The Reserve Bank did what it was supposed to do on Wednesday and told borrowers and banks and businesses to brace for financial stress that would "test resilience." It talked about dark clouds on the economic horizon and "risks skewed to the downside" in its half yearly stock-take of how our financial system is coping with spiking interest rates.
An alien arriving from another planet might think most home owners were deep under water with negative equity, drowning in high debt and were on the verge of being kicked out of their homes after the fastest spike in mortgage rates in living memory. Actually, nothing could be further from the truth. New Zealand's households, businesses and banks are all in rude health, with default rates at infinitesimally low levels and capital buffers stocked to the gunnels.
You wouldn't know it by reading today's headlines. "Dark clouds over NZ's economy," warned Newshub. "Rising interest rates will test financial resilience," wrote 1News, cribbing from the Reserve Bank's own news release on its November half-yearly Financial Stability Report titled: "Global financial stress will test resilience." The NZ Herald heralded: "Negative equity warning for home buyers," while Stuff focused on a "growing number of households struggling financially" because of higher mortgage payments that were about to get much worse.
Yikes. Dark clouds. Negative equity. Financial stress. Struggling households. Things must be really bad. On top of the risk of nuclear armageddon, an unprecedented and ongoing global pandemic, and Taylor Swift having all 10 of the top 10 most popular songs all at once this week. Whatever next? A wave of mortgagee sales and young homeowners being turfed out onto the streets in a vortex of forced sales, triggering scads of mortgagee sales, bank losses and ghost developments?
Yeah...nah
Actually, we should all just step back from the edge of the headlines and take a few deep breaths. We all need to take a class in financial stability and macroeconomic policy yoga. 'Namaste', Governor, rather than 'brace for it.'
Almost all of us will be absolutely fine, and even those who bought homes last year and are beginning to hyperventilate at the prospect of a 7%-plus mortgage should just take a chill pill, as the kids probably never said. Those with relatively high debts who paid prices that have now slumped 10% to 20% in the pixels of the valuation websites they check daily were only able to borrow after passing their banks' seemingly ludicrously high test rates at the time of over 7%. They were put through the wringer last March or April with the assumption that they were able to handle a seven point something mortgage rate. It seemed a pain in the proverbial at the time, but now it feels like prudent bankers operating prudently for the good of themselves, their shareholders, their customers and the economy. Anyone still in work won't be kicked out. It is only the dead and the divorced who need to worry, and they have other things to worry about.
The calculations showing they face paying more than 50% of their disposable incomes also assume their incomes have not changed. Most in this position will have seen double-digit disposable revenue growth since they took out their mortgages. It will hurt and the local purveyor of flat whites may not make so much money, but the world is not going to end.
The same prayers of thanks should be said for the high loan-to-value ratio (LVR) rules reintroduced in early 2021, and then tightened in late 2021. All but a few buyers were forced to hold at least 20% equity before buying, with the investors having to hold at least 40%, and often a lot more.
That means the share of buyers who are likely to get into negative equity once house prices have fallen the 20% forecast from peak to trough by the Reserve Bank is actually very low. What might have seemed to be a giant exercise in pointless party-pooping at the time, now feels like the grown-ups were in charge after all.
No one liked the LVRs when they were introduced in 2013. The banks, the brokers, the buyers, the sellers, the voters and the politicians all hated the LVRs, bitching and moaning all the way down the Terrace and across the road to the Beehive. Previous Reserve Bank Governor Graeme Wheeler even lost his job (well, didn't get a second term) because he introduced LVRs and then tightened them in the face of a fair amount of bitching and moaning from across the road. The ninth floor was livid before the 2014 election.
Take a closer look at the actual risk
A closer look at the actual levels of negative equity, mortgage servicing stress and mortgagee sales in New Zealand's housing market, banking system and corporate balance sheets shows the nation in a rude state of health and easily able to handle a 7% mortgage rate, let alone a higher unemployment rate.
This week's FSR came out with a fresh stress test of our banking system showing even a 47% fall in house prices with a 9.3% unemployment rate and a cyber-attack couldn't bring down our banks. They were even profitable in all but one of the four years of the stress test timeline and their capital reserves remained more than twice the minimum levels.
Reserve Bank Deputy Governor Christian Hawkesby was also careful to point out in the news conference that it was his job to put his serious hat on and warn against home buyers getting too indebted or bankers becoming too loose. But, he said, we shouldn't lose sight of the strength of the base we have.
