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The exit interview: Retiring RBNZ Governor Alan Bollard points to 70s experience when arguing against LVR limits; prefers counter cyclical credit controls

The exit interview: Retiring RBNZ Governor Alan Bollard points to 70s experience when arguing against LVR limits; prefers counter cyclical credit controls

By Bernard Hickey

Departing Reserve Bank Governor Alan Bollard has argued against moves towards Loan to Value Ratio (LVR) limits on mortgages in his final exit interview (see above) with Interest.co.nz.

The Reserve Bank is looking at using various 'macro-prudential tools' to influence bank lending behaviours to try to avoid asset bubbles like those seen in the mid 2000s, including a surge in house prices between 2003 and 2008 in New Zealand that underpinned a burst of consumer spending and household borrowing.

"That's one of the tools one might look at under macro-financial policies and where would you use it? Yes in a time perhaps like the mid 2000s," Bollard said when asked about the use of LVR limits by central banks and regulators in places such as Canada, Singapore and Hong Kong.

"A loan to value ratio might be the least desirable of the ones we might look at. The ones we might look at might be counter cyclical credit requirements," Bollard said around the 5 min 40 mark in the interview.

I then asked why he didn't prefer LVR limits.

"Because I can remember the 1970s and you can't Bernard, that's why," he said. "Those sorts of direct interventions (were used) and they ended up with lots of distortions, and they ended up with people finding other ways to get money, and that's where some of our current crop of finance companies came from, ways to get around bank regulation in the 1970s," he said. "They're distortions."

I then asked if it was therefore always the Reserve Bank's job to limit the natural tendencies of banks to try to grow lending faster than sometimes was good for an economy.

"Yes. We would more likely do it by looking at increasing the amount of capital required, increasing risk weightings on assets, or increasing liquidity requirements. ie fiddling with bank balance sheets rather than fiddling with household decisions because we think we'd be more effective doing that. Not to say you wouldn't use loan to value ratios, you potentially could," he said.

"Indeed, Around 2007, we were thinking of doing those, and we went in and talked to the banks and told them to slow down on their lending, particularly to the farming sector. By then they had slowed on housing, but they were pushing away on the farm lending bubble off the back of very strong dairy prices, but they were happening very late in the cycle and we'd already had Northern Rock and a few of those nasty Northern Hemisphere signalling events by then. We did slow them down that way. We might have done that a little earlier, if we were going to do that again."

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90 Comments

and he leaves with a wimper.

Andrewj - What else should we expect from a wimp.  The NZ taxpayer paid him $500,000 p.a. for him to now tell us what he should have done.  I have no doubt that history will prove that Central Banks were useless.

Andy please - you are underestimating the Governor's departing worth and superannuation payments you and your taxpaying cohorts will be unable to afford in the future.
 
See page 33 (PDF page 35) of the latest RBNZ annual report - it clearly states NZD 600,000.00 - 610,000.00 give or take a dollar. 
 
Mind you, it seems Don Brash was on NZD 490,000.00 - 500,000.00 back in the 2000/1 year, so this Governor has not really been able to extract above inflation increases over 10 years service. 

500k p.a. is not a lot of money, given the responsibilty of being Governor of the RBNZ.
A lot of Jaffas made that on their North Shore properties, by doing sweet F. A.
Could he have done a better job?  Most certainly.    But a lot of people, made a lot more, by doing a lot less.
 

re a lot of people, made a lot more, by doing a lot less.
huh? they did negative work?

Were they standing at the helm during the Lehman collapse, making decisions, or were they too busy, making a Latte?

are you talling about the SCF debacle ? that was a real win win for someone.

I actually think he has a fair point - if LTV ratios have been tried and didn't work, then there's no point trying it again and just hoping that 'this time will be different' .... makes sense really

except its been done in Texas and seems to have worked somewhat...
So the thing is to determine why it did / didnt work.
 
regards

Correct. A thorough analysis would help. I'm not aware of the distortions he refers to. Bollard snookered Bernard with that answer. Clever. No come-back what-so-ever.

AB pretty much said it, poorly executed regulation and /or failure in over sight. As esprit says FFS if ppl are speeding get better equipment and punishment.  Simple to me, have a 80% LVR and incl HP's etc if you are found to be breaking that on purpose, force a mortgagee sale. Few would do it a second time.
regards

If it is breaking a law, intended or not, rather than just a forced sale, surely there should be a penalty too? Crime = punishment? or is that era gone? So much available free forced labour here... who needs to borrow overseas money?

Hey Bernard - next time you get face-to-face with either Dr Don Brash or Dr Gareth Morgan (both ex-RBNZ) can you ask them to confirm or deny that comment.

So explain - why does it work so well in Texas where they majically avoided all the excesses now being suffered right accross the rest of America?

Hi,
Im not so sure they have avoided it totally, but from what Ive read its been heralded as a significant control.  I think Steve Keen also wrote that it was a good tool, but NB 31% of mortgages in Texas are under water.
regards

If you watch the video it is Dr Bollard who claims it was tried by NZ in the 1970's.

that's right... Dr Bollard said it himself ... from 1st hand experience. People just found a way round it via finance companies, people will always find a way to get around any limits imposed on them...

