By David Hargreaves
Sometimes you can hear things, know things, understand things and yet somehow they don’t resonate.
And then there’s one thing you do hear that brings everything into sharp focus. It can be one apparently simple statement. It can be a number or a percentage.
I’ve heard all the talk about how stretched debt to income ratios have become in Auckland.
The Reserve Bank has been talking till its various senior execs are blue in the face about house prices now being 9.5 times income.
And yes, that doesn’t sound good, but somehow it doesn’t paint any great pictures in the mind.
However, put the same thing another way as the ANZ’s economists have in their latest Property Focus publication - and say that 51% of household income is getting sucked up by the interest payments on an average new purchase in Auckland and, well, frankly – wow! Wow! That’s the word.
I’ve always personally worked on the basis of trying to spend no more than about a third of my income on accommodation. I guess this is my own rough approximation of the ‘28/36 rule’.
The golden rule
The 28/36 rule of course says, in essence, don’t spend more than 28% of your income on mortgage payments and other housing related costs such as insurance, and don’t spend more than a total 36% on mortgage payments plus other consumer costs such as car loan etc. It's a time-honoured, sound and sensible rule.
Have Auckland’s 51 percenters not heard this one?
Well, in all probability they have, but they’ve ignored it out of a sense of desperation to get on an Auckland ‘ladder’ moving ever more out of reach.
I’ve nothing but sympathy for those who have been battling to get on that Auckland housing ladder.
Anybody who has ‘waited’ for the market to settle down before making a purchase has seen prices in the past few years scream higher and higher, and out of reach.
So, there’s a kind of logic in doing whatever you have to in order to grab a home.
But 51%?
I can countenance that kind of ratio if interest rates are sitting at 20% and there’a belief that these rates are only going to go down.
Dice with death
Here, however, is the multi-billion dollar problem. Anybody doing that 51% dice with death is doing so at a time of historically low interest rates.
Yes, it’s not impossible interest rates could go down again – if there’s some massive kind of global implosion (and the chances of such a thing still have to be reasonable).
It’s got to be said though that the huge balance of probability is that rates are going to go up – as they have been already in recent months.
The Reserve Bank’s not planning any interest rate hikes in the near term. The rises in rates so far have stemmed from the big banks seeking to recoup the costs of their increased funding as they have to borrow more offshore to make up what’s become a large deficit between what goes out their doors in mortgages and what comes in through deposits.
So, the kind of incremental upward moves in mortgage rates we are seeing at the moment should not be a problem. But, however, if you are already up to your nostrils in debt, then very small moves will make a very big difference to your affordability position.
The assertion by ANZ’s economists that the ratio of debt servicing to household income is now for new Auckland purchasers the same as it was in 2007 is really alarming.
Because in 2007 of course mortgages were more like 9% - as against current floating rates of still mostly under 6%.
These 51 percenters have got no wiggle room.
Rate rises possible this year
I still think there is a strong possibility the Reserve Bank will be forced to raise interest rates much sooner than expected – maybe even this year. I think inflation is going to surprise on the upside, which would of course force the RBNZ to act.
If that were to happen then some people in Auckland clearly stand to be badly caught out.
There’s two things that stand out here.
Firstly, the magnitude of the Reserve Bank’s error in not getting debt-to-income ratios included in its ‘macro-prudential toolkit’ when that was signed off by then Finance Minister Bill English in 2013 is becoming bigger and bigger.
Secondly, I will now officially term it a disgrace the way this Government has turned its back on the RBNZ’s attempts to make up for lost ground by getting DTIs installed into the macro-pru toolkit this year.
Remember the Govt's delaying tactics
I hope everybody remembers in future the cute delaying tactics that the Government has engaged in to block DTIs before this year’s election.
This is clearly one instance where for the good of the country people have probably needed saving from themselves. And DTIs would do that.
Look, we might get away with this.
There might not be any major rise in interest rates and eventually the 51 percenters will find some degree of comfort.
Almighty gambles
However, there’s clearly been some almighty gambles taken here. Buying a house is supposed to be all about security – not a high stakes gambling exercise.
It seems, however, that for at least some in Auckland, the latter is exactly what it has been and is.
I hope this all turns out okay, because it could be very messy if it doesn’t.
And just as a final word to the Government. Guys, what about reconsidering on the DTIs? Give the RBNZ this tool. They’ve promised they won’t use it right now.
57 Comments
To sum it up : Government should have acted.
......Acted they did, but not to control instead to support and aggravate the situation. Everything that is happening is prosperity for National Leaders(their own words) and are not entirely wrong as the social circle that they move around and the people that they cater to is prospering and who cares about average kiwi as many do not vote.
