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David Hargreaves says the next few months will be a big test for the banks - and how the banks react is likely to be long-remembered by the public

David Hargreaves says the next few months will be a big test for the banks - and how the banks react is likely to be long-remembered by the public

By David Hargreaves

So, the Reserve Bank Governor would like the banks to be "forgiving" when dealing with mortgage holders under financial pressure.

I might suggest that a bit of pragmatism won't go amiss either.

With, according to NZ Bankers Association figures, nearly 54,000 mortgage holders having gone on the six month repayment 'holiday' we can see there's already a fair bit of pressure on homeowners.

Announcements such as Fletcher Building's decision to cut 1000 New Zealand staff  and reports that Air New Zealand is shedding 1300 staff tell us that there's likely much more trouble and strife ahead in terms of job losses.

And we know by crunching some of the numbers that the Reserve Bank has been producing on mortgage lending by debt to income ratio that there are a fair few homeowners out their fully geared up and vulnerable.

The attitude therefore of banks to customers who not able to meet their payments in coming months is going to be crucial.

That's where the pragmatism comes in.

A bank simply deciding to foreclose and force sale of the house would be seen as inhumane in this environment.

But it's not just that.

Logically also it could be extremely counterproductive for the bank and its business.

The more houses that go on the market, the more that prices might be forced down, and so, more bank customers could find themselves under pressure and possibly facing the perils of negative equity.

Nobody should expect the banks to suddenly become some sort of social service, soaking up vast losses in order to keep people in homes and happy.

But equally, the banks do need to face up to the fact that in the short term it may be better for them and their shareholders to suck up some losses (or at least make less profit) in order that the economy and the housing market can hopefully recover more quickly.

Okay, now, there might be those who say at this point, well, what about personal responsibility of the buyer? What about people who have borrowed too much and taken on too much risk? 

Look, it's a fair point.

Climbing the ladder - in a bubble

But I do have a lot of sympathy, particularly for first home buyers, who watch prices go up and up and feel frustrated and just want to 'get on the ladder' - yes, maybe at all costs. It would be all too easy now to look at what's happening and say these people have been reckless. However...

I've now been writing for interest.co.nz for over seven years and I was intrigued to look back at some of the things I've said over that time - and I found this, which is me seven years ago calling the Auckland housing market a bubble.  Yes, seven years ago. And I absolutely stand by what I said then. It was a bubble.

People get funny about anything being described as a bubble because for some reason they think you are implying that said bubble is about to burst. Well, not so. Bubbles can just keep growing and growing and growing. Often they won't burst until some unexpected external event intervenes.

Seven years ago, according to Real Estate Institute of NZ figures, the Auckland median house price was $555,000. If as a first home buyer you had gone all 'ridiculous' on it then, borrowed say 95% (over $527,000) and bought a house, you would now have a property (based on the latest REINZ medians) of $925,000 and have probably something in the region of 50% equity in your home. Very comfy. Your 'reckless stupidity' in buying into a bubble would have seen you rewarded with hundreds of thousands of dollars of equity in a house.

The mortgage is the priority

If we go back to personal responsibility, let's face it, most if not all homeowners put paying the mortgage as the absolute priority. 

If times are tough and other things have to be foregone in favour of meeting the mortgage commitments, then so be it.

Therefore while on the one hand a bank leaving people who are struggling to pay in their own home and not foreclosing is obviously the 'forgiving' approach it may be the most pragmatic approach too. 

Unless we end up faced with some sort of truly ghastly 1930s depression revisited then the economy will recover and those who have lost jobs will find new sources of income.

So, by being patient the bank will likely find that at some stage the non-paying customer will get themselves back into a position to start fully paying again and the whole thing over time gets back on track.

As I say, the alternative, with houses put up for mortgagee sale, is for the banks to inadvertently put downward pressure on house prices - and therefore in effect to undermine the collateral they have on all their other mortgages.

Banks as jugglers

The banks are going to need to find a satisfactory juggling act. 

They are going to have to balance between what works for them commercially and what is pragmatic.

And I say this with the fear in the back of my mind that this is the sort of juggling act I don't think banks have achieved well in the past. 

Faced with the sudden realisation that loan repayments are drying up, it has always seemed that at this point the bank becomes, well, all 'bankish' on it and says, agitatedly: "HEY, give me my money back!"

Well, I think we really are all in this one together.