AB does have a point.  Do we really want to go back to the 70s when you had to have 40% or so deposit to buy a car, find a networked solicitor to get a mortgage, get 2nd & 3rd layered mortgages, & tighten up credit at a time when we need to get money circulating around again?
Actually, maybe some people do need protection from themselves  .....
While people may scoff at the $600k salary they really don't understand the complexities of being the Head of a large institution.  With the multituse of demands, political pressure, complex data mining, multitude of meetings etc.. There are not that many NZ-ers actually qualified for this position.  Integrity & character which AB does have, are really in short supply when you start putting top people under the microscope.

The banking environment was totally different in the 1970s.  More building societies for example.  Oh, and weren't houses cheaper/affordable?

It was a lot harder for a first home buyer in the 1970s. You had to have connections to actually get a loan.   And houses were more expensive in terms of servicing costs.  

How pathetic. Saying LVRs won't work because people will find other ways to get the money is a bit like saying "Everyone speeds, so we're going to just abolish speed limits because people break them anyway"..... This man has to be the most pathetic excuse for a RBG this country has ever seen.... anonymous and dithering.

Yes...
regards

If you listen carefully he doesn't claim it "won't work".  He simply states one of the unintended consequences of the use of the tool in the 1970's was the creation of finance companies to get around the regulations.

The rise of Finance Companies (Marac and Broadlands) in the 1970's had "absolutely" nothing to do with housing finance. Sources of housing finance were/was provided by Insurance Companies and Building Societies, and then Solicitors for second mortgages. With insurance companies you had to be a customer for several years, with "whole of life" policies and got an LVR of 70%, with building societies you had to be a member for some years, a reasonable balance in your account, established a good savings record, and then when you wanted a mortgage you went into a monthly ballot for the funds available which were limited to the funds deposited by members during the preceding month. Again 70% LVR.

I suggest you and Dr Bollard agree to disagree on that one - ;)

Yes you got 70% from Ins Co or Bank or Building Society but then went and got a second mortgage from one of the above or Solicitors Nominees Company and third from the one you missed out on second mortgage so resultant LVR was up to 90% odd.
Difference was the second and third mortgages were priced for Risk and usually over shorter term like 10 years so equity built up from debt retirement.
I know this went on as I became an expert in Memorandum of Priority of Mortgages and Deed of Priorty of Mortgagees!!!!!
Haven't seen a second mortgage in years!!!!

Yes, an enforcement of a 80 or 70% LVR would simply mean a market would spring up for the missing 20-30% (unlikely to be a saved deposit) -  which will be priced at 10 - 12% as a second mortgage etc.
Also Vendor finance was more common in the 70s due to lack of full bank finance - especially on sections.  So we might see vendors offering sections on a 3 year term at 14%.   

Hah .. yes .. vendor finance .. forgot about that .. just to recap .. sources of housing finance .. there was the first mortgage from either your insurance company, or your friendly building society, then into the deadly embrace of the family solicitor for a second mortgage (don't recall too many third mortgages) then if still strapped, vendor finance. Where were the banks .. don't think they had their snout in the mortgage lending trough till much later.
 
Now what I would like to know is (a) when were LVR regulations, supervised by the RBNZ introduced .. and secondly (b) when did the RBNZ subsequently remove those LVRs which didnt work in the 1970's .. (according to Bollard) .. c'mon Bollard, there's a challenge for you .. tell us. Even better still, maybe Bernard could find out .. and advise .. History Bernard, history .. factual matters of record .. must be a record somewhere ..

Here is the Texas legislation:
 

http://www.statutes.legis.state.tx.us/Docs/CN/htm/CN.16.htm#16.50

 

"(B) THE PRINCIPAL LOAN AMOUNT AT THE TIME THE LOAN IS MADE MUST NOT EXCEED AN AMOUNT THAT, WHEN ADDED TO THE PRINCIPAL BALANCES OF ALL OTHER LIENS AGAINST YOUR HOME, IS MORE THAN 80* PERCENT OF THE FAIR MARKET VALUE OF YOUR HOME;"
 
(Apols for the capitals, that's how it is on the link.)
 
Maybe someone could find the equivalent that NZ was using at the time?
 
It's about firm legislation that we police and for which there are consequences if the legislation is ignored. It appears this was not the case back when Bernard was knee high to a Reserve Bank Governor.
 
In addition there are other ratios that could be used, like Steve Keen's idea of a multiple of rental income associated with the property, or loan-to-income limits, as suggested by some Fed researchers:
 
http://www.calculatedriskblog.com/2012/08/research-loan-to-income-guidelines.html?m=1
 
The fact that something didn't work in the past does not mean it will not work in today's context, especially if we are not too lazy to find out why it didn't work in the past and correct the errors. (Let's get that baby out of the plug-hole .... )
 
As for effective policing, I wonder what the pay-back  would be if we took on a few more people at RBNZ in an active policing unit?
 
Cheers, Les.
www.changenz.co.nz

 

Esprit - People will always find ways to get the money if the really want something. Why do you think rent to buys (for example) were invented?
 
I think many people need to learn a lot more about how to value property. 
Any banks obligation when assessing mortgage applications only really comes down to the customers ability to pay. The ability to pay is setting valuations. High prices suburbs have high income earners and low priced suburbs have low income earners etc.
 
Many people buying a home never consider how much it actually cost to build a home of the size they are purchasing, they never consider how much the property would earn if rented, they don't consider the age of the home or condition and what repairs and maintenance are likely to be needed etc.
 
You can't hold Bollard responsible for other people's ignorance.
 
