It remains to be seen whether the X and Y lot are as silly as their parents. Will they trot into the banks and stick their necks in the noose. Gotta rush on in and grab that $300000 loan before the property drops to below $200000! When do the peasants learn?

Well, Nicholas Arrand, you can see it and call it as you like, but the whole point is that it increases the un-sustainability of current house prices. If it's not possible for gen x and y to get on the ladder by their own thrift, then is loaning capital from a relative the way to go.

What they are not talking about above is what happens if the borrower defaults on their end - say they get laid of from work and cannot easily find replacement income, where does this leave mum and dad's commitment.

Sorry Nicholas, I was trying to explain what you were saying rather than rebuke it.

Next stop, intergenerational loans.

A la Japan in the 80's, look how well that worked out for them.

It doesn't surprise me that the banks are bringing out new products to help keep the NZ Ponzi housing scheme afloat. But like all Ponzi schemes it will eventually crash. I'm surprised at how well NZ house prices have fared compared to the US and UK. Unfortunately I think that the longer they remain unrealistically elevated the harder they will fall. My advice to Gen X & Y is to either rent or live with their parents, as housing will again become affordable due to lower prices, not higher wages or Ponzi financing (as above).

Will this be the next Government bailout? Parents who have pledged their houses against the properties bought by their children, who are now no longer able to pay their mortgage. However, just like the leaky home problem, I'm sure JK will be able to inflate it away.

Agree with previous posters. This is a crap idea from ground up, and only conjured to keep the bubble going.
To get prices reasonable, demand must go down, not propped up by banks.

I'm still amazed by the general willingness to borrow money. If house prices suddenly tenfolded, but interest rates cut to an tenth, thus maintaining the same mortgage servicing costs, would people still borrow? I guess this is what central banks are currently trying to find out...

If house prices suddenly tenfolded, but interest rates cut to an tenth, thus maintaining the same mortgage servicing costs, would people still borrow?

Yes - check out http://www.greaterfool.ca/ and http://vreaa.wordpress.com/ ---> Canadian interest rates are much lower than ours and the amounts people will borrow (its seems like 5-6x income) are scary.

I had a "Scary" experience in the weekend.
Went to the bank to get a mortgage pre-approval, they approved the mortgage I wanted, and it happened to be the mortgage that I thought we could realistically afford.
I then asked then to pump it up another $40-$50 and to see if we could still get approval at that level - and we could!
I couldn't believe it, because the mortgage I sought approval for was what I considered to be right on the edge of affordability

Hello Hugh
I got approval for a mortgage equivalent to around 3.5 times my salary (As my wiufe doesn't work my slary is the household income).
But I COULD get approval for 4 to 4.5 times my salary

MattinAuck

Thanks for that. Good to learn that you are not a mortgage slave!

Look forward to other readers experiences too......

Hugh - yes there's no way I want to be a slave! But if the banks had their way I could be!!!!!

for thanx news...
I would be most grateful to learn of the amounts being lent in relationship to gross annual household incomes. MattinAuck and others – can you enlighten us in this regard please?

@ Hugh,

Here is what the RBNZ says:

"By December 2008 the outstanding total debt of households had increased more than six times in dollar terms since 1990. As a percentage of households' disposable income, household debt peaked at over 160% early in 2008, nearing 3 times the December 1990 level. The weighted average interest rate on total household debt however had fallen from over 15% to just above 8.5% per annum (at December 2008, 92% of household debt was housing debt, at an average rate of around 8%)."

And here is a link to a graph showing household debt
http://www.rbnz.govt.nz/keygraphs/Fig5.html

Cheers,
Emma

I don't fancy your luck NA....Wally is pretty certain he can hear the bloody Tsunami closing in and he's staying way up on the high ground as far from the beaches of debt as he can get. From up there it's easy to see the pollies, the bank managers, the poodle media and some fool from the RBNZ herding the peasants down onto the beaches with soothing words and free ice creams for the kiddies....guess who will be left playing at sandcastles when the roar of the water reaches them?

I think its going to fall apart. 'Govt for Free', I don't think that can last for long.

The bad news is that that improvement in saving (cash-flow) is
based on things that are not likely to remain all-else-equal. First,
while the private sector has lifted its gross saving, the
improvement in net cash flow has also been due to a crunching
reduction in investment spending (Exhibit 5). Over the medium
term this is unsustainable (by the middle of last year, private
net investment – investment net of depreciation – had fallen to
zero, something not seen since the 1940s).
The second unsustainable element is that the private sector –
particularly the household sector – has received a substantial
income top-up from the public sector. As we’ve noted before,
the household sector is now receiving more in cash payments
from the government than it is paying in taxes. In short, it’s
getting the government for free. This is clearly not
macro-economically sustainable.
How this will be resolved is not clear, but will have an important
bearing on risk assets. Our US macro team sees the likely
increase in investment underpinning a rise in private sector
credit demand. This increase will clash with still-large public
sector borrowing. The result will be a sharp lift in long-end
interest rates.

