New Zealanders on borrow-and-spend treadmill

Property

Westpac's chief economist says low interest rates and rising house prices are cranking up the borrow and spend cycle

17th Jun 16, 2:16pm by Greg Ninness

New Zealanders are in a strong borrow-and-spend cycle, fuelled by strongly rising house prices, according to Westpac's chief economist Dominick Stephens.

In his latest Home Truths commentary on the housing market, Stephens said house prices were continuing to be pushed up by low interest rates.

"The New Zealand housing market remains red hot," he said.

"The REINZ House Price Index has now risen 6.9% over the past three months, which is the fastest three month gain since 2005.

"And a wide tableau of other indicators all point in the direction of house prices continuing to rise rapidly in the coming months," he said, pointing the finger at low interest rates as the culprit.

"Our assessment is that low interest rates are the key driver of the market at present," Stephens said.

"Low interest rates also help explain why share prices and commercial property prices are rising at the same time as house prices.

"Rising house prices have sparked a strong borrow-and-spend dynamic across the economy.

"When house prices rise, home owners tend to spend some of their increased wealth.

"Meanwhile, house buyers need to borrow more, and they are able to do so courtesy of low interest rates.

"The net effect is that the nation borrows and spends," he said.

And he doesn't see that pattern ending anytime soon.

"Once it gets going it can develop a life of its own," Stephens said.

"This self-reinforcing cycle tends to continue until a circuit breaker comes along to end the party.

"Last decade a sharp lift in interest rates was the circuit-breaker, but we don't expect a repeat of that anytime soon.

"In fact, we can see no circuit-breaker at all over the coming year or so, which is why we are forecasting such strong house price inflation over that period," he said.

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53 Comments

by sammnz | 17th Jun 16, 2:42pm 1466131347

*gets the popcorn out*

by Boatman | 17th Jun 16, 4:28pm 1466137705

Seriously ? Forget the popcorn , bring out the Caviar and crack a bottle of Moet en Chandon , and hope like hell we don't go into a shock recession or an Asian -style Banking /Currency crisis anytime soon.

I am always fearful of going on a rampant spending spree with unearned money ............ things always change its the only constant we know

by Colin | 17th Jun 16, 2:52pm 1466131951

Answer raise interest rates before the ended game mess gets even bigger this has been obvious for a long time fiddling around the edges with new lending rules etc is a complete waste of time.

by TheFuzz | 17th Jun 16, 3:04pm 1466132685

And completely sink the farmers?

by Henry Filth | 17th Jun 16, 3:43pm 1466134990

Oh, you can probably do a spot of targeting and differentiating, The old chap. Needn't be too hard on the yokels at all, really.

by Stephen Hulme | 17th Jun 16, 4:04pm 1466136282

Farmers could help themselves by reducing the supply glut. A reduction in supply would have much more impact than perpetually lower interest rates fanning interest cost capitalisation and land banking.

by Justice | 17th Jun 16, 4:50pm 1466139010

Only the one's living/borrowing beyond their means. Currently and for quite a while now savers have been used/abused and exploited to save those who are living well beyond their means. Time to end the charade and reward the diligent instead of the dimwitted

by Justice | 17th Jun 16, 4:51pm 1466139109

Yeap! raise them 1-2% and have a good almighty clean out. End the debt binge party!

by Stephen Hulme | 17th Jun 16, 5:25pm 1466141106

Indeed. Stop the repressive state inspired regime of unelected officials imposing taxes upon savers to benefit debtors.

by i am not a nimby | 17th Jun 16, 3:16pm 1466133377

first comes a recession. as soon as its (recession) spotted we want people to get out (i assume people here meaning investors) and borrow and spend. In the meantime, everyday investors, as part of their long term plan have been doing this very same thing from day zero and continue to do so on a regular and in a planned manner / basis- and tell me whats wrong with that. I assume most of the current investors know what they are doing. May be they are not investing in "what I think is the right thing to invest in". or may be they are not borrowing "from me and instead borrowing from other banks". Leave the scales alone. Let it swing back and forth a bit, It will settle in the middle, if its not already there.

by rastus1 | 17th Jun 16, 3:20pm 1466133623

"In fact, we can see no circuit-breaker at all over the coming year or so". In other words, keep spending folks because we cant see any reason for you not to. Which of course suggests they have some magical ability to see it coming...

by Uninterested | 17th Jun 16, 3:55pm 1466135739

He's saying "...year or so..."
That's a ridiculously short period of time compared to the length of the average mortgage!!!!!!!
So if the circuit breaker happens in 3 yrs time everyone who bought recently is absolutely and completely stuffed. So will the banks be, and consequently, unfortunately, so will savers be. (Unless the govt steps in, and then its tax payers too!)