As I say, I don't expect the banks to suddenly come over all warm and fuzzy and say: "Oh, you know that money we loaned you - well, you  don't have to pay it back. This one's on us."

Business is business. If you lend money to someone, you expect it back. But equally, if through some huge external event that no-one saw coming, nor had control of (and a pandemic qualifies, I think), people are struggling to repay, well pragmatism has to come in.

A big moment

This is a big moment for the banks in this country.

People will remember in future years how the banks reacted now. 

No business has an absolute right to exist. We see businesses and whole industries fade into the sunset.

And with the way technology is moving, banking could be another industry that simply falls by the wayside as well. Ultimately. As hard as it might seem to believe now. 

So, this is the massive test for banks now. 

If they 'pass' the test their future will be secure for the moment.

If they don't they may - hard as it may be to now believe - signing their own death sentence.

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122 Comments

I do think that your sweeping generalisation that "banking could be another industry that simply falls by the wayside as well." is too - er - Sweeping.

Banking as a way of matching savers with investors has existed in forms roughly similar in outline to today's crop, for around 4-600 years, depending on whose histories one consults. To be sure, individual banks may well overstep the bounds of their social acceptability and be Cast into the Outer Void. But banking as an industry going down the tubes????

The first recorded use of writing is of people keeping a ledger of who owed what to whom. Maybe farther back still, the tally sticks of the upper paleolithic were a record of obligation. There was debt and obligation before there was money, cities or states. Debt is at least 5000 years old and possibly older. Before banks, the "lender" was the crown, some aristocrat, land owner etc. In modern banking, we have merely swapped out one lot of elites for another.

And through fractional reserve banking allowed them to create the money supply.

Ah yes. But not much difference between a monarch, pharaoh or emperor issuing currency or a bank issuing currency. None were chosen per se. But they all claimed the "mandate of heaven". When once we accepted debt bondage because we believed in Gods and now we accept debt bondage because we believe in capitalism. Whatever you do with the belief structure, you still have vast wealth and power inequality. In fairness to capitalism though, the contemporary debt slaves live a lot longer and in far more comfort compared to most of history ;-)

Graceful historical correction there GJ. I did think of Sumerian inventory management software (reed points s impressed into clay tablets) afterwards....

Only to the degree that their Central bank allows via Capital Requirements..... frequently missed by youtube novices.

I believe banks do not need savers in order to write loans today.

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"Unless we end up faced with some sort of truly ghastly 1930s depression revisited then the economy will recover" - that is the question, isn't it. Unemployment stats coming out of the US point to this scenario.

It's not if, it's when...

I'd really like a sane answer as to how this is not already a depression. The stats are far worse than the 30's. Unemployment everywhere has just started. Even in the US a lot of jobs are being protected by PPP and when that runs out it will be a massacre. NZ is close to 100% on welfare of one kind or another so the brutal reality is masked.

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Hilarious tone of this and the RB's "please be gentle with our citizens" plea to the banks.

Has anyone ever heard of banks being forgiving? If they start now, it would be a miracle and would continue to ruin true price discovery for assets.

Who wears the cost of banks being forgiving? The tax payer? We should bail out these companies who have been pulling billions of dollars out of NZ every year because they didn't plan for a shock? You must be joking...

I completely disagree with this David. Banks should just let prices fall and suck it up. Yes people are going to lose their shirts and we will go to a bad place, but people need a shock to bring them back to reality. We have had years of entities borrowing to the hilt without consequence, companies, investors, mom and pops. Now when the consequences come around we should NOT shield them. It's a hard world, sometimes stuff goes wrong, get used to it.

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It's a bizarre mindset. Do we next ask restaurants to lower their prices so folks can eat out at cheaper rates or perhaps encourage discounts on footwear ?

There seems to be a misguided notion that banks are something other than 'for profit' enterprises. They dont have a social consciousness, their reason for being is to make money and pay a dividend to shareholders.

Because banks play a HUGE role in everyone's lives, and society as a whole. Much more so than restaurants or shoe retailers.

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Did we invite them into our lives to the extent they have – or did they just push their way in at every opportunity.

That still doesn't explain why you would turn to a bank for social welfare services. Surely that is the job of the government?

Retailers and eateries will also need to adjust prices and products to match their customers incomes or prepare for fewer sales for a few years.

Yes... for profit and shareholder wealth but every business operates under social licence.
Good governance know this.