"Just a reminder," Hawkesby said after another question about how borrowers could possibly cope with higher unemployment, "this is our Financial Stability Report, so this is the one where we put the gloomy hat on, deliberately."
"We benefit from a financial stability perspective from the strong, strong starting point that we have," Hawkesby said when asked about the financial stability risks from a slowing economy.
"We have very high levels of employment. We have high levels of income, job security. And so all of those things benefit financial stability in the near term. We are conscious that in a rising interest rate environment that will slow the economy down, or that will result in a weaker labor market," he said.
"What our research and our stress tests are showing is that the financial system is resilient not only to our central view of a cooling labor market, but for a scenario where unemployment was much higher than anticipated."
'Praise be to the LVRs'
The central bank's Manager of Financial Systems Analysis, Chris McDonald, was also clear about the strength in our system.
"When you look across the household sector, households are in a good position. And that's because the house prices have increased over the past couple of years prior to the peak that we saw in the last year," he pointed out.
"And so the equity that they have has increased, so they have that buffer for potential price declines. In addition, we had the LVR settings that were in place since 2013. And that, again, is credited with increased buffers for households," McDonald said, pointing out however that a few might be strained.
"Now, while in aggregate households are in a strong position, they're always going to be pockets of risk, And so we've put some numbers in the report that shows that right now, even with the 11% decline, only 2% of households are in negative equity. And partly that's just because house prices have only really fallen back to the level that they're at in May last year. So they're still high relative to where they weren't pre pandemic," he said.
'Keep talking to your banker and they should keep talking to you'
Governor Adrian Orr also pointed out banks were in a strong position to help customers that they (by definition) they had already put their trust in.
"My advice to people is to talk with their financial advisors and stay close to the bank. House prices falling don't create a financial crisis in and of themselves, it just means that you're living in the home," Orr said.
"The servicing of mortgages is where you need to stay very close to the banks. If they have lent wisely, then you are the wise person they have lent to, and they should be able to work with you through through good times and bad," he said.
"So stick close to your banks and banks stick close to your customers, would be my suggestion. We are in a strong position to weather this international challenge."
Hawkesby emphasised that mortgage servicing, rather than equity, was the key, and that delinquency rates were extraordinarily low.
"The really important part of servicing mortgages is your income and your participation in the labour market. So that's why having a strong economy and this strong starting point puts us in a good position," Hawkesby said. Participation in the labour market means having a job in reserve banker language.
"So that's a really key feature of your ability to service your mortgage, regardless of where the level of your house price is. And it's why when we think about financial stability and the types of stresses that we worry about, it is the ones where unemployment is high for a prolonged period."
But even then, a 9.3% unemployment rate and a 47% fall in prices aren't enough to take down the banking system. Not even close.
Adrian Orr quietly pointed out in this discussion that his much-criticised push before Covid to force banks to hold capital was now paying dividends in financial resilience terms.
"The resilience of the financial sector is is strong and open to an enormous amount of buffering. Is it infallible? No. So there's always that balance between levels of capital and efficiency versus security and precaution. And New Zealand sits at the more conservative end of that, because of the capital work we've been doing," Orr said.
Pointedly.
And correctly.
We should all just take a deep breath, put our palms together and breath out through our noses.
Namaste, Governors.
153 Comments
Interesting to ponder why certain people here are vehemently negative - why they yearn for the housing market, the labour market, the share market, money markets, export markets, consumer markets (and virtually any other market you can think of) to become one massive bloodbath........ Do they actually believe this would be good for NZ and its people? Perhaps it's simply because these odd-bods are envious of people who keep a positive mindset and who achieve success in the material part of their lives - while also contributing to the wellbeing of others.
Anyway, the aptly named Doom Goblins who constantly vent their disaffection here would be prudent to take heed of Bernard Hickey's remarks. Indeed, the housing market is proving to be resilient enough through the current correction. It's underpinned by robust economic fundamentals and some very capable people in key public sector leadership roles....... The tide will turn again - and the housing market will recover quicker than many Doom Goblins dare contemplate.
TTP
Hi TTP
keep a positive mindset and who achieve success in the material part of their lives - while contributing to the wellbeing of others.
Some people say that bad news is good news. I am inclined to think that even good news is good news. Either way by staying positive, we can't lose eh TTP.
There is a brand of tyres called "Goodyear". Cool name.
TTP - I just noticed the time of your post further up the comment section.
Is there something keeping you awake in those early hours of the morning ? Maybe 10% Interest Rates Next Year, Guaranteed !
