreed that a lower rate than 2.5% could be used and suggested a rate of 1.5%-2.0% above the variable rate to be used. Hence most banks are currently using a servicing rate of 6-6.5% on most loan applications
Just to scare everyone - 2 weeks ago Adrian Orr began discussions with the banks in line with APRA of lifting the servicing rate calculation (whilst DTI's were still been consulted on) with an implementation within the next 3-6 months.
P.S - Interest actually reported on this exact issue on the 16th June.
https://www.interest.co.nz/personal-finance/103022/banks-have-reduced-i…
Well, i'm still not seeing any evidence to back your assertions up that nz banks use floating rate + 2.5%, so yeah, you quite possibly are making things up. That link says that Australian banks can use the loan interest rate (not specifically the flaoting rate) + 2.5% or more.
Australian floating mortgage rate + 2.5% is not far above NZ floating rate.....
Up until the last 12 months - 85% of loans in Australia were floating/variable loans (today 70% of loans are variable/floating) - as per the following attachment - so the variable rate would be what's used in Australia to determine the affordability rate as the majority of loans are variable. It is also unusual in Australia to roll a 12 month fixed loan to another 12 month fixed loans as the break fees (often up to 1% of the loan value) make it costly to sell a house during the fixed term. I have no doubt in my mind NZ is using an identical system to the Australian system and as the article states in late 2019 RBNZ came into line with APRA on the methodology used.
https://www.rba.gov.au/speeches/2020/pdf/sp-so-2020-09-17.pdf
To dress up your incorrect guess as fact and to then post it on a public forum is appalling.
So once again, more waffle about Australia, and not a shred of evidence about NZ.
They absolutely are making it up, it is changed at bank discretion and is purposefully rarely adjusted, and when it is reduced, they keep it sticky, moving much less than the real rate of interest. It serves an important duel purpose of adding stability to lending calculations as well as a safety margin. This claim they made completely discredits them.
You are incorrect, thats just totally incorrect. Banks notify when the AIR changes and it absolutely does not change in line with floating rates. It is assessed and changed only irregularly and is very sticky to change. Its purpose is to add stability and safty to the lending calculations, it is rare to have it change.
Indeed, an embarrassingly over simplified assessment from the author.
Diluted... maybe, maybe not. One would assume the range of possible rates tested would be influenced by current and future expected rates..
The last time the RBNZ increased the OCR by 100bps in 2014, median house prices New Zealand and Auckland rose by 5 and 8 percent over the following year, while inventory on market fell .
That's when we were still having foreign investors buying off our lands and houses and housing price was fairly low back then. You need to look into all factors.
There are still gains to be made in the Auckland housing market, be it good or bad depending on your view. Rezoning in Auckland has made it especially good for developers, if and that’s a big if, they are able to source labour and a guaranteed on time supply chain of materials. The two combined in a negative way will see no catch up in supply, adding only demand.
If we have a correction, the first thing to correct will be the NZ Dollar. $1,000,000 NZD equals around $705,000 USD today. If you go back to October 2000, you will see that rate was as low as 40 cents. 1,000,000 NZD would be have been around $400,000 USD. The point being, houses in New Zealand are priced in NZDs and that NZD floats with respect to the rest of the world. If you consider the price of New Zealand houses in USD terms, the currency or houses are massively overpriced.
I think this is an underrated point. We could see a devaluation of the currency rather than nominal prices. Of course that would mean actual inflation here on imported goods. I think that can be 'looked through' indefinitely though, if necessary to keep the bank balance sheets/home-owning voter bloc happy.
Agree this is an underrated point, however I do not think we can 'look through' the inflation due to currency depreciation indefinitely. The cost of non-government funding would go up significantly so in effect the inflation would be directly imported. In the medium term the inflation will be here in a significant manner, the CPI can be manipulated but only to a degree.
to continue the theory, if Government were to continue filling the gap via QE then at some point our trading partners will no longer see us as viable trading partners.
As per my comment in regards to ANZ predicting a Nov lift yesterday
Two weeks ago I said the first lift would be August and I stand by that - if the REINZ and Corelogic numbers show a hot housing market in June and July - then I'll guarantee there will be an August 2021 rate rise and if there is no cooling in Sept and Oct- then it will be followed by a Nov rate rise.
Quite simply- the government knows it has to stop the housing market increases and if lifting interest rates will do this- then the Finance Minister who now can instruct the RBNZ - will push for a soon as possible interest rate lift.
How much is your guarantee worth in $ terms?
ikimpaul..whats your background as you talk with some authority?
Inside knowledge of the banking industry (and an economics degree)P - and a little bit of logic.