by i am not a nimby | 17th Jun 16, 3:34pm 1466134493

these very same "experts in all" people who wants all this to stop because its ALL wrong to invest in houses for your retirement came out around 2009 (and still going on) and gave their "know it all" and told investors to sell out investment homes or dont buy now because prices are crazy and will drop- "buy then" . Feel sorry for the guys who listened to these "know it all experts". It happens all the time - free advice from these "know it all experts". Listen to them, but be careful, be very careful.

by J.C. | 17th Jun 16, 4:10pm 1466136613

Yeah, if I had known, I would have gone for broke. It's almost like not giving your heart to Jesus Christ then finding out that he's for real.

by dictator | 17th Jun 16, 4:13pm 1466136812

Eggs in one basket investing? Sounds great! Given that in 25 years we will be around peak retirement population, with about one third of the population above the current retirement age, how many houses do you think each retiree can buy as their retirement "fund"?

Why wouldn't people sell some of their investment properties to buy into bonds and shares to spread the risk. Realising gains allows for rebalancing and an increase in return.

What are the people who invested everything in property supposed to do with the 50% price crash that has hit now their bubble has burst? Why do NZers insist on gambling instead of investing?

by Justice | 17th Jun 16, 4:58pm 1466139538

And they are still correct. Time factors for such debt consequences to go full circle is about 10 years now. Nothing has changed since 2008, the debts still remain and are bigger than ever. Borrowed time....borrowed time

by Northland Hippy | 17th Jun 16, 9:48pm 1466156907

The banks have made it pretty obvious that interest rates aren't going anywhere soon accept maybe down. The only way to slow this market, not even mentioned by this bank economist, is to remove the demand.
Stop foreigners from all over the world, buying NZ real estate. Currently anyone anywhere in the World can buy up to 5ha without any restrictions. They don't even need to visit NZ.
Cap immigration at 10,000 useful people.
The rampant property inflation would stop overnight.
The further from 'wages reality' that the property prices get the worse the inevitable crash and recession will be.

by Northland Hippy | 17th Jun 16, 6:18pm 1466144322

I don't understand how so many educated intelligent NZ'ers can't see the unfolding disaster that our property market is becoming.
I don't understand how so many educated intelligent NZ'ers can see the symptoms but can't associate them with the causes of the unfolding economic disaster.
Politicians, media and economists are either blinded by their capital gains or complicit to the selling off, of our low population and the countries infrastructure.
Our exports for the year are $36 billion.
Auckland needs $17 billion for the basic infrastructure to provide for the housing shortage. That doesn't include a hospital or power station or another lane on Auckland's motorways.
What is this population growth doing for our export income? NOTHING. we just have more people to support with that income.
The immigrants bring in foreign currency which pumps the property market and supports car salesman but after the currency is spent, then what?
Wake up people, Where selling our lifestyle, our infrastructure and our children's future.

by sharetrader | 17th Jun 16, 6:17pm 1466144229

try 2-3 lanes needed, try driving down any of aucklands motorways during peak if you can get up to 20ks an hour your doing great.
Sh1 needs to be 5 lanes wide from Bombay, and sh20 needs to be 4 lines wide to handle the growth in population.
not to mention all the main roads needing widening as well.
I think 17 bil is a bit light

by bender | 17th Jun 16, 6:29pm 1466144979

Go to cities in the USA and see what good it does to build all those lanes. Just more gridlock. Build it and they will come and fill it. Not just LA. Portland, Oregon and Philadelphia, etc.

by Northland Hippy | 17th Jun 16, 6:32pm 1466145156

Yeah sharetrader, $17 billion is just a drop in the bucket of what it costs to build infrastructure for the 200,000 people who have immigrated here in the last 3 years. The NZ taxpayer has laid it on and will have to build the infrastructure needed to support these people. The NZers who want more people should go check out England. The NZers who think roads and bridges are part of the natural landscape should go check out a 3rd world country and then maybe realize the value of what we've got. (mostly built and paid for by the much maligned baby boomers back in the days of the Ministry Of Works)

by rastus1 | 17th Jun 16, 9:02pm 1466154138

The politicians are getting away with this nonsense simply because they are not being held account by the media on prime time TV and radio. Instead they get away with sound bites of rubbish which is never contested. I remember well the likes of Tom Scott and co getting stuck into Muldoon at parliamentary press conferences. Nowdays they are scarred of getting banned and missing the invite to the next overseas junket with Key and his sales team.

by iconoclast | 18th Jun 16, 9:47am 1466200026

You are being sedated

Northland Hippy asks a good question "why so many educated intelligent NZ'ers can't see the unfolding disaster that our property market is becoming"

From my perspective One answer is the absence of real-information. Everyone is aware that there are serious societal problems and what the consequences are - but we dont know what the causes are

Imagine if you will the possibility that house prices stabilise and stay flat for 20 years, everyone adjusts to the new normal, and then, suddenly the same begins to happen all over again - nobody knows what caused it in the first place and nobody will know what caused it to stabilise