-30% Crash in home prices this year already like the Prophet said ? ( North Shore )
How about no longer the biggest office in Havelock North, now Property Brokers is the smallest, some think its gone altogether !
I sleep like a baby.
Future - what are your thoughts on you/your idol being referred to in Oneroof as "The Profit"?
This is a desperate attempt to discredit The Prophet. The Vested Interest Brigade are in Panic Mode.
7% Interest Rates This Year, Guaranteed ! Confirmed.
-30% Crash In Home Prices By December, it's a Certainty ! North Shore is at -28.6% already.
Who are you going to Believe - The Vested Interest Brigade ? Or The Prophet ?
10% Interest Rates Next Year, Guaranteed !
Wow! The Prophet is so famous that they are writing about him at OneRoof!
Never thought we'd see that. Some specu-journalist feathers must be ruffled.
The Prophet has earned his fame though... from the time he first started posting, he has been more accurate in his predictions than all of the bank economists, and the RBNZ too.
More accurate than Tony Alexander and Squirrel Bolton too. In fact, the Prophet was more accurate than any talking head that has been featured in OneRoof over the last 18 months or so.
Well done Prophet.
The Prophet could see in his sleep. Thats why they are known as a Seer. Actually working in their sleep. Dreams and Visions.
When you know the End of the story then there is no need for Anxiety. And he would sleep like a baby.
I the Apprentice for The Prophet have learnt to do the same.
I see you TTP also sleeping like a baby, only you are teething, got diarrhoea, and having bad dreams about some office in Havelock North selling Tombstones.
It's about contemplating the undesired consequences, so one can prepare or at least not be so affected if the event arises.
Going through life with feel good glasses on is not realistic... and smacks of political gaming (the smiling RE salesman).
People should contemplate the potential consequences of events that happen...take Hosking's rants at moment on Wage increases...'this can't go on forever'... was he saying the same when housing was going ballistic!
Charles Goodyear ’s discovery of the vulcanization of rubber—a process that allows rubber to withstand heat and cold—revolutionized the rubber industry in the mid-1800s. All rubber came from the Amazonian Rainforest back then, before Goodyears' discovery, rubber use to melt in the heat and go brittle in the cold.
Great example of "keep a positive mindset and who achieve success in the material part of their lives - while contributing to the wellbeing of others" ;o)
I guess if most people were choosing how to construct a society and economy, what we have probably wouldn't be it.
But here we are, an unfair world and a highly manipulated system. Like a Big Mac, it doesn't match the picture, but it's already here so you can eat it or complain it's not a nice fresh salad (and then begrudgingly eat it anyway).
If you read enough history, it is often guys (and women) like TTP that end up with the pointed end of a pitchfork aimed in their direction when the masses have had enough of the misery they are suffering through in order that other people (often rich property owners) can maintain their wealth.
Like petrol prices people accept and get use to it, if the price of 91 goes back to say $1.90 people will be celebrating.
Something is happening and most are kept in the dark, noticing the bank branches disappearing? Although house prices ain’t going anywhere in the near future, those who without any assets will be worse off.
People with mortgages are actually “working for the bank” sadly. Are you in the system?
"Interesting to ponder why certain people here are vehemently negative"
Says the guy having a whinge about other people and calling them doom goblins!
https://i.pinimg.com/originals/d7/d5/e4/d7d5e4b35a87d304933d4d25f9603e4…
I couldn't agree more with TTP. Although I have no further vested interest in the interest rates hiking or not, I do feel that everyone here is very negative and wants the worst to happen for everyone. It's quite concerning that people have these type of vicious thoughts for others. Whatever happened to wishing everyone happiness and wealth? and not doom and suffering?
Anyways, freedom of speech, so everyone can say as they wish. But these types of economies go up and down in waves. What goes up, must come down, and what goes down, must go up.
-7
... first item on the bucket list : A bucket ! ...
So handy every day ... ATM , for capturing the tears of FHB's who were too late to the party ... and the door of guaranteened capital gains has been firmly slammed shut in their faces ...
... " this time is different ? " .... sadly , no ... gravity still works ...
Bernard is still firmly clinging to the idea inflation is just transitory. As a result he still seems to be convinced rates will soon be cut and price falls are almost over.
