In the gritty detail of drawdowns, interest costs, and repayments David Chaston finds clear evidence that low interest rates aren't used to save borrowers money, they are used to bid up prices and debt levels

Good to see these numbers. I’ve often wondered how much impact lower interest rates actually have on credit availability/ability to borrow more given that banks stress test mortgage lending at about 6.5%ish no matter what the actual interest rate is. Seems that this particular factor may not be holding people back.

When the data came out I saw that the repayment deficiencies had reverted to where they would be expected to be. I think that for those partly defaulting on their payments the OCR cuts have probably helped.

The rate of increase of mortgages seems unaffected though. Too bad that mortgage debt is growing 12 times faster than productivity, that's asking for a correction.

e: A note on drawdown and excess repayments. Those include revolving credit. While the repayments are good the drawdowns are exceeding repayments. Some will be in a better position and others worse.

Is this a surprise? I thought this was obvious to most people who have looked at housing and debt with more than just a cursory glance.

Good work

Now, DC, if the numbers of mortgages were available, and able to be set alongside this analysis, it would allow a per-mortgage average to be ascertained. Which could be Interesting. Yes, yes, there would be some double-counting: 'mortgages' aren't 'people' in the sense of business entities or households. But, still, Interesting......

Well done, David. Excellent analysis.
Some people are using lower interest rates to borrow more
Others are paying more off and borrowing at lower rates on renewal basis.
Government and banks do not want to reduce credit availability or increase in rate of growth of mortgage credit as this slices GDP growth and consumer demand. So, FHB are worshipped accordingly as older borrowers are more savvy

Excellent summary David. It confirms that bureaucracies favour the status quo. This is actually a strength, a lot of the time, as it provides stability and continuity. Against that, it also means trends tend to overshoot badly.

https://www.dlacalle.com/en/crises-happen-when-we-believe-there-is-no-r…

Asset inflation, the consequence of low rates.
More a consequence of low BIS imposed RWA bank capital requirements for residential real estate lending, which contributes little to GDP.

There were two major evolutions in money and banking that seem to fall outside the orthodox narrative. The first was a shift of reserves and bank limitations from the liability side to the asset side. The second was the rise of interbank markets, ledger money, as a source of funding rather than required reserve balancing: replacing the old deposit/loan multiplier model. Courtesy of J. Snider from Alhambra

The empirical tests rejected the financial intermediation and fractional reserve theories (Werner, 2014a, 2015) and showed that banks do not need prior savings, nor central bank reserves or other deposits to lend. Instead, banks create new money when they do what is called ‘bank lending’, and add it to the money supply (see Figure 1). Bank loans thus do not transfer existing purchasing power, but add net new purchasing power. The banks’ lending creates 97% of the money supply. Bankers’ decisions about how much money is lent – and thus created and added to the money supply – and given to whom for what purpose quickly reshapes the economic landscape and affects us all. Sadly, no regulator has asked banks to ensure they lend for productive and environmentally projects – over two thirds of UK lending is not for productive purposes that creates jobs or boosts GDP, but instead for assets, causing asset price inflation. (same in NZ) [my bold] Link

Two thirds of NZ households are mortgage free, thus the remaining third with mortgages, corner 60 %+ of bank lending.
The consequences are graphically clear for all to see here and here.
Interest rates spiral down, in concert with extended periods of poor GDP growth, and central banks follow them down.

Great article David.
Agreed, rather than blaming the buyers splurging, the reality is that lower interest rates create increased demand in the market:
More/cheaper money -> increase in number of buyers -> increased demand for houses -> increased competition -> increased prices.
Sadly, the result is that the FHB just has to pay more to be competitive in price when trying to secure a property.