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I totally agree with you, and I am an investor and have taken calculated risk but always been prepared to face concecuences as markets and industries change, now it seems like markets will never fail they will always get propped up by the tax payer and we send the message out to the next generation "don't worry about tomorrow or the concequences because there won't be any" all we continue to do is devalue our dollar and weaken our economy, lessons need to be learnt this time around

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Capitalism without bankruptcy is like Catholicism without Hell.

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Haha yes totally, it takes the fun out of it if everyone is a winner so to speak and I don't mean I want to see people go through hardship and don't want to see more people on the street but there needs to be accountability for desisions in this world people need to live within there means more and think about the future consequences of today's desisions. I feel sorry for the kids who will pay for this mess

Ditto......head of nail has been hit! I am pretty disillusioned with the whole system, we are careful with our money, no debt apart from a small amount left on mortgage, one house that we live in and invest smartly. Think I am doing everything right in that if I lost my job tomorrow my family would be ok, we wouldn't lose our house. Yet all I hear about at work for example is people bleating on about house prices, where they bought their latest investment property, borrow, borrow, borrow, new car, boat etc etc with not a care in the world about "losing their job!!!". Enough is literally never enough for a lot it seems and our way of life supports that. Seems very out of who to me!

When governments muck about inside markets for political ends (like the US government did with its home ownership goals) it either causes a misplacing or removal altogether of risk. That creates distortion, which left unchecked grows like a cancer until it causes real world damage (like the GFC explosion of sub-prime loans did).

Then the socialists cry, "market failure'.

Govt caused the GFC now?

You literally have ZERO understanding of how the world works.

The US govt did actually force banks to lend to un-creditworthy customers. Banks enthusiastically complied but the few that didn't had some unpleasant regulatory sanctions.

Oh the poor innocent banks, how awful for those poor innocent victim banks, just innocent bystanders caught in the crossfire

Did the government force banks to repackage subprime mortgages and sell them as low risk investments?

Yes.

Source: I own multiple regulated US lending entities.

Yes, they did. It was stated US government policy for years to put poor people into homes.

Freddie Mac and Fannie Mae were the government engines to drive the finance industry to do it and in so doing they put people into homes who could not afford the payments at interest rates that could never be sustained and then blamed the banks for doing what they were told when it all blew up.

A spectacular government regulatory disaster.

"Has anyone ever heard of banks being forgiving? "

Yep, I have, in 2008/9/10. They gave people mortgage holidays, didn't care if they lost their jobs and so on. And they didn't do it to be kind to their customers, they did it because of the reasons David gave in his article i.e. if they force people to sell up, they reduce the value of other houses, and it becomes a downwards spiral.

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" in order that the economy and the housing market can hopefully recover more quickly."
Indeed.
But 'recover' to what and when?
The unsustainable structures in place 3 months ago and that we think (hope!) we still have today?
Or recover to levels more appropriate to a chastened population; one that finally appreciates the risk associated with too much household debt?
If 'recovery' is to what we had in January 2020, then let the whole lot burn now....because it's only a matter of time until it does anyway
(PS: And, yes. This should have been sorted 'last time'; that +7 years back you mention)

Yes exactly.

There seems to be a number of different hopeful scenarios about what is a recovery.

1. Those with houses/Investments. Get through this taking only paper losses and then return to the same status quo as before, including recouping any capital losses ie a V-shaped recovery.

2. FHB/Vulture capitals - Lucky to buy at the bottom of a cycle and then for a return to the status quo so they can enjoy the non-value added capital growth that others have been boasting about for the last decade or two.

3. Set a new normal at the bottom of the cycle, and that any increase in prices going forward is at the rate of inflation only, ie no non-value added speculative capital growth. ie no boom and bust cycle.

See Harry Dent saying the housing wise NZ, Australia is more vulnerable than the USA. NZ has 67% of its wealth tied up in housing, the USA 27%. The converse, of course, is true with the stock market.

I am not certain about this but, it might be possible that the very act of concentrating a nations wealth in one investment area actually creates a strength in that sector (unintended consequence). In the USA their sharemarket is very robust and historically at least, in NZ the housing market has been very robust.

It depends on your definition of 'robust.'

In NZ case that would mean the price of land decoupling from its intrinsic worth due to restrictive regulations that confer a monopolistic advantage to both land bankers and councils, causing the housing to become increasing unaffordable, and loading FHB up with debt that is double what it should be.