 
 
 

You are absolutely right. also...
"Everyone speeds, so we're going to just abolish speed limits because people break them anyway"
We do this here in NZ too. eg. Huntly ~ 2-3 years ago? was 50km area, "too many" people got caught on camera, so they made it 70km area. Our pollies, that we elect, prefer to legalize problems, its more popular. responsibility on us as citizens though. get what you vote for, even if it's unintended.

He didn't say it "won't work", he said it was the worst of the tools available and had some unintended consequences when it was used in the 1970's.

Heavier than air flying machines had unintended consequences (i.e. didn't fly) before the Wirght brothers and/or Richard Pearse.  Is that the same logic as Bollard uses about loan to vlaue ratios in the 1970s?

Bollard says in the interview that aiming at a sensible level of exchange rate should not be the Reserve Bank's remit. This after acknowledging tnat it is too high, and that that does cause real problems, especially to import substitution businesses. The government clearly do not see the exchange rate, or the related current account deficit, as their problem either.
No wonder that both are where they are.
He quotes Korea and Switzerland as being countries that have struggled to lower their exchange rates, despite strong efforts to do so.
Perhaps that is because they each have massive current account surpluses.
See here: http://online.wsj.com/article/BT-CO-20120828-715405.htmlis not their remit, and shouldn't
and here:
http://www.tradingeconomics.com/switzerland/current-account
Assuming those countries have printed money to buy foreign reserves, they are massively ahead with their interventions, even if they take paper losses as a central bank.
Bollard talked of fretting over having a $30 million loss one night in the RB's foreign exchange position.
Our current account is losing $30 million a day, every day. And because of our current account position, there is no natural force keeping the currency up (other than all the money coming in from surplus countries looking to distort their currencies). So there would not be any paper losses anyway if the RB showed any determination at all; but even if there were, it would be trivial compared to the current account position that it would help rectify.
 
 

It is the Government IMHO not RB. I think it needs to come down, the Q is can it be safely and properly controlled. I can see a tobin tax would reduce volitility and maybe stop other un-useful speculation.  Really though I cant see why the OCR cant be dropped to discourage the carry trade but that needs to be a Govn instruction to the RB IMHO.
Can anyone anyone give a reasoned why not?
and by that I dont mean "whine whine Im an OAP and I need the income".
regards

steven,
I mostly agree; certainly the Reserve Bank Act would need changing if their target was to be anything but inflation, and only inflation; and changing it is the government's job. Bollard does not seem to believe the target should be anything else, so he is passing the buck to the government in terms of some other sorts of policies; or he just thinks it's all a bit hard. I believe the cause of a high exchange rate, and high current account deficit, is monetary policy, which mostly should be the Reserve Bank's remit, but needs the government to change it. 
Am not sure about a Tobin tax (as among other things I'm not sure how you would administer it between two offshore parties); while dropping the OCR (which I potentially agree with as a first step) would likely need some other capital controls to stop over borrowing and asset bubbles; and would punish savers somewhat in terms of interest received. 

Some good posts here. Laughed when AB said that BH didn't remember the 70s (Playing the "age" card!) but really Bollard could LEARN from history rather than abandoning a potential approach to a problem because a previous incarnation of the approach led to "distortions". Isn't the whole of fractional reserve banking a "distortion"?
A simple application of LVR controls is to make any legal instrument that exceeds the LVR limit legally unenforceable. That is, noncomplying loans become, in effect, gifts.That would see the supply of finance dry up.This approach does require Government co-operation, however - the RBNZ can't do it on it's own.
I am not sorry to see Bollard go. As Governor he acted as little more than a functionary of the major trading banks, I didn't observe any genuine independence on his part, nor any boldness or original thinking. I really think he is too timid a personality to have been effective (for the 99%) in the role. But maybe that is just what his appointers wanted.

In my opinion Bollard showed a lack of imagination with that reply. 

Gibber...lack of imagination...? The man is devoid of it, a birth defect ,I fear....he has spent his entire tenure at the RBNZ reflecting on the imaginative solutions of others, while awaiting the Messiah of Macroeconomics to appear before him and point the way. Even then Bolly would have found cause to be nervous, unsure, hesitant, styfled by his inability to make judgement calls........................does that sound like Bolly.....or what..! 

Come on you lot...leave off bashing AB...he did what he was told to do...end of story. Fault over the direction the NZ economy has taken rests with us idiots for voting in a succession of morons on the back of pork promises. Morons who new how to make a quick buck in the property market that they knew was to be pumped by the cheap credit...or in the rural sector playing pass the farm games.
Since none of this has changed...the future looks set to rerun the past. Bubbles anyone!
Wheeler will play the game...credit allowed to flood in cheap as chips to mask the underlying farce that is the NZ economy and you had better hope the farm export prices remain bloated.

NO. Sorry Wolly. Bollard is lying. And he demonstrates once again how adept he is at either avoiding Bernard's questions or answering with whatever comes to mind. And it also demonstrates Bernard doesn't do the necessary preparation. 

Nah that's just 'Sir Humphrey speak'...par for the course inside the circles of power in wgtn...Knighthood coming up AB..Sir Allan Bollard...membership of the exclusive club...a gong to shine.