In this context his article might make sense. The problem is he doesn’t consider that his baseline assumptions could be wrong, even though the weight of evidence suggests rates will stay higher for longer. So he’s saying “everything will be fine if all my assumptions play out”
He’s also glossed over that fact that during covid bank stress tests got as low as 5.6%. He doesn’t consider what will happen if prices drop below early 2021 prices, when LVR limits were removed (and how many people this will put in neg equity). He also ignores that pre CCCFA stress tests are less reliable etc etc.
And that is precisely what happens every cycle. This is what the behavioural research on markets and bubbles shows. People will leave selling until it’s too late and then it’s a race to the exit…..which compounds the downturn.
Rates are very very likely to go to 8.5% (or higher), the risk is high, and yet multiple property investors will hold out and rely on emotional, irrational notions rendering them incapable of objective risk assessment.
The recency bias and the hard sell of the property cult “you can’t lose” narrative is in effect.
The other problem with this mentality is - if you have to sell, you have to take what you can get.
And that almost certainly won't be what you want.
My investor friends have also said 8% is their "we're in trouble" mark. Except they've already tried to sell, and no one wanted to buy. Though, they still think prices are trending up, and like to reference TA a lot as well, so maybe the price was set just a little too high, perhaps.
Maybe Bernard will be right?
Actually I don’t think he will be, but neither do I think the NZ economy will fall apart. I think it will be somewhere in between.
There will be pronounced areas of weakness and even carnage, but also areas and sectors that fare OK. It will be patchy.
And the same will apply to the financial well-being of households.
Unfortunately we now live in a day when everything is catastrophised and superlatives are disposable. Natural by-product of making attention spans a highly prized commodity.
Post February Russia is a good example of an economy not disintegrating immediately, despite having the kitchen sink thrown at it. That's not to say Russia's looking good, just that people's imaginations of imminent carnage are rarely rewarded in reality.
Was surprised to read yesterday in an article published here that "Among households with mortgages, the average percentage of disposable income dedicated to debt servicing is expected to rise from a recent low of 9% to 20%, based on current mortgage rates", even 20% is not a lot of disposable income to spend on mortgage payments. However, different story for those that borrowed in the last two years.
WTF! You must be on some real out there drugs brother to think that most of us can handle a 7% interest rate. Seeing beauty articles like this really pisses me off as a full time worker on the highest salary at their govt dept job. You make me need to take a blood pressure pill I’m that mad lol
I must live in a small subset then as most I know are complaining about $400ish mortgage payment increases a month. Thats a lot of beer and lollies for the kids. $400 bucks thats a lot of money. Obviously not for the millionaires the largest subset in NZ, this subset only make over a couple 100K.
Sorry, but voting Labour next election. Look at the record.
Tightening up the LVRs is enough for me. They take the sound advice. The wage subsidy is a large part of why we're ok.
It's too risky to put National in charge of the legislative branch of government. We need public service to be responsible.
Good post. Agree.
National has totally lost its way.
It needs to reposit itself as the party of all businesses NOT the party of landlords and big rich lazy business. NZ issues result from a lack of focus on productive business and too much focus on housing and low skilled immigration.
Their problem is that most of the MPs own multiple properties and earn big money so as seen as self serving elite. Their donors are big business who struggle to improve productivity and develop strategies to train their own workers.. so want to import cheap ones - who in turn dont earn enough to pay for the infrastructure and public services the consume - so the standard of living falls for all. Above all National completely miss the point most Kiwis want a better standard of living and more affordable housing - definitely most people dont want the elite to get richer at their expense
Labour knows this and will rightly exploit it. National will lose an election that was a given. Labour might not be able to run a drink up in a brewery but are the less evil.
Luxon has openly called poor people "bottom feeders".
Luxon would enjoy imposing austerity. He would get a kick out of it, in the same way as Uffendil gets a kick out of beating schoolboys with wooden bedlegs.
Beat those bottom feeders down. A bit of austerity will show them who's the boss.
It's all about being the winner in the powersuit looking down on the bottom feeders.
maybe they are in rude health because it hasnt happened yet,their interest rate hasnt refixed,they havent tried to book their holiday or been to the dentist or an auto mechanic and copped a big bill.its still incubating before it breaks out and we will all come down with a severe dose of inflation in time for the new year.
Yep we are slowly boiling the frog. More and more people will be fixing for longer, and a lot of people probably have over the last 6 months. This just delays the time it takes for the hurt to flow through. I think people are currently at the "maybe I won't have the muffin along with my takeaway coffee" level of cutting back, but come middle of next year the pain will be a lot more than that.
Interesting perspective. In my little world (commercial property) things feel somewhat different.