NZ will go through the same crisis again - no-one will know why, or what to do about it

What is astonishing is the way the populace is mis-led and beguiled, and fed smoke-and-mirrors by the lever-pullers, and the sad state of affairs the main-stream-media are in. They dont and cant afford investigative journalists. That isnt helped by a compliant govt controlled television station constantly feeding the masses with sanitized feel-good nothingness

I have difficulty watching the amount of advertising on TV for feel-good self-enhancing potions and medications

Last night on TV One, there was Doctor Nick Smith, he with a doctorate in earthquakes, re-announcing for the 4th time the release of 190 sections on crown land in Massey. Top of the news. First announcend May 2015. Twelve months later nothing done. But, we have had 4 announcements. And the builder will be (one day) you guessed it, Fletcher Building. Sweetheart deal done and dusted.

What isn't announced is the use of crown land which is of fixed supply.

What happens next time around, when all the SHA's are done, all the available crown land gone

Selling off crown land doesn't solve the problem - it postpones it till another time

by Crow22Darkness | 18th Jun 16, 3:52am 1466178763

While 40,000-50,000 Kiwis moved to Australia annually over the last 15 years. Australia grew by the population of NZ in just the last 13 years.

by Northland Hippy | 18th Jun 16, 8:38am 1466195897

Yeah Crow22, most of those kiwi's were immigrants who used NZ as a stepping stone to get into Oz. The Oz'ies back lash has been to deteriorate our special relationship with them so that now kiwis in Oz can't get benifits or free med care and are justifiably now sent home if misbehaving. we didn't even used to need a passport to go to Oz.. We were like one country.

by J.C. | 17th Jun 16, 4:08pm 1466136517

I respect his honesty.

by OpenPensionResolutn | 17th Jun 16, 4:10pm 1466136601

Anyone with a modicum of common sense is using this low interest time to get out of any debt they are in.

Those leveraging up large will soon learn that bankruptcy isn't an automatic out and that bailouts are for banks not borrowers.

by Boatman | 17th Jun 16, 4:30pm 1466137835

Anyone borrowing against this supposed unearned "windfall" has never been to the moors and Fells of Scotland seen Scotch mist disappear

by Too clever by half | 17th Jun 16, 4:57pm 1466139425

Don't worry be Happy before the asteroid hits one day and wipes us all out and what does it really matter when dead and gone.

by ham n eggs | 17th Jun 16, 5:02pm 1466139762

the only circuit breaker left is the (final) crash of the financial system. Interest rates globally can never be raised again - real growth is dead.

by sharetrader | 17th Jun 16, 6:22pm 1466144566

I would not say never, but we are on a path to the bottom, sooner or later neg interest rates will not work. then I guess it will be time for a new solution, my guess helicopter money

by Justice | 17th Jun 16, 5:08pm 1466140124

"Last decade a sharp lift in interest rates was the circuit-breaker, but we don't expect a repeat of that anytime soon."

Yet that is EXACTLY what the RBNZ have the capability to do IF they really wanted to end the madness.

Yes there would be consequences, and pain, and bankruptcy in certain areas. But the ones who didn't binge or 'bet on debt' will soon pick up the pieces and carry on in a more sound educated manner.

by Northland Hippy | 17th Jun 16, 5:50pm 1466142616

Justice, lifting interest rates will only hurt NZ'ers and throw us into recession, meanwhile the world carries on buying our houses and renting them back to us.
Stop overseas buyers and the market will correct itself back to what NZ,ers can afford.

by Justice | 17th Jun 16, 6:12pm 1466143929

Lowering rates is hurting many NZder's! Many of those NZder's just happen to be wisely debt averse, or living on savings to top up their pensions, or trying to save for a deposit......etc

Why should THEY be punished for the excesses of others?

by Justice | 17th Jun 16, 5:26pm 1466141190

I see Westpac cut saving rates again along with a few others this week. Those deposits become less secure each time these banks do it, due to added depositor dissatisfaction .
They are starting to feel like victims and will feel like "whats the point of saving at all with a bank?"
Might as well buy a safe and at the very least secure those hard earned savings.
So when does it reach a point where the cutting off of incentives to deposit start to effect borrowing levels to 'fractionally' fund the growth of the debt binge?

by Ezy | 17th Jun 16, 10:14pm 1466158478

And gold is tracking up steadily. The great thing about gold is that you can't give it a haircut too. It's immune from the OBR.

by Northland Hippy | 17th Jun 16, 10:39pm 1466159993

How does gold work Ezy? It doesn't pay you a dividend or rent. Is it gambling on timing it right? do you actually get your gold delivered to you? or is it symbolic gold represented on paper?