Here is why Wheeler et al will toe the bankers line on cheaper for longer with no LVR rules...:
"The federal government has been working on reducing household debt levels and recently adjusted mortgage lending rules. August was the first full month with the new rules in place and it appears these regulations have affected consumer confidence, resulting in significantly reduced sales of new homes,"
Read more at http://globaleconomicanalysis.blogspot.co.nz/#uaIuXyZA0pypfHJd.99

I'm for the Financial Transactions Tax FTT (Tobin).  No idea what rate.  But enough to be very discouraging to the speculative trading.  With luck it would discourage and thus not actually be incurred that often.  So not a revenue earner of any note.
Then our currency would go to what would be a rate based on fundamentals.  Could be very interesting as to what that might be.
Leave the OCR to the Reserve Bank.  And leave the inflation targets alone.  If you don't shudder when you remember the horrors of inflation.  Then take somebodies word for the horrors of it.
As for LVR limits.  Well what was the problem with that experience.  It worked.  People needed a deposit.  But that was actually easier than affording the ridiculous prices of houses now.  I don't recall it was a government policy.   ?? Just expected by the lender ?

KH - FT tax, all it would do is kill markets liquidity, push FX spreads considerably wider for the NZ  exporters and importers, push interest rates higher as much short-term investment leaves, and massively increase FX volatility whenever anything largeish has to passthrough the market - dumb idea that non market people do not understand - be careful what you wish for.

What's wrong with all of the above that u mention Grant? Higher interest rates sound great, stealing from savers to give to borrowers isn't really fair is it? Balance of house affordability rather than crazy income vs. price ratios? for the record, i'm a borrower. Makes no sense to save nowadays.

Under the current "market" regime I've seen the kiwi drop 10% in an hour during the flash crash. At one point during the Lehman meltdown it was falling 5-10% a day. Personally I think the liquidity arguement for currency trading is self serving (John Key uses it all the time). The risk on - risk off nature of the kiwi and aussie dollar prevent a fundemental value for the two currencies being established on the basis of trade flows alone. If a FTT discouraged speculative plays on the NZD wouldn't it make it less volatile in a crisis because there would be no speculative positions to dump? Yes spreads might be wider in "normal" markets but so what. It just gets built into the cost of business. NZ used to export and import before the currency was floated and with all kinds of other restrictions. Business just deals with it.

Our first mortgage was 106% LVR. We had no deposit and once we added on lawyers fees, moving costs, stamp duty (UK) etc we worked out we needed 106%. We bought a modest house that we could afford, never missed a payment and walked away a few years later with considerable equity.
 
Contrast that with a few years ago (2009) when banks (temporarily) invoked 80% LVR maximums. We passed a few figures through one of the local NZ banks. The 80% was a line in the sand for them - they wouldn't lend more than that. But if we were to come up with 20% then they would happily lend us ridiculous amounts - up to 50% more than we had worked out we could reasonably hope to pay off. I wouldn't be surprised if there are a lot of young homeowners who scraped together deposits from Daddy, savings, credit or who knows where who are now underwater because the bank told them they could have the 4 bed, 2 bath new build on the nice side of town rather than the 2 bed starter they could actually afford.
 
If we were a young couple (university-qualified, reasonable earners - as we were some years ago) looking to buy and was told by the reserve bank we weren't allowed to buy because we didn't have the  20 or 30% deposit, I'd probably tell them to stuff it and buy in another country.

Maybe you wouldn't want to buy in another country because affordability could be better because housing cost could be relatively lower and your salary greater, if at long last we managed to better balance the economy, by using these kinds of ideas and tools.

Bollard is quite correct that the quantity of bank credit needs to be controlled. The SNB is already looking at this as part of controlling excess liqduidity from their new currency ceiling. This is one part of my Monetary Dialysis proposal. 
http://sustento.org.nz/wp-content/uploads/2012/07/NZ-Investor-Piece-Mone...
As to a FTT, that would be very difficult to implement. However, there is another approach, which we call a Foreign Transactions Surcharge. This is a surcharge (a fiscal intervention) which makes the price of imports more expensive, thus reducing demand for them, and so improving the balance of payments. See below for a fuller explanation.
http://sustento.org.nz/wp-content/uploads/2007/05/FTS-paper-version-3.pdf
 

FTT on every transaction in and out of an account, domestic or international transfer, cash or credit, to partially or totally replace other taxes would be progressive, easy and cheap to collect (by banks like RWT) and encourage long term investment rather than speculation. Combine with a flat land tax and full reserve lending. Banks would hate it!

Well at least an FTT on Forex traders WTF.....that the start I'd like to see....maybe scaled for long puts...covering pants down positions.

Do those in favour of a high LVR realise how hard it is to save for a massive deposit AND pay rent at the same time?  All a high LVR would do is cut off any hope for those on lower incomes to buy a first home.  Prices in Auckland wouldn't change - it's not lower income people buying those.  Entry level houses would still be snapped up, but by property investors who already have  high capital.  The thought of taking perhaps over ten years to save a deposit would be too much for most, I very much doubt I would have the staying power, at the moment I aim paying nearly double the amount a mortgage would cost,  just so I can save for a 10% deposit and pay rent, and I'm not on a low income.  People would be far better off being able to get into a house sooner,  at least you would be paying you own mortgage instead of alandlord as well.
 