Hardly a strength, which I think we will find out over the next 12 months.

It does. But strength can also mean many people not easily abandoning that market and panic levels are lower.

More investors in a space also must improve total market liquidity.

But wasn't housing in NZ historically robust because of the high ownership participation and corresponding low investment participation. That's gone way out the window to the time of almost 50% of adults now live in rentals. Times have changed.

Ralph logic

Bubble = robustness

"historically at least, in NZ the housing market has been very robust."

Many property investors have been willing to take on large amounts of debt as they believe property prices do not go down by much.

Also many other property investors are unwilling to invest in the share market due to the high level of market price volatility (especially those who were mentally scarred from the 1987 stock market crash, & 2008 / 2009 stock market crash). Since property prices historically have not been as volatile as historical prices in the sharemarket, many property investors believe that the housing market is a safer investment.

If we once again refuse to address this, as hard as that will be.. I shudder to think of what awaits us further down the same hellish track.

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Wouldn't it be wonderful if the tenants stopped paying the greedy landlord, the greedy landlord had to sell at a loss and the tenant then bought the house at a reasonable price.

FB, if you haven’t bought by now, hen you should be very soon with interest rates so low.
Most landlords won’t be selling at a loss as the interest rates currently will be making most property now neutrally geared at worst.
ChCh they aren’t dropping but I will be buying nice property when the great opportunities occur.

"most property now neutrally geared at worst."
The perfect time to abolish Negative Gearing then?!
If no one will be disadvantaged by it by being Neutral, then what can they complain about?

You mean the fact that you could write negatively geared property against other income?
They have brought in the ring fencing, which means accumulated losses accrue until you make a profit.
Never had a negatively geared property

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Why would someone buy now when they could get a 12% discount in a year? That may wipe out most of their deposit.

As they anytime is good time to buy for FHB But Not when BETTER times are ahead.

Buy now and possibility of the deposit/equity being wiped out or may give on negative equity as fall is imminent.

Are you okay TM2 ??
You didn't put any !!! in your comment!!!

Can interest add a feature so I don't have to see any posts from The Man 2? I often start reading them and think "this sounds ridiculous" and then see the username...

As much as I'd love a dark night mode, with no add-on I've tried working for the comments - there's far more value in being able to block that thing.

Because you dont like to read That there are professional landlords that are successful investors?
What have I written that sounded ridiculous?

Agree with FB. This is the dream scenario for my adult children. I live in hope.

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That’s great David – following your line of thought simply locks in no end to the stupidity.

"Would you please be nice so the system that by all objective measures is completely f#%@ed, can continue to operate?"

It's exactly what all the central bankers want. According to them everything was rosy 3 months ago.

Part of that pragmatism will be looking at current LVR on a case-by-case basis using a weighted approach. Where there is still home equity backing a non-performing loan (NPL) you might reasonably extend more time than perhaps a high LVR home or there is an unusually high level of lending (e.g. customer is also guaranteeing an investment property.) Also banks should set themselves goals that allow the steady return of NPLs to pre-crisis levels over 2 or 3 years.

However if a customer can no longer afford a loan there is no excuse for prolonging the inevitable. Bankers need to earn their money even if that means having difficult conversations to prepare customers for difficult times.

This call for banks to be pragmatic is useless (banks are businesses, so of course they will try to be pragmatic, like any normal business would do) but at least it makes some sense, and at least it is not as ridiculous as Orr's statement.
The problem is that banks do not act as one single collective entity: who is going to blink first and start letting customers default now (when house prices have not collapsed yet), thus avoiding or minimising the bank's loss (rather than later, with customers in a situation of negative equity and some losses impacting the banks) ?
Has anybody learned anything from the GFC, I wonder ? Once the downward process with the house prices kicks in, it is going to be very hard to stop it until it reaches a new balance (which I reckon will be sometime in late 2021 with the house prices being a third less than now).
I hope that there will be some support for FHB's from the government (their only fault was to believe in the real estate agents' and house speculators' BS about the myth of ever-increasing house prices), while house speculators should be left go (which will only make the market more healthy in the longer term).

"Once the downward process with the house prices kicks in, it is going to be very hard to stop it until it reaches a new balance"

The price feedback loop worked on the way up for property prices which led to high property price levels and the entry of many property traders, and property investors (many using equity release / deposit recycling techniques). All property buyers were enabled by the banks by financing property and fueling rising property prices.