I am aware of 4 investors who have been told they have to tip in more equity (in each case >$1m) in the last 4 weeks.
Was informed of one investor today who has been told to sell several properties by the bank (portfolio of over $200m).
My bank manager told me yesterday one of their major clients (well known syndicator) is rolling off 3% interest costs in Dec and will likely be refinanced at 6.85%.
Personally I think things will get extremely tough in the next 6 months.
Those who are leveraged at over 40% based on 2021 valuations are going to burn.
Thats weird unless the investors are highly geared. I cannot imagine the investor with a 200m portfolio is highly geared probably 30 percent LVR. I have noticed that commercial property rents are indexed to inflation. If a property is geared 40 percent, the increase in interest rates would be covered by the increase in rents. Further, stress test interest rates are now at 7.5 versus 6.5 earlier, so they have not increased by the same margin as the actual floating rate.
A major concern is the tenant of a commercial property that faces life and death daily. And that becomes the concern of the property owner if the tenant does not renew. It takes a year or two for leases to expire.
"Usually lease returns start at 7% but more often around 10%"
I think you may be a bit out of date. I sold a couple of small industrial properties earlier this year at around 4% yield. Last time I saw 10% yields on Auckland industrial property was around 2004-2005.
Not really the same thing happened post GFC. It’s simple maths. The banks have been lending up to 40-45% of valuation. Purchasers have been buying properties at yields of 4-5%. Now interest rates have climbed to closer to 7% that drives down the value of properties. Valuations have pulled back circa 10% and will fall further. Banks recognise this and are now selectively approaching owners to tell them they will need to top up the equity so they don’t breach banking covenants. Few rentals are CPI indexed. Most are fixed increases of 2.5-3% pa.
Just ran the numbers below using NPV analysis.
If cash flows increase at inflation (say 8%) but discount rate increases from 3% to the new stress test at 8%, the value of the asset drops 40% which could put it near or in negative equity.
So I can see why the banks wouldn't want to lend on it - or are asking for additional equity from the investors.
"If a property is geared 40 percent, the increase in interest rates would be covered by the increase in rents"
Out of interest I thought I'd run the numbers on this.
If your commercial property starts with an initial rental income using an example income of $30,000 and it increases at 8% inflation a year and the lending is arranged for a 20 year term (for example), if the discount rate applied to this is investment is 3% (i.e. say current lending rate), the Net Present Value of the cash flows is $948,395.
If the discount rate increases to 8% as the banks run the new stress test rate, this reduces to $555,555.
So even though your income on the commercial property is increasing at the rate of inflation, the higher discount rate erodes this, and the value of the asset drops by around 40% - removing all of the equity you hold in the property.
I can see why the banks are getting nervous and asking leveraged investors for additional equity.
Thanks for update JamesM... this is the picture I'm hearing as well.
Business and investors have been institutionalised into a low-interest rate environment...their cash flows and leverage never contemplated doubling of rates +.
A great awakening is about to occur.
I think this has less to do with interest rates than the massive shift to working from home.
This is reflected in the total return for a number of office based REITS across the world - especially when compared to world stockmarket returns.
You'd probably find that smaller commercial property syndicates (assuming the portfolio is office weighted) - have less ability to attract high quality tenants.
I only have a few examples to draw on but office occupancy rates have fallen by as much as 50%. If you run the DCF model based on the revised occupancy then it's perhaps not surprising the banks are getting nervous.
Am I missing something?
"But even then, a 9.3% unemployment rate and a 47% fall in prices aren't enough to take down the banking system. Not even close."
Bernard is using the outcomes of a test to ascertain whether banks will collapse and concluding that because Banks will not collapse we'll all be fine???
10 years ago -- the i wont buy a house Hickey -- would have only been concerned or the welfare and impact on the public and not given a flying duck about the banks ----- NOW -- totally corrupted by the gravy train that funds his lifestyle be selling advertisign space to property brokers soon
The scary thing is that the politicians and reserve banks are simply trying to defy gravity. Downturns will happen as night follows day. The problems is that the longer we try to stop a downturn and the higher the boom.. the greater and more prolonged the trough.