 
 

Hi,
I think you mean a "LOW" LVR....Texas for instance has 80% and there has been some research that suggest 80% is "neutral".   So the RB could then use it as a tool by raising or lowering it by 1% to act as a break/accelerator.
What a LVR does is reduce the degree of crazy up-bidding, really the poorer paid get that impact the hardest.
There will always be some earnings point below which some ppl will not be able to ever get a home.  However bear in mind 2 things,
1) We are in a property /ponzi scheme bubble, that means that houses are twice thier fair value....So actually if houses were at the 3 to 1 fair value an 80% LVR would be the same as the 90~95% LVR we now have, you'd be no worse off.
2) Risk of huge impact, when prices drop the poorest earners with probably the least secure job(s) will be the hardest hit, go under water first and most likely to go bankrupt / mortgagee sale'd first....
Rents are set at the maximum rate the landlord thinks you can stand though his/her starting point is going to be what it costs him/her in a mortgage.  So if houses were fair value (50% less than now) rents should be a lot cheaper....hence relatively it would still balance.
There is a good reason ppl move to OZ and the like...this (over-proiced housing) I suspect is one of them
regards
 

Well yes in theory,  but do you really believe house prices in New Zealand will fall by 50%?   I certainly don't.  I know there are a lot of doom and gloomers out their who seem to be almost fervantly praying for a complete collapse in society, but people still need somewhere to live and most kiwis want to own so demand will usually outstrip supply unless we have a change in the available land and building is made easier.  And yes you are right about low income earners re job security,  but even those on middle incomes are going to struggle to save say 60K for a 300k house whilst paying rent.  Speaking from personal experience I can't wait to get my mortgage as I will be much better off financially, and yes I have remembered to factor in rates, increased insurance and everything else that comes with owning a house.

I used to think the fall will be 60%+
Now watching the madness that is the rest of teh world, I think its going to be 75%.
regards
 

Over what sort of timeframe Steven?

Hi, The short answer is I dont know.  I dont have a crystal ball.  So many factors...and me Im a nobody....I wish I knew more. Many in the IEA and other "professional" bodies must have a far far better picture but they are constrained / afraid to say.
Longer answer.....based on the info Ive seen/read,
5 to 6 years of average 10% drop.
Based on,
For the 1930s Depression....
"By this yardstick, the last depression in the United States was from May 1937 to June 1938, where real GDP declined by 18.2 percent. "
So in one year, 18% drop
"If we use this method then the Great Depression of the 1930s can be seen as two separate events: an incredibly severe depression lasting from August 1929 to March 1933 where real GDP declined by almost 33 percent, a period of recovery, then another less severe depression of 1937-38."
If we use that its 10~12% (ish)
http://economics.about.com/cs/businesscycles/a/depressions_2.htm
When the CCCP collapsed they had I think in one year a 25% fall in GDP.....There is a youtube piece where a russian academic / economist taks about it....cant find it, great watch....he doesnt think americans will do as well as russians did (thats a jaw dropper).
Consider what Steve Keen writes....how much bigger the debt is this time...
Oil, 8% decline is quite a reasonable value, that means if the 2.5% more oil gives 4% GDP growth holds true in reverse an 8% decline in oil means 12% average decline per year in GDP.
Note that however when we drop off the plateau all the drops Ive seen for single oil fields have been larger....Cantarell the number 2 managed 36% in one year....the number 1 oil field ghawar is the biggest by far its production is 5mbpd (ish) its very mature, when that declines that will be a big impact.
So my best guess is when ghawar goes bye bye we will see something like 20% plus for the first year or two tapering off a bit....realistically I think the odds are very high for within 5 years....
Nicole Foss goes further and suggests housing falling to what you can save as a deposit, or 90% loss on present prices......
Its going to be interesting.....UGLY.
regards
 
 
 
 
 
 
 
 
 

Steven - you might like to read up on NZ during the 1930's Depression.
 
http://www.rbnz.govt.nz/research/bulletin/2007_2011/2009sep72_3wright.pdf
 
And just remember NZ didn't form the RBNZ until 1934
 
 

Dont know if Ive read that already, I think so, Ive certianly read other pieces.
regards

There will be a fall in real value, not necessarily nominal value. ie: inflation and low rates may mask it, but has to be in income vs. price terms.
"demand will usually outstrip supply unless we have a change in the available land and building is made easier."
or, when our population shrinks and demand drops? Isn't our population kept steady only by immigration at the moment? BB carking it would create some supply... in the nicest possible way.

Finance Girl - If you are paying double what a mortgage would cost - have you considered going to a bank to see how much you could borrow right now?

Yes I have I'm currently in the process of finding something (modest) to buy, I have just reached a 10% deposit, having saved my arse off for three years.  I am looking at getting a small two bed house completely within my budget.  Very the thought of having to knuckle down and save another 10% whilst paying rent makes me feel sick.  I haven't even had a hair cut in 8 months!

and if there is a huge reset and the price drops 50%+ how much will you spew?  You will spend 12 years of your 25 year mortgage paying for something that no longer exists in terms of value to you.
Sure make an adult's decison its yours to make but please make sure you understand the total thing and accept the consquences.
regards

Steven - Just tell me how you arrive at the house price drops of 50%? Even if that event did occur - what do you think will happen to inflation and interest rates? Up or down? 
 
Governments tend to inflate away their debts - why would they not do it this time?
If interest rates do go up then people just have to hunker down and somehow ensure they can afford the interest bill this is what happened in the 1980's. And that means cutting all expenses to the bone.
In the 1980's the NZ Govt also devalued the dollar which created high interest rates and inflation.
 