Hopefully this election will change.
The government spent a couple of years in denial when they were supposed to acknowledge the gravity of the housing situation and treat it with utmost urgency. The National Party leadership time and again proves that there is no room for the well-being of general public on their agenda; capitalists and land owners are their only target audience.
Why is it the Govn's fault? I mean this is private debt willingly taken on by, yes greedy and stupid people, lent by yes greedy and stupid people, IMHO. Can I prove that however? no. Could a Government? No. This has been my opinion since 2008, so really I am 8 years wrong, it has not blown up yet, so how can I prove I am right in the longer term? when it finally blows up I guess. At that point I just have to hope the Govn/RB has the balls to trigger the OBR, but I doubt it.
In the meantime, how many votes would be lost by the Govn? probably to an opposition who would have keenly jumped on the opposite side in order to win votes off said stupid ppl "desperate" to buy their own homes.
Who voted National for the tax cut they offered in 2008? more than enough people, much of that cut then probably went into housing. Sure I blame National and JK but Labour were/are just as bad IMHO.
What will this election change exactly? we might get another political party (or 2 or 3) equally wedded to the grow for ever economic model on a finite planet, so not much.
You're right. They're all willing participants. But it's still hurting the non-participants.
The governments local and national have created the problem through incentivisation of investment in land, negative gearing, tax writeoffs of interest against invesment properties. They swapped out land tax for GST in 1990. Disincentives to development, such as infrastructure growth charges and expensive consenting processes.
If you actually want development and low prices, you fund council costs through a tax against the land. It's the development of the city that gives the land its value in the first place. Land tax through rates is simply recapture of the value of that public spending. This should not go to landholders simply by virtue of them holding that land at the exclusion of everybody else.
Spending by the government on accommodation supplement was simply a subsidy to lift the demand side of the curve in the rental market and really hurts the middle class who are now competing against their own tax dollars for the same tenancy spaces. They should have instead focussed on supply by building more state houses to keep us at the same ratios we saw in the 1980's. Instead they sold state houses, and subsidised landlords. Releasing Kiwisaver for first homes was just taking young peoples retirement funds and giving it to the baby boomers retirement funds, adding fuel to the fire.
I recommend reading this reddit post about why it's all so messed up in Australia. The parallels are startling. https://np.reddit.com/r/australia/comments/61p3dd/underemployment_of_yo…
Given the other article on Interest.co today pointing to Chinese cash buyers being the primary cause of the irrational exuberance, DTI restrictions would have forced FHBs (who are a minority of house buyers) out of the market, which would have spared a few from getting burnt in the coming interest rate rise/value fall crunch, but would have done little to contain the cashed up Asian buying spree that has driven prices to absurd levels. Housing would be just as unaffordable.
Yeah that was a great trade to make. People weren't aware of the heavy bookings and high prices on hotel rooms compared to 2016. When I was scoping out the casino around that time it was impossible to get a seat in the restaurants without booking well in advance. While the VIP room is the source of a lot of turnover it's also been the source of major losses via cheating.
Of course that's the long way to say my position is up considerably on that buy order.
In relation to 28/36 or 25/33 or whichever rules you apply they all come from personal finance culture. From what I've seen not many people have guidelines like this to base their decisions on or to even give a comparison. All that seems to matter is buying a house and people do whatever to make that happen, and then promptly start a family to reduce their income. It's not the 1960s anymore.
I totally agree and it’s an absolute shame! I am in my 30s and a professionally qualified accountant and I had never heard for this ‘rule’. Don’t get me wrong I have my own ratio which is comes roughly to the same conclusions but it was something I had to figure out myself. I fear many in my generation and younger have not thought about it nearly as much. Also I feel that personal finances is, even now, something of a taboo subject and when it’s not taboo it’s too boring to take the time to learn in this ‘you only live once’ environment we find ourselves in.
I'm not sure of the exact origin of these rules or guidelines but a lot of it as a result of people having out of control spending and debt. The rules are helpful for giving people perspective on their spending, and lifestyle expenses.
A similar rule is invest 10% of your income for your retirement. Generally that was sufficient with no planning or calculation. It's been updated to save 15% unless you have calculated how much you need to save for retirement to maintain your lifestyle.
Unfortunately accounting teaches a number of useful things but you have to understand or discover them as you learn.
There is an issue in the west of people having poor financial literacy and making poor decisions about borrowing. I don't think people have a clear understanding of how painful payments will be until after they have a loan/credit card/mortgage.