1. RBNZ and government have run out of obvious ammunition to slow housing - rate increases will create the uncertainty they need.
2. Lifting rates requires no consultation- unlike DTI's and removing interest only loans
3. A roaring economy with large quarterly GDP growth - means there is little reason to hold the OCR rate low to stimulate business.
4. They will want to stop momentum before the spring housing market kicks in - Nov will be too late to do this.
The government knows it doesn't have 4 or 5 months to stuff around with the housing market if its still roaring along. The media will crucify them.
You are all *too* logical. This isn't logic, it's politics.
1. There is still tinkering around the edges that can be done. DTIs are still a threat rather than reality.
2. Fair point.
3. There will always be the threat of another outbreak, always uncertainty around the corner -- always some reason to wait.
4. They won't be front-running the market, they'll be thinking 'maybe we do something if next summer rages like last one'.
And the media... while they like running stories about locked-out FHBs, it is *nothing* next to the 24/7 hit job we'll see on Orr (and Labour) if he raises rates and the housing market takes a tumble. FHBs forced to sell? Grannies losing their nest egg? The real estate industry owns the Herald, for a start. In terms of political capital, the risk is massively asymmetrical. These aren't brave people.
If this is the case then bring it on - needs to happen for the greater good. Better to start it soon in a managed way then have a catastrophic fall in an unmanaged way later on.
"Those people who already have a home but are looking to move up the property ladder would probably have a bit more wriggle room to cope with rising mortgage rates and may not be as severely affected as those buying their first home, although their borrowing capacity would also likely be crimped to some degree."
Without actually doing to many figures, 50% equity minus 10% equity drop would mean a substantial pull back on what you could move up to,without the additional loss to REA fees.
If there is anything to be learned from Covid is that logic flew out the window shortly after it hit. House prices are going nowhere, at best they can begin to reign in the silly price increases. At some point the RBNZ will have to stop the waffle and actually increase the OCR and it will probably be something low like 0.25 to 0.5% increase as a strong signal that more rises in the near future are more than talk. The increase cannot come fast enough, if they leave it to even February, then Santa will have thrown another sack containing $100K down your chimney.
So the answer to getting house prices down is to increase interest rates.
Hmmmmm so nobody thought of this before.
RBNZ doesn't want an increase in the currency that would come if they increased rates before other countries. This will be why they try using other methods to slow the market.
yes, but its rather like fixing leaking dam with sponges, eventually they are saturated and continue to leak
Really ?? Poor article in my view a, 1% rise will do nothing other than help to flatten rises. This is typical of articles that are pie in the sky.
The Government actions have incentivized more money being pumped into the family home to avoid Capital Gains, big upside to good suburbs. The only time there is a meaningful drop in NZ real estate values is if the Economy is in recession, which it is not.
Our terms of trade are strong, unemployment low, economy producing exports that are in demand globally.
Time will reveal all but this prediction is ridiculous.
Yep a 1% rise will not cause a 10% drop, it wall cause the price increase that's coming to fall from 10% to flat if they are lucky. Your trying to stop a freight train here.
Carlos67 - The increase of 1% may limit price increase to 10% as everything to build a house is increasing a min of 10%.
When people talk of the supply and demand coming back it line on paper it could look as such.
The new builds numbers have a huge % of apartments, attached town houses included in it, of which a lot are in very unattractive areas. take a drive out west Whenuapai /Kumeu areas.
Horrible nasty cheap builds that frankly don't compete with well established green leafy suburbs so in my opinion it is another red herring that prices will instantly stabilise when build figures balance out.
Certainly new mass building projects would start dropping thats about it.
You've got that right. What they are building out west are the slums of tommorrow.
Could be right. Bring in the flat land tax on all land, and offset by reducing income tax reduction. Promote actually working, and punish idle speculation, which is the opposite of what we have today.
Banks use about 6.5% rates in their borrowing assessment and that rate does nto move in line with real rates, it is much stickier, so i don’t see why you would get such a direct exchange between real rates and borrowing capacity.
Banks also take how many rooms you are willing to rent out into consideration. They also ask you to sign the agreement that you will rent other rooms out as a compulsory requirement. So if a person lives alone, when the rate increases, it's definitely gonna hurt him and make him start looking for tenants or boarders.
Nothing changes really then. Everyone I know had boarders some of them had up to 3 at one time and I took on one and thats 15 years ago. Its the only way to go in terms of sharing the costs as well as paying off the mortgage. If you can afford to pay off the mortgage on your own you have one hell of a well paying job and/or you live in a do up.