The bigger problem is that there are likely a few major businesses and countries that have hidden massive debts..at some point one will fail (like evergrande) and the dominos may start to fall.
points taken and Housemouse yours too -- but it finally appears taht there is no more road for the can to be kicked down -- Inflation has done a Waka Kotai to taht option -- closed and full of potholes! If they go go up down or around hte blockage with the can i am sure they would -- but its hard to see what that even looks like with no unemployment -- wage rises inflation goign nowhere in a hurry -- Ukraine still going supply chains not improving and a global labour shortage in the developed world - and FFS sort out hte lack of spell checker -- not all touch typists !
Unclear to me why there’s not the remotest mention in here of the biggest risk of all - and one that will not care what house prices or interest rates do - that’s the international demand for things we sell. From the top of a commodity cycle there’s only one way but down - china is getting poorer - as is every country we trade with other than the US (reserve currency and all that) -if our balance of trade continues to fall to bits - then all the rude health in the world isn’t going to keep people in jobs and people out of jobs often find themselves out of other things too.
This commentary seems to assume we are subjected only to domestic influences - sadly this is a very long way from the truth. If commodities hold up - rude health might pull us through - if not - I’m picking this spin will be about as accurate as inflation was ‘transitory’.
PS - the mortgages most at risk aren’t the ones who bought houses - they’re the ones that re-mortgaged to keep the business afloat - and now the business and the house hang in the balance ….
Yep I think you got this one wrong Bernard. I have asked around, farmers are looking at nearly 9% to fix for a couple of years. Think of all those giant multi million dollar loans. Many interest only.
Then consider many operate with large overdrafts. And overdraft money has gone over 10%....
Then imagine what its like to not get your fruit picked or stock killed at optimum timing. Cos that is happening everywhere.
Add in not getting stuff fixed. Cant get parts. Cant get the staff.
Its about the big changes in our current world. Its not getting better its getting worse. I went to get some brushkiller for the annual blackberry battle. Doubled in price. Diesel fuel has doubled.
Fundamentals have changed.
Try and get anything fixed? sorry what staff we have are away. Sick.
Go to the bank. Only open between 10 and 4. Or there is no bank left at all.
Feeling crook? Its a months wait to see a GP.
In rude health Bernard? You better be cos all this stuff is adding up bit by bit. Until it just doesnt add up any more.
But the value of farm land has gone up, bouyed by the value of carbon. Farmers may struggle to meet the higher interest costs, but they should typically be a long way away from negative equity, unlike homeowners who have bought in the last few years and are facing both mounting interest and sinking values.
Its not about negative equity. Its about the money go round. An awful lot less money to spend in town.
Secondly fertiliser. The price is crippling. Your food prices havn't actually been hit by this cost yet. Fertility can be mined. But not for long. Soon we will face a conundrum, pay more for food or we will produce less.
There is no gas in the tank to withstand the shock of the fertiliser price rises. More money is headed to interest payments. I dont see a quick end to this. We have entered a vicious cycle.
All I will say is that people who earn really big money can so easily get detached from reality. The assumption becomes because I'm all right then everyone is alright. I had an 8.6% mortgage back in the day but by the time that happened I had what looks like a tiny mortgage of $200K. If rates get back to those levels there will be trouble that goes exponential over a certain threshold.
Very good post.
The elite and leaders of our country have lost any concept how most people live and their financial buffer. Recent decisions reflect that problem.
We are one black swan event from a large number of people having a financial catastrophe. And thus a massive social issue.
Rotoruas motels and nation wide Hospital ED problems lead me to believe otherwise ... Seeing the meat section of the supermarket so well stocked and bypassed by so many leads me to believe otherwise... taking a deep breath and breathing out thru my nose isnt helping ...I might need a ventilator...lol...Nice to know the banks are healthy although its difficult too see how they couldnt be given the rates they are pushing.... NZ debt , 3 million dollars an hour...lol, Can I get a couple of pocket spray ventilators Doc? https://www.debtclock.nz/
Hats of to Bernard Hickey for being so positive when every data, news and analysis is pointing towards disaster.
Do agree that so much money has been pumped in the system that 15% - 20% fall in house value will make no difference, so chill.
Do think that it will get worse before getting normal as this downside is just the begining and has a long way to go.
This will be our daily fare for some time now I imagine:
No money, in negative equity...
The majority of people will be just fine. For some, probably a significant minority, this is going to be an epic catastrophe.