The bank management in place when the banks were lending aggressively to property traders, property investors have now left the scene (after having collected their performance bonuses). New bank management teams will need to deal with the legacy loan books.

Needed to have implemented a macro-prudential debt to income ratio lending limit. The RBNZ was denied implementing this measure by the finance minister at the time.

Here is a financing product by a bank to assist owner occupier buyers.

This is how banks enabled owner occupier buyers (without access to the bank of mum and dad) to pay ever rising property prices. When the only solution for many owner occupier buyers is shared ownership, it highlights the lack of affordability of property prices for owner occupiers.

https://www.youtube.com/watch?v=6-fejBXv4pQ&feature=youtu.be

AKA "How we can get New Zealanders to send ever more money to Australian parent companies"

FHB who bought last at the peak of bubble by streching their finances and paying premium will be worst to suffer, specially if their earnings has been affected.

If what this global economist said today turns out to be true, will be brutal for NZ as housing was and is the only Rock Star / Feel Rich economy in NZ and if it goes down, everything is finished, specially banks though LVR restriction will give some comfort but if it falls as drastic as the below experts is saying and also as many indicators suggest than it will be hard for the bank to be generous. As it is other sectors like Tourism and hospitality sector is dead for now and many like International Education / Students limping besides in many other industry - Going future job loss and business loss are going to aggravate the fall and speed, once wage subsidy and mortage holiday runs out.

https://www.newshub.co.nz/home/money/2020/05/new-zealand-s-housing-bubbl...

So wait and watch may be the best policy for now as advised by many experts except those in and related to RE industry and trying to invoke FOMO - Be Aware of such experts/friends/well wishers.

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This is a thoughtful piece but overlooks the problems caused by ‘zombification’ if banks just keep pushing out mortgage terms or otherwise delaying the inevitable. If a FHB has made the mistake of getting a mortgage that consumes too much of their income, better to rip the bandage off and sell at a loss. Otherwise we have a generation who, as long as they keep repaying their massive mortgage, will not have any disposable income, with all that entails for the economy. There’s an argument to be made for zero growth, but Japanification is a crappy way to achieve it.

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Be Forgiving when one cannot pay a mortgage? Hmm.Beats me. Perhaps,its well and good if its someone else's money involved.But, if its my money in bank deposits which has found its way into the mortgage, I would not be so charitably inclined.

As a single depositor, the bank really doesn't care what you think. They are somewhat answerable to their shareholders, but not to any one depositor. Perhaps we need a bank depositors union?

What we actually need is a Depositor Bank, owned by Depositors, for 1st time Buyers and the Future needs of OUR Country. This could have been Kiwi Bank, but even our own country does not use so called Kiwi Bank as their main Bank.

We need to get the total thing right with Banking as it is so much out of kilter it is crazy.

We need to get back to basics. Look after our own "Economy" not be at the mercy of a Foreign owed Bank.

I cannot "Trust" any one in the current system.

Man-ipulation is fraud-u-lent as far as I am concerned and should be made illegal. But crime does pay it seems. One should not have to work around a system that favours excessive printing, over legitimate hard work and toil and Saving is to be degraded by those
man-ipulating the entire system at the detriment of others. And I include all Bwankers and Politicians in this fraud.
Time for a Reset and Match. Would all depositors like to put all their money into one Bank, with one aim......Total Honesty.

Because if we all Worked together, we could void all other Banks here in NZ and stick to a plan.

And I do not mean Rob Peter to pay Paul. Slavery should not be profitable.....but it still is.

We also need to get a Political Agenda right......neither left, nor right....but fair to all.

But that will never happen, unless those creaming the system, stop milking it, one way or another.

Yet again, we need to get honest citizens into power, not huge Beneficiaries of a system that actually discourages Work and Income and Policing hidden Agenda.

As I always say, Taint one thing, it is all of it.

And none so blind as those who do not see.

Mortgage defaults will start to rise, banks will start to suffer, banks will be unable to take a firm stance with its customers without making the situation worse. Bank cannot fail without affecting everyone in the country. Government bailout will occur. Minimal financial loss to banks. Maximum loss to over leveraged homeowners. Nobody will be blamed because "you cant predict these things".

Doubt there will be bank bailouts. OBR should take care of that. If all the shareholders and depositors funds are sucked up by the OBR then maybe a bailout.