 
 
 

notaneco, did you see this article Stephen Hulme posted?
http://www.professorfekete.com/articles%5CAEFNoBusinessLikeTheBondBusine...

"Governments tend to inflate away their debts - why would they not do it this time?"
This is an oft recited refrain, but I see precious evidence of it happening, let alone a logical rationale for it.
 
After all, it isn't government who manages the money supply. It is the private banking system who issues the vast majority of credit. Not to mention that people overestimate the inflationary effects of credit anyway. After all, credit is of short-term duration and must be paid back, whilst inflation is by its nature of its very definition is long term since its the rise in the general price level.
 
For me the Marxist's had good grounds to lampoon the monetarist confusion between real money (notes and coins) and bank credit money back in the 1980s.  
 
"The confusion of the Monetarists extends to giving a new meaning to the simple phrase “printing money”. To Marx, Marshall and Cannan it meant “printing notes”; as no doubt it still does to most people. But when Denis Healey, as Chancellor of the Exchequer in the Callaghan Labour Government, said that the government “are not printing money now”, and was asked to reconcile it with the fact that the Bank of England was busily engaged in printing and putting into circulation hundreds of millions of pounds of additional notes, the Treasury, on his behalf, explained that “printing money does not mean printing notes . . . but issuing Treasury Bills to the banks” (that is, government borrowing from the banks).
 
 
http://www.marxists.org/archive/hardcastle/marxmonetarist.htm
 
 
Even Alan Greenspan implicitly acknowledged the correctness of their criticism in a Congressional Hearing when he was Federal Reserve chairman.
 
"The historical relationships between money and income, and between money and the price level have largely broken down, depriving the aggregates of much of their usefulness as guides to policy. At least for the time being, M2 has been downgraded as a reliable indicator of financial conditions in the economy, and no single variable has yet been identified to take its place."
http://www.ny.frb.org/aboutthefed/fedpoint/fed49.html
 
Not to mention the fact that governments have little reason to devalue their debt by "inflating" the money supply, because they harm their very ability to repay their debts with devalued money which they take in through tax revenues.  

Last para, yes thats seems to be most likely.  If the investor percieves that the Govn they are lending to is going to inflate then they will demand a higher interest rate to compensate...
regards

Steven,
 
"Investors" don't demand hgher interest rates for government securities, because investors are price takers thanks to many OECD government's cosy relationship with Primary Dealers.  Thanks to the conditions of the deal, a government debt auction is guaranteed not to fail, which ensures that governments are price makers.
 
http://www.bankofengland.co.uk/education/Documents/ccbs/handbooks/pdf/ccbshb06.pdf
 
The notable exception is the European Union since the EU nations lack a sovereign currency and sadly for them they're saddled with an ECB riddled with mad monetarists who still insist on setting money supply targets, which most other Central Banks ditched long ago after the policies spectacular failure in the 1970s and 1980s. Even Paul Volcker has recently admitted he didn't believe in monetarism and that he was merely using it as a convenient rationale for his high interest rate policies in the 1980s. Volcker actually began a failed bid to control inflation through interest rate targetting in the late 1970s with little success. It just created further volatility and instability in the financial markets.  The cause of inflation in the 1970 were the OPEC initiated oil embargo, which led to a dramatic spike in the oil price. One can't solve fundamental supply side issues with tools which target the demand side. Many claim that the so-called "Great Inflation" was caused by an overly accomodative Federal Reserve Monetary Policy, but look at the historic trend for Primary Bank Rates. The overall general trend was upward, and yet it had little perceivable effect on inflation. 
 
http://research.stlouisfed.org/fred2/data/PRIME.txt
 
"A Carter appointee, Volcker’s attempts to use interest-rate increases to slay inflation in the late ‘70s were met with a great deal more inflation. By February of 1980, with the Fed funds rate at 14 percent, gold hit an all-time high of $875/ounce.
 

The dollar’s aforementioned fall was of course sped along by another major mistake carried out by Volcker just a few months prior. Correctly recognizing the futility of interest-rate targeting, Volcker shed the latter only to make a fateful decision that would drive the U.S. economy even further into the ditch. Put simply, in October of 1979 Volcker began a three year experiment with Milton Friedman’s monetarism.
"Instead of targeting the Fed funds rate, Volcker attempted to target the quantity of money with disastrous consequences. Though inflation is surely a monetary phenomenon as Friedman long noted, with the majority of physical dollars outside these fifty states, attempts to control the quantity of dollars within these fifty states were bound to fail. To the extent that the Fed targeted various aggregates of U.S. money supply lower, this merely meant that dollars in other markets (eurodollars for instance) would fill the shortfall."
 

http://www.realclearmarkets.com/articles/2008/02/the_paul_volcker_myth.html
 
 

You dont agree, but then you throw in we have a notable exception....isnt that a bit of having your cake and eating it?
In a way though yes, Im really commenting as a simplified model and that has to be taken with a pinch of salt when comparing to the real world.  For instance greed and political blinkers can account for the taking of what is offered even when its otherwise irratioanl to do so according to the model......so many angles make it complex.
regards
 

"You dont agree, but then you throw in we have a notable exception....isnt that a bit of having your cake and eating it?"
 