It seems to me that most are just avoiding thinking about it. Possibly even stepping up spending to enjoy the last months of the good times. The malls and streets are busy....
ok then if majority of mortgage holders can withstand 7-9% interest rates and only a few will actually be effected, then whats the point of keep hiking the rates up, as it will have minimal effect on controlling inflation. If the majority of people who got a 8% payrise and have a stable rent price or are mortgage free don't feel the effects of the interest rate hikes, again whats the point. I think someone said only 23% of households carry a mortgage, so seems like if you think targeting such a small % of the population is going to tackle inflation (which we keep getting told is driven from offshore) then I don't expect inflation to come down anytime soon. Now wage rises are in at 8%, I have never known them to suddenly decrease by that amount, especially given the current immigration policy.
Might not be related to anything, but I'm always on the lookout for obscure signs that things are turning, and turning hard. I've seen this car on sale near my place for the last 4-5 months. It was first advertised somewhere over $100k I think, then price dropped to 99k, now $79k. I mention it because these jdm performance cars were in a huge bubble, fuelled by millenials making bank on crypto, the wealth effect of housing, etc.
https://www.trademe.co.nz/a/motors/cars/mitsubishi/lancer/listing/38265…
This site likes to focus on housing, but yeah there's been a fairly obvious asset bubble across the board. Cars got a bigger boost by supply issues on new vehicles, I know a couple of people that sold 2-3 year old cars and bought equivalent new replacement make and models and pocketed a few grand.
You'd have to expect toy prices to drop over the next 12+ months.
One is a decade old WRC hero car and the other is a new EV. That's not exactly an apples with apples comparison.
Petrol pump prices and congestion are probably doing the most damage. Easy to cop a Leaf if the alternative is $200 a week. Can't do much about the time loss but at least it's not costing you to stand still.
Bernard "big pay rises of 8.6% will hold things up" Hickey.
Couple (with student loan) each on $100,000K a year, total take home pay = $125K ish
After 8.6% pay rise total take home pay = $133K ish
Total extra take home = $8K
Mortgage repayment for loan of 700K @ 2.5% = $33K ish per year
Mortgage repayment for loan of 700K @ 7% = $56K ish per year
Difference = $23K - $8K = $15K short fall.
Oh wait....... what? Yeah na.....
Exactly, I had been looking at this the other day. At best pay rises will slightly mitigate.
And your figures are conservative too. Many on those incomes will have mortgages significantly larger than 700k. Also factor in increases in cost of living eroding perhaps a half of that new 8k net increase in household income…
I don’t agree it’s ‘not many’. This type of scenario could apply to many who bought in the last 2-3 years. That could well be tens of thousands of households.
I agree it’s a minority of the population though, so it will limit the wider economic implications, even though it is painful at a household level.
There are bigger things to worry about at a macro level, such as - a looming building industry slump, small business pain, and challenges on farms.
Rough napkin maths says theyres about 30,000 FHBs over the 2020-2022 period.
How many are only on 1-2 year terms I can't easily see.
How many of those will fall over at the slightest notion of higher rates, as opposed to battling it out is hard to say. But yeah probably a few thousand.
... at up to 10x DTI's.
This is the elephant in the room, that Bernard Hickey and OneRoof, and even interest.co.nz refuse to look at.
They are all focusing on homeowners. The collapse will be sparked by overleveraged house collectors, who have multiple mortgages over multiple properties.
The numbers in the article below are terrifying. For anyone with the guts to look.
https://www.interest.co.nz/property/113230/new-reserve-bank-debt-income…
100% agree, increased mortgage payments across multiple properties (even if just one owner occupied and one investment property) combined with the loss of tax deductibility of those interest payments, is going to cause massive financial stress amongst investors with incomes that cant sustain two mortgages and increased tax payments.
Using https://www.paye.net.nz/ with M/SL and 3% kiwisaver
$100,000 = $62,172.16
$108,600 = 66,518.60
Stuff are starting to trickle through the anecdotal opposite, but I do guess in the scheme of things those who did buy at peak and only lock in for a 1 year rate are a small number.
Judging by the rhetoric on stuff there is little to no empathy for these buyers. I hope my friends who just couldn't wait anymore and jumped in within the last year don't end up in the same boat as this guy.
I have plenty of empathy for these people.
One can be high and mighty and say they made a silly decision, but that ignores the fact that most people are not economic / financial nerds like us here, and it also ignores the fact that they live in a society where the overwhelming narrative all around them is that ‘property values never fall, mate’. A view cynically hyped up by the MSM, which as we all know has so much influence and power.
Most of us were exposed to the possibility of higher interest rates at one time or another and took a calculated risk. We should have a lot of empathy because we got lucky and dodged a bullet. I remember having many a sleepless night when I pondered the possibilities of only having 20% equity.