It would be fantastic if an interest rate increase of 1 per cent drove house prices down 10 per cent. In fact I would like them to drop more. Then the young people starting their working life today will find it easier to get into their first home quicker than they can today. The western world is in la la land re house prices. A bit of reality would be a good thing overall as it has never been harder to buy a house than now. All that interest going to the Banks is an absolute waste of money and means a lot of people will be just getting by in order to have a roof over their heads. As a boomer it was so easy to buy the first home and then trade up and up. It has to change.
Indeed - lets take it up 3%. No worries as they banks have stress tested all their borrowers at that level.
I think your inuendo is correct, the loans wouldn’t default until the economy tanked from the lost spending and we all lose our jobs. But thats the point, the author has demonstrated a total inadequacy to asses these impacts appropriately. Its an extremely complex model to build, test and assess. This article is a hack job piece of click bait.
Is the Wolf at the Door ?
This is all interest rate spin, very high levels of debt require very low interest rates. Talk of 1% or 2% rates rises are a joke. You need to consider rated rises in percentage terms. A 1% rise on a cash rate of 5% equals a 20% increase. A cash rate of 0.25% that goes to 1% is a 400% increase. It would not be possible to do this if the levels of debt are high. The spin is designed to to scare people from taking on too much debt.
Fear of taking on too much debt is long gone…I think people are fearful of paying too much now. IMO market sentiment re future price rises is less sanguine.
I can see the market ambling on sideways maybe a slight dip but no crash. Not unless we have 4+ percentage point rise on floating. This ain’t going to happened without huge inflation shock.. which isn’t to say it won’t happen.
1% rise on a cash rate of 5% equals a 20% increase Exactly! I dont know why people talk about a zero lower bound. The zero lower bound is asymptotic. You can halve the interest rates, and consequently debt servicing costs every few years and keep increasing asset prices that way. That's been clear for quite some time now.
Unless you go negative you cant because there is a cost of doing business. Banks must charge a basically flat margin, and this means you do not get an asymptote approaching zero, but rather an asymptote approaching 1% to 2%. A further limit of your curve is the principal contribution, which does not reduce in line with interest rates, its not exactly a cost of borrowing but it is a drain on cash flow in some similar ways to interest. The principal contribution effect is low at high rates and high at low rates, which means to get the same bang for your buck you actually end up having to run home loans negative and directly monetize house holder debt, which may make the asset scam too transparent to continue without some broader welfare reforms.
This is probably the blow off top part of the trend. After that folks will be losing their shirts all the way down, whilst explaining to anyone that will listen that bull markets can experience turbulence.
More obsession with 1st home buyers when assessing possibility of future housing disaster
Poor piece of analysis IMHO
"However it’s important to note that the calculations above are for people borrowing the maximum amount they are able to. Typically they are more likely to be first home buyers.
Those people who already have a home but are looking to move up the property ladder would probably have a bit more wriggle room to cope with rising mortgage rates and may not be as severely affected as those buying their first home, although their borrowing capacity would also likely be crimped to some degree.
More obsession with 1st home buyers when assessing possibility of future housing disaster
Poor piece of analysis IMHO
"However it’s important to note that the calculations above are for people borrowing the maximum amount they are able to. Typically they are more likely to be first home buyers.
Those people who already have a home but are looking to move up the property ladder would probably have a bit more wriggle room to cope with rising mortgage rates and may not be as severely affected as those buying their first home, although their borrowing capacity would also likely be crimped to some degree.
More obsession with 1st home buyers when assessing possibility of future housing disaster
Poor piece of analysis IMHO
"However it’s important to note that the calculations above are for people borrowing the maximum amount they are able to. Typically they are more likely to be first home buyers.
Those people who already have a home but are looking to move up the property ladder would probably have a bit more wriggle room to cope with rising mortgage rates and may not be as severely affected as those buying their first home, although their borrowing capacity would also likely be crimped to some degree.
More obsession with 1st home buyers when assessing possibility of future housing disaster
Poor piece of analysis IMHO
"However it’s important to note that the calculations above are for people borrowing the maximum amount they are able to. Typically they are more likely to be first home buyers.
Those people who already have a home but are looking to move up the property ladder would probably have a bit more wriggle room to cope with rising mortgage rates and may not be as severely affected as those buying their first home, although their borrowing capacity would also likely be crimped to some degree.
More obsession with 1st home buyers when assessing possibility of future housing disaster
Poor piece of analysis IMHO
"However it’s important to note that the calculations above are for people borrowing the maximum amount they are able to. Typically they are more likely to be first home buyers.
Those people who already have a home but are looking to move up the property ladder would probably have a bit more wriggle room to cope with rising mortgage rates and may not be as severely affected as those buying their first home, although their borrowing capacity would also likely be crimped to some degree.
Fails to take into account Immigration and rising incomes
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