I think including a significant qualifier doesn't negate my overall argument. Including an exception merely shows integrity by including all the facts rather than attempting to skew the argument by excluding inconvenient facts which call into question the basis of my argument. 
The vast majority of the world's largest economies have close relationships between the government's Treasury departments and specific financial market participants. Close coordination is arguably necessary to ensure relatively stable financial market activity. This is what makes governments price makers, but its a win/win for both banks and governments. The situation in Europe is a salutory lesson in the importance of said close coordination between banks and the government. 

Anarkist - Andrewj has placed a link in this particular feed above which is actually interersting reading.
 
On inflation - The CPI is extremely limited and is not a a reliable indicator. I think you will find money printing causes structural inflation.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

Yes, I read it, though I respect Professor Fakete for his defense of the Real Bills Doctrine, but I believe his avowel of the efficiacy of the Gold Standard to be vastly overstated. Its an elegant theoretical construction, but it never worked in practice, because its nothing more than a social convention and therefore is susceptible to the vagaries of human nature. What the likes of Professor Fakete fail to recognize that "the economy" isn't a thing like an engine which can be fixed. Its a PROCESS which has so many dynamically interrelated variables at play that it can't be fully described, let alone managed to function optimally. 
 
Yes it can be made to function better, but I think his attention is being misdirected in an avenue where the historic record has shown conclusively is a dead end. I guess even today the lustre of gold still draws the eye and inflames the passions even after the failure of alchemist to find the mythical Philosopher's Stone. 

agree
 

"On inflation - The CPI is extremely limited and is not a a reliable indicator. I think you will find money printing causes structural inflation."
 
Yeh but what is money printing? You mean spending by the government in excess of tax revenues? Otherwise theres no such thing as money printing. Reserve Bank money is merely an analogue for Government debt which can be redeemed for interest bearing government securities. That much Professor Fakete got right. He is also correct that the Treasury Bond market is a farcial foil to mask the true reality of Government debt settlement. Its objective is that largely provides a convenient risk free sink for excess bank reserves, but thats the whole point. Banks need a countercyclical refuge for their reserves in case of a reversal in the fortunes of the economy. Its a financial stabiliser. This is why the Federal Reserve was founded after the panic of 1907. Financial panics occured with regular repition throughout the period of the so-called Gold Standard era, and one could argue occured far less frequently after the establishment of the Federal Reserve. Even Friedrich von Hayek acknowledged that even without the distortionary effects of government activity, the private banking system is inherently prone to causing periodic financial fluctuations. 

CPi isnt really an indicator of inflation as its seasonally effected for one thing....its an indicator of ppls pain.
If you want to look at structural inflation then that would be how I see it measured through core inflation which has volitility taken out I harp on about as a trend thereof.  Right now that is at best flat and is even tending to dis-inflation...and has been for 4 years despite the stimulses and QEing....
The q is then why not, and that can be answered by keynesian economics, there is no other model Ive seen that adequatly explains why we cont get inflation when we print when we are up against the zero bound.  Now if we were not in this unique situation then Id very much tend to agree and we would see that in the upward tilt of that core inflation graph.
So the Q is what happnes when we get out of this trap....given the poor success of past managment of that its going to be a bit painful....
Of course we are now not on the upward slope of ever more energy being available...so its unknown just whats going to happen economically.
regards
 
 

I think ive written a lot on what I see as the future and I replied to GV just above....
I see a depression and deflation overall and Ive written why above and lots of other times.
Inflate away their debts is indeed the plan of many countries right now, I think that is implicit at the least, the Q is will they succeed. I would say it wont succeed as I see a tsunami of "hunkering down" and high cost and even scarce energy crippling our productive economies with ppl not having the ability to pay all but the most essential bills....that is deflationary overwelmingly so....not to mention the private debt.....
regards
 

Wow did you take courses to be that patronising or does it just come naturally? 
I told you the reasons I thought that a 50% drop wasn't going to happen.  Obviously it's easier for you to write me off than rebutt.
I was actually quite interesting in joining this forum, but going by the caliber of your answer, I can see I'm completely wasting my time.
Have fun playing
 
 
 

I wrote why in response to GV above....and simply your reasons are very centred on NZ and based on factors that if changed by external events will be incorrect.  The external to NZ factors are IMHO far more important.
Meanwhile you seem to have come here looking for comfort you are doing the right thing and are reacting badly to the possibility its not.
regards

Finance Gal,
I enjoyed your common sense approach; I wouldn't worry about steven or the odd other patronising writer (a category am sure I fall into frequently enough). steven makes sense some of the time; but sometimes wants NZ to solve the world's problems on its own. 

huh? why do I want NZ to solves the world's problems? makes no sense and I certiainly have never thought that or am aware Ive said that.
NB It cant be solved...the course is full speed ahaed towards the iceberg
regards

steven,
Apologies if I have the wrong man. To some extent I had you (mistakenly possibly) as like minded with pdk, whose passion and focus I respect. But he does seem to believe that any fossil fuel energy based activity is or needs to slow down dramatically very quickly. And while on a global scale that is likely to be right up to a point, with questions on the speed of decline in supply, and speed of alternative supplies; or less energy intensive activity coming on stream.
There is certainly an argument that NZ's scale of fossil fuel consumption is sufficiently low, that our efforts to drop consumption may be irrelevant to the world.
In the meantime people do have lives to be getting on with; this is arguably an economic/ finance site first and foremost, and you did seem to jump on or patronise a new visitor.   