Most of these stories seem a little bit odd. Having some equity and paying for only half the mortgage should be cheaper than rent. Marriage breakups don't help though. A lot of people live on the edge and seem to not even consider cutting back on spending like going to cafes and eating out is a human right or something.
http://www.davidmcwilliams.ie/arrears-and-the-paradox-of-aggregation/
see graph in this post (also note, people who warned of it happening where also labeled DGMs)
Arrears always start as a small percentage and then grow - the same happened in Ireland and in the end they had to bail out the system of sorts
The scary part, is in Ireland interest rates halved, and yet still the arrears kept climbing to the point of a bail out.
Bernard - I’ve lost all respect for you if you continue to pump ‘most of us will be fine BS’
You’ve either got no clue of the mess that’s been created through too much household debt that’s now being wickedly repriced…. or you’ve bought some developmental land bank with no rental income at the top of the market hoping for a retirement payday and now realise your only hope of ever developing it or shifting it is trying to soften the house price/land value landing.
A real economist or commentator like Bagrie talks straight no BS and will say something like ‘things aren’t looking flash for NZ and a lot of people’
Unfortunately, it’s not what mainstream press wants to hear, so they wheel in Tony the comb (who by his own admission, owns no shares only property, surprise, surprise), who tells them they should load up on debt now with a property purchase.
FFS - there has never been a worse time in the last 30 years to load up with 25-30 years of debt when you can’t calculate with any degree of certainty an estimated cost of servicing.
Few issues here Bernard, you are suffering from recency bias, looking at recent data and pushing that forward as "that's what will continue" regarding the deliquency data. Not necessarily so.
If we get businesses failing because they can't pay interest rates on their home loans backing them or their business loans due to higher costs everywhere, we hit a tipping point where unemployment starts going up at the same time as high inflation. And that's the danger, the linear thinking of "we have tested for this and everything will be fine" doesn't gel with me as it is backed by assumptions of people able to pay still. Look at the amount wiped off from the "value" of NZs residential housing from the peak and assume a good portion of that is backed by loans at a low rate that is about to go a lot higher. Do the banks really have the 10s of billions of capital sitting around just to absorb this haircut? Maybe for the initial shocks, but this is the start of the problems, not the end. Plus remember cost of living for those people are going up dramatically as well, which is absorbing their wage rises.
This might be a noob question, but are the 'capital requirements' of banks just the difference in the estimated value of the security they hold vs the debt secured against them or is it actual cash they are required to hold? If it is the former, and the housing market tanks so that the capital does not meet the requirements, then would the RBNZ require them to recapitalization to meet the requirements? How would they go about doing that? Ask shareholders for a top up or just hope that they somehow make enough profits to retain (which seems unlikely in such a scenario). Sorry not an economist.
Actually, we'll almost all be just fine
is an expert talking or spirtiual leader giving hope........:)
https://i.stuff.co.nz/business/world/300729732/us-fed-unleashes-another…
Where does he hint at a pull back. He was open and said that is premature to decide, now and will be discussed in next meeting based on data to decide.....
Cherry picking by almost entire media.
I'm very late to this comments section, when I read the article which basically is saying "don't worry, things will be OK" I thought "oh no, the majority of the commenters are not going to like news saying things are not that bad. First comment says "the author of the article is wrong" and gets over 40 thumbs up...
Why are so many commenters so desperate for bad news? No wonder their lives are miserable!
My life rocks, maybe I wish I could carve a bit better on my board, maybe I wish I wasn't getting any older, maybe I wish my kids were not getting bigger then me. But definitely happy house prices are going down so more affordable for majority of people in NZ. Life couldn't be better. Business looks to be going in right direction. Popcorn has a lot of butter. All Blacks may even win. I see no negativity, only views different to yours.
The problem is that while banks may have stress tested borrowers with 7% interest rates at the time they took out the loan, that was done based on disposable income available after paying expenses, and that would not have accounted for 8% inflation in those expenses (and more like 20%+ higher in the things that count like food, power, petrol, etc). So while borrowers might have had money available to pay extra on the mortgage two years ago, now other household costs have eaten away that disposable income, so where is the money going to come from for the extra mortgage payments?
Im on 2.39% now and struggling with ill health , cost of living and may need to go on a benefit, Im a ubereats driver, my income is less than $25,000
My fixed term runs out in march 2023, should I break now and fix now, in your opinion.
I don't want to lose my home next year, but struggling to cover costs already.
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