Surely the 51% number is simply the outcome of some arithmetic, surely no sane person would take on such a commitment, and no sound bank would lend on that basis. So the calculation simply shows that recent prices are higher than make sense and they must soon come tumbling back (or incomes must sky rocket)
It is stated as an average. It is not the top of the range, some will be paying substantially more. If the top of the range was 51% you might have an average in the range of 30-40%.
Some borrowers will be in a dire cash flow position. While we have historically low interest rates. Consider how bad that is.
Sounds like vl1975nz is trying to shift the blame for buyers' frenzy and greed onto the government.
No, people are responsible for their own decisions and actions. It has been said for sometime on this site, in the press, by the government, and by the RBNZ (who introduced LVR), that prices were not sustainable but these warnings have not been heeded in the belief - that unlike tulips - house prices were going to go up and up and up . . .
Of course the 51% number is fiction. Assume everyone borrows the full amount (most don't as they are switching, or cash buyers), assume everyone is buying right now (but nearly all homeowners have bought when prices and mortgage sizes were much lower), and assume all new homeowners are buying at the average price (they are mostly buying in the bottom quartile). Then you have created a newsworthy (if fictional) problem to lament about.
The only thing I blame the govt for is excessive immigration. If people want to borrow too much and get into trouble then that's their problem. What has that got to do with govt. a lot of young people today are buried in their devices and cannot interact socially anymore on an intelligent level. I suppose that's the govts fault too? And what about the people who take P and burden their families and society...that must be the govts fault too! History proves that we will run govt and society into the ground purely through expecting govt to solve millions of problems that we as individuals create. Then it is naturally always someone else's fault...
>a lot of young people today are buried in their devices and cannot interact socially anymore on an intelligent level. I suppose that's the govts fault too? And what about the people who take P and burden their families and society...that must be the govts fault too!
Your misguided view of young Kiwis today...that must be the government's fault too.
That's a very big call. What I find is that if I try to connect with the older generation on an intellectual level to discuss issues of home affordability, foreign ownership or the environment they either a) run for the hills, or b) bury their heads in the sand. All very much like the current government. They appear happier if I return to my iphone than to discuss and deal with the issues.
Unfortunatly Nat has allowed NZ property to be a object of global and domestic speculation. Great for their voting demographic (45+ property owners).
The 51 percent show how important a slice of gods own is to kiwis, look at the loan size and length they are prepared to sign up for.
For the
Absolutely fine spiffing news old boys and gals....51% !!! ....my banker pals and I am extremely happy as we have hit the over 50% mark for the "mortgage serfs" spending on moi and my ilk !! All those delightful mortgage interest repayments coming in, that we borrowed the funds for at 0.64% haw haw ..... they don't call it "fractional" reserve banking for nothing !! What a business !, what a life ! ....... well, back to the lanai for a quiet afternoon G&T, then perhaps a nap or whatever whimsical desire takes my fancy....well, what are you loitering around here for - back to work all you bourgeois and keep those mortgage repayments rolling in for MOI !! .....anyhow, toodle pip for now.
Only by extrapolation. Investors are 40% of the new lending market and 40% of the interest only lending for New Zealand. There's no way to be sure that they are entirely interest only or that it is partial. I'd hazard a guess that if they are investors targeting a percentage return on capital then they will be mostly or all interest only.
e: I should have read the question more carefully. Nationally interest only loans are 33.3% of total lending. If investors are almost all interest only then their 44% of sales are probably interest only in their entirety. If the remaining non-investors get interest only at the national rate then the total for Auckland would be about 62%. The figure is rather fuzzy as there's often the mixture of interest only and P&I for owner occupiers. It seems like rather a lot of interest only loans with 2/3 being investors.
So if 33% of total lending in NZ is interest only (assuming residential and commercial property?) - and lets hypothetically say there are no further capital gains to be made in the NZ property market - at current yields and assuming a small increase/s in lending rates over the next 5 years, how long before these 33% of loans start going sour? Immediately?
That's a massively important question.
Theoretically I suppose so long as the loan is supported by an income stream that covers the interest cost the end of capital gains shouldn't matter. A quick look at rents to prices show this is not the case in Auckland, even with historically low interest rates. Which means the rest of the interest cost must be being paid from some other source. So I guess it comes down to how long the debtor is willing and able to throw good money after bad. My guess is maybe 6 months or so for most to try and cut their losses?
It must be more or less there now in the Auckland market if you compare expenses/interest payments vs rental yield.
And if for the last few years nearly half of purchases have been to investors - that's a lot of bad investments that could all come unstuck at the same time. Anyone know what interest rate it would take for the average Auckland investment property to start going negative return assuming no capital gains? (standard rates, expenses etc). Or are we already there?
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