by Ezy | 20th Jun 16, 10:52am 1466376779

We're just about to talk to our financial adviser about using as part of a more conservative investment portfolio. There's two ways you can invest - the first in gold itself where you buy actual minted bars and they sit in a safe/bank deposit box somewhere. The second is in a gold mining or trading co where you get the dividend and fluctuating share value typically indexed with the gold price. Gold is one of the most stable risk averse investments available. You're unlikely to make a fortune in capital gain, although who knows if we hit "GFC2: The Awakening". And at the end of the day you have a commodity that's been held in high value since time immemorial. See the 20 year prices here https://www.bullionvault.com/gold-price-chart.do

by KH | 20th Jun 16, 11:08am 1466377683

Why would you - but if you are going to buy gold anyway then make sure you actually receive it. Then physically carry it somewhere else for safe storage under your control.
Too much of the gold trading is on paper only, and from time to time people have not been able to find the gold they were told they had purchased.
If you are buying it as a high level defence to some economic disaster, then it's value to you is being able to actually put your physical hands on it. At the time of disaster, the printout on paper won't give you much comfort.
There is a lot of physical gold held in the poor parts of India -jewellery. And in some places it's diamonds. Because they know that if the poo really hits the fan they can pick it up and bolt for the border.

by Crazy Horse | 17th Jun 16, 5:16pm 1466140618

Now Justice ....don't you go upsetting the "PPP" - Property Ponzi Party - you will ruin YL's weekend with truthful statements like that !

by Justice | 17th Jun 16, 5:23pm 1466141007

It's crazy!....... Crazy Horse is it not? So blatantly obvious whats being protected at everyone else's expense to try and save the face of the corrupt banking system and the institution/s that 'claim' to regulate it.

by MortgageBelt | 17th Jun 16, 5:39pm 1466141950

Interest rates are not the driver of Auckland high house prices.
NZ interest rates are very high compared to other developed economies.
Why can't commentators face the truth about the real, dominant drivers of high property prices in NZ?

by Justice | 17th Jun 16, 5:49pm 1466142574

Ok, well then no harm in putting them up significantly then using that logic.

I do understand you are really pointing to large immigration numbers and foreign money coming here as the key driver. But to say there is no direct link to a great deal of that domestic speculation and our OWN record low interest rates (regardless of what they are abroad) is being dis-ingenious.

Continued lowering is fixing nothing and got us ALL here, including abroad ( referring to the global debt issue around housing/property) So is it not logical to kill it via doing the reverse?

Your thoughts MB?

by notaneconomist | 17th Jun 16, 6:38pm 1466145487

Explain what happened when the last labour led government was in then Justice....NZ had the higher interest rates back then and yet house prices doubled!!!

by Justice | 18th Jun 16, 8:06am 1466193990

Define "back then" so I can answer your claim. 2001-2003? 2003-2006? 2006-2008?

by Northland Hippy | 17th Jun 16, 10:29pm 1466159360

I think for Justice to not see the bigger picture it must be that his 'vested interest' is the amount of interest payment he is receiving on his savings.

by Justice | 18th Jun 16, 8:07am 1466194073

The bigger picture? Like Japan has you reckon? Lol

by sharetrader | 18th Jun 16, 10:24am 1466202246

the low world wide rates, and easy credit to be loaned for property is the biggest driver. there is a lot of credit out there looking for a home and our open door policy means we get some headed our way.
until you lower immigration , change the immigration policy to not include housing, and close of non citizens being able to buy.
then you could bring in LVRs and income and loan that would work

by quality guy | 18th Jun 16, 8:21am 1466194880

What are people moaning about. This spend and borrow cycle is exactly what the rbnz wants.....to use their words...stimulate growth, stimulate spending.

by Justice | 18th Jun 16, 8:45am 1466196337

Define growth? Perpetual Debt fueled? thus just banks being the overall winners.

by quality guy | 18th Jun 16, 2:24pm 1466216649

Well justice, do you really expect this "not" to happen with a drop in interest rates? Its like giving a baby candy and telling him not to eat it. I dont own property. I dont have debt. I do have liquidity. The rbnz doesnt like people like me because i dont spend. Im a saver. But somehow thats bad for the economy. I disagree. Saving is actually deferred spending and hence, deferred economic growth. Assuming you can hold on to it. Trust me this isnt going to be perpetual debt fuel growth. The world wants to deflate. And it will in a very big way.

by Justice | 18th Jun 16, 3:54pm 1466222042

Quality Im not advocating for a drop. Im advocating for a definitive rise to benefit people just like you.

by Penguin | 18th Jun 16, 6:47pm 1466232446

Everyone is obssessed with house prices but look at how prices in bonds,equities and agricultural land has done in last 10 years. The NZX has performed almost in line with the Auckland housing market.
The unfortunate consequence of Quantitative Easing is due to putting billions more cash into circulation it has devalued every $1 that people held.