@Steptoe
Agreed - but I'm having difficulty reconciling Iain's link with Hugh's work.

The Reserve bank seem to be saying houses are affordable (just over the 3 ratio) - what am I misunderstanding this time?

"When do the peasants learn?"

Wow. This guy makes me not want to ever go on this site. Crazy.

I mean maybe we have different circles but # friends make thousands and thousands on property? I'd say 12 that I know personality in last 10 years. # defaulted and got burnt = 0.

You either scratch with the turkeys or fly with the eagles i guess. Turkeys are gonna lose money on property even if it goes up.

Emma and Ian C - thank you for your most helpful comments.

It should be abundantly clear to readers that there are serious structural problems that need to be dealt with, if we want to improve our living standards.

The pathetic productivity update from Statistics NZ reported today on interest co, is just another reminder of this.

Where is the inter-generational conflict ?? It appears that BB parents are actually working in with their children, even to the point of getting involved in dicey bank promotions.

A socio-econmic factor that is different is that when married women, by and large did not work, the amount of a family mortgage was based on one income, in recent decades there has been a major change and the level of morgage debt gone up considerably.

@ Hugh - we borrowed 3 x our household income to purchase our house. They said we could've borrowed more but that was the limit we were comfortable with. Incidentally, we have one of these BNZ Total Money mortgages but don't have anyone else's BNZ accounts but our own offsetting against our mortgage. FWIW, my father was prepared to link his BNZ account in to help us (we have no control over his funds, and nor would he in any way be guaranteeing our mortgage) but it's a business account and they don't allow business accounts to be linked for this purpose. If they did, what my father would've been doing is sacificing the interest on his funds (which is not much anyway on a business account) so that we could use the funds to save on our mortgage instead.

veedub - IRD only gave BNZ until end of March to run that Total Money offset scheme so may not have much time left to benefit from that arrangement.

veedub - are you nervous about the downturn in the housing market sales volume that has commenced in 2010? Could see you lose 10% of your equity in a matter of months.

Hugh - I spoke to a couple of urban planners today, it is clear that most of them still have no idea of development economics. This is scary given that it should be essential that planning regulation is cognisant of development economics

28 - thanks

@ Bank Manager - when/if the rules change on that offset account I'll simply dump the funds I have sitting in the savings account onto the mortgage, same effect but in the savings accounts the funds are "on call".

No, I don't care if house prices drop 10%, even 20%. It's the house I want to live in, for many many years to come. I didn't buy it to make money. If that happens then that's all good and well, but I don't need it to happen in order to be financially secure. I have at least 20% equity in the house, growing by the day as I pay far more off my floating portion than necessary. Whatever happens, happens. At least I have stability and security - somewhere to live that I really enjoy.

MattinAuck - you are quite correct about the planners lack of understanding of basic urban economics.

You and other readers may like to go to my website and read in particular the "Welcome Page" where I touch on these matters. There are many other articles there dealing with these issues.

It needs to be borne in mind that this is a "cultural problem" in the widest sense of the term. i walkied through the whole issue within a March 2008 Paper "Getting performance urban planning in place".

The profession that should bear a massive amount of responsibility for these unnecessary and destructive housing bubble fiasco's is the Economics profession. I covered this within an article "Housing Bubbles & Market Sense" back early last year.

The reality is that the consequences of artificial fringe scarcity values and inappropriate infrastructure financing should have been "blindingly obvious" to the Economics professsion decades ago. The sad realirty though (in large measure thanks to the influence of Paul Samuelson) is that the profession badly lost its way. In short - because of a focus on modelling, not market realities.

So we shouldn't be surprised that the planners are "all at sea". The economics profession simply didnt have the skills required to counter the fads generated by the planners. So the "lurching from one fad to the next" planners have to date had it all their own way.

Note too - it was the NZ Planning Institute that came out supporting the Demographia Surveys back in early 2007, which then got the National Party moving on these issues. If the Planners can act in a socially responsible manner - why shouldnt we expect the same degree of social responsibilty from the Banking sector?

It is to be sincerely hoped that the NZ Environment Minister Nick Smith's Urban Technical Advisory Group does its job properly and gets a Report out later this month / early April, that spells out clearly the problems and solutions required.

After all - these are by no means complex issues.

We most certainly do not want to see a repeat of the Simon Upton fiasco back in the early 1990's, when the guy made a complete hash of getting the (then) new RMA bedded in properly. Those interested in these issues need to go back and read the McShane Think Pieces of the time - and draw their own conclusions.