Good analysis. I think that there is another aspect too. That of the savers. If you are a saver and interest rates drop, then you are less inclined to spend. So as I have been saying for years now; while the model that ties high inflation to raising interest rates makes sense, the converse does not. It is totally counterproductive and the only sort of investment that it encourages is in non productive assets like property. We have been labouring under this flawed model since the 2008 crash and really have not made any meaningful progress in addressing the problems. So now that we are facing even more problems we are "turning up" the knob further.
"The beatings will increase until the morale improves" Or as Einstein said - the definition of insanity is to keep doing the same thing and expect a different result.
As I have droned on about before, there is also a another very destructive flaw with this model. That is, it totally prevents society from benefiting from increased productivity as follows
As productivity increases, relative prices of the effected products fall. This is not allowed by the inflation/interest rate model, so interest rates are dropped. This means money is channelled into fixed asset speculation so these assets rise in price. e.g. housing. There is also a rise in the price for goods that are not subject to strong competition and the forces that drive productivity (in NZ case building materials, food, petrol, power) The net effect is that the price falls due to rises in productivity are more than offset by the price rises from fixed asset speculation and price rises in low competition, low productivity sectors of our economy; so that inflation can remain positive. By this mechanism there has been a huge transfer of wealth from working people to some industrialists and the capital owning classes.

Good to see the practical data confirming theory, ie if you increase demand (by supplying more money via cheaper rates) without increasing supply (of what they are spending the money on ie housing), then any savings gained through having a low rate are capitalised into the price of the property.

The real kicker is that this increase in price is non value added and only exists because of the in balance, which can quickly be reversed if interest rates increase and/or supply of housing increases to meet/exceed demand.

The price can go backwards in real or nominal terms but your debt is locked in.

David, is there any way to look at; of the 69 billion last year and 74 billion this year, what portion of this is for new housing stock vs existing housing stock. If their are a lot more new houses coming onto the market then this low interest doesn't necessarily translate into inflated house prices for existing stock.
Also if a customer moves from one bank to another does this result in + drawdown and - repaid in full, therefore net change is $0 unless a little bit extra drawdown for rennovations?
I think it is quite hard to state "clear evidence that low interest rates aren't used to save borrowers money, they are used to bid up prices and debt levels" without addressing these two possibilities of paying for new housing stock and rennovations.

The problem might be addressed by cutting back significantly on immigration.
This will force wages up to a point where the reserve bank can then restore some stability by raising interest.
This would then start reversing the low wage low productivity hole that our economy is in and force our businesses to raise productivity if they want to survive. If they do not want to rise to the challenge, then they will fade away and the more highly valued workers will move to enterprises that can raise productivity and pay higher wages.
Less people coming in would also significantly ease the pressure that we face in housing and infrastructure.

Good analysis. Shows that DTI ratio limits are the only answer.

If the borrowers think that they would not be making any profit by using the borrowed money, after paying the interest, why would they borrow and lose whatever they have to invest themselves and face insolvency ?
The business optimism drives investment and borrowing not low interest rates. If any one does not understand that, then they have no business being an expert and running the show of the nation.

Interesting analysis. What I learned was that mortgages dominate bank lending far above all other products combined but the other products actually command a higher interest rate. That's fairly interesting when you think that business lending, margin lending, personal lending etc. are actually such a small part of banking. Mostly...it's just mortgages.

DC's last sentence; "Asset inflation,the consequence of low rates". Indeed,while inflation as conventionally measured remains low, it has inevitably led to asset inflation. Minsky warned of this a long time ago. To quote from Felix Martin's excellent book, Money, The Unauthorised Biography,"The more successful a central bank is in mitigating one type of risk by achieving low and stable inflation,the more confident investors will become and the more they will willingly assume other types of risk by investing in uncertain and illiquid securities". "Monetary stability will actually breed financial instability".

Surely nobody can regard the Auckland property market as normal? $2m for a nice but unexceptional villa is patently absurd. The level of our stockmarket has concerned me for some time and I have been gradually taking some money off the table. Despite the low return on cash,i am comfortable with the liquidity this gives me.