Hi,
I am of similar belief to PDK.   Somewhat of a mixed message here, its not a case of belief that it has to slow down (if we ignore AGW for a moment) as it will slow down its a geological fact....and its within 5 years. Ive seen no one I respect (ie knows what they are doing) who does the numbers saying past 2018....
NB there is an estimate that global losses to AGW now exceed 1trillion...isnt that of importance financially?
NZ's use of fossil fuels is actually pretty high per capita and as has been said we are on the end of a long supply chain. We also dont earn much by developed world standards so matching the global price is going to be tough.  A financial burden...
Our drop in consumption is indeed irrelevent to the world, I totally agree, but not to NZers and our economy.  I ignore the rest of the world, what Im concerned about is NZ....cant save the world and it doesnt want to.  I see NZ as a lifeboat and saveable.
Finance site, indeed....which is what Im looking at.  If oil drops at 8% and if that means 12% drop in GDP isnt that financial?
The point of lives to get on with is time to adjust.  As an example I fellow co-worker this week has been looking to move from Lower Hutt to near me. He is doing that because the rental is about the same ($500 ish) but he will save $130+ a week in petrol plus parking....He's renting so can move / adjust fast, he's in effect pretty liquid....house owners? PIs?  I'd suggest not.
Consider what that means moving forward, Hugh seems to think that building out on the fringes is a good idea, if the above example is typical it doesnt look good for that idea.  Does hugh really think spending $500~600~$700 a month in petrol not an issue?  Wouldnt it be better financially to take on a bigger mortgage for smething closer in with a big chunk of that transprt bill? I'd say so.
The same applies to existing rentals, the price of the house has to reflect the income which the further out you go is going to drop.....its a similar pattern we are following to America........
PS I certainly didnt mean to patronise.
regards
 

Steven,
Fair reply. And I acknowledge that my initial criticism actually was off in logic.
On house prices, and other things perhaps, I suspect the perspective in Auckland is different to Wellington. Maybe we Aucklanders just have our heads further in the sand, and have further to fall. Regardless of the decline in oil supply (which I'll happily take your word for), I do believe we have an inevitable currency drop coming in the next while; and that also will cause petrol prices to go up relative to local goods and services. 
If inflation then was forcibly kept at 2% overall, then prices for anything other than imported goods would have to decline; including for houses. A sensible Reserve Bank and government would though "see through" such a currency drop, (or an oil price lift due to supply shortage) in a similar way to "seeing through" a GST increase, and would not massively suppress demand for locally made goods, or capital. They should instead let inflation spike to say 5% while the pig went through the python. Whether we have such a Reserve Bank or government is moot; but I suspect the political pressure of collapsing demand for houses and jobs would force them to finally act.
So somehow I suspect houses in the main centres, with good transport options, will keep their value in NZ$ terms.
Small struggling towns maybe not; and commercial, especially retail, property looks very vulnerable.

In terms of the RB seeing through in such a scenario that you suggest, then yes because I think monetary policy is a thing of the past anyway.  I dont think it can be kept at 2% because trying to do so will greatly damage other parts of the economy not seeing un-avoidable inflation....these are the vunerable ppls/sectors who would suffer greatly to try and hold a pointless line if the sand.
Im not sure if there will be a drop in NZD but I'll go with Nicole Foss who thinks there will be a flight to safety (the USD) in a global financial crisis so yes (I dint know if your reasoning matches hers but the outcome yes)....not because I think its justified but because thats what investors will perceive....
Houses with transport options, yes....initially anyway.....I was of that thought 15 years ago its what I think is ahead...and where Im at. 
In terms of small towns struggling yes initially but some of the ppl I read and respect suggest a de-centralised and very local model is likely to be the steady state in further future. We just have to get over we cant do we we do now and do what we can and that suggests locally......so the small towns maybe havens..........funny world....
regards
 
 

Make sure you understand the liquidity aspect of an investment before you commit to it. Try looking at Exters' pyramid for an idea of how secure different asset classes are considered to be.

Finance Gal - You've done very well and good luck on finding your first home and hope this happens very soon for you. Cheap interest rates and not enough supply to meet demand will be very favourable for you.
 
 
 
 
 
 

Finance girl - Do it. Just forget about whats happening around the world and just do it. Although, finding a freestanding home for less than $500K thats not in Otara is goign to be a bit tricky. In my opinion, in this city, a free-standing home in a good suburb is a pipe dream for a first home buyer.

Steven,  um no I wasn't "looking for comfort" I was commenting on why I think LVR limits are a bad idea giving my own situation as an example,  because you know, that is the title of this article...
I certainly don't need any comfort as I know 100% I am doing the right thing.
 
Muppet King,  Luckly I love in Wellington, lots of 2 bed houses sub 500k

If you take today, then having a LVR at 95% is way high....When I bought my house it was a max of 80%.....I paid less than what seems to be your limit now.....Is my house worth over  double its value for no work bar sitting on it? I cant see how.....At the time it was 3 x my wage....now its over 4...probably 5 if you take out my promotions....
Steven Keen has commented that allowing an lvr over 80% just pushes up prices and with more and more leverage its a spiral upwards...the result its prices run away from you....
The point  made before is its relative....the 200k house you look at now would be more like 100k or 150k so an lvr of 80% would be fine, you would still be buying.
The historic figure is 3 to 1 and we have 5 to 1, that suggests a bubble and they pop......so a risk, not one I'd take myself.
but hang around we get to see whos forcats work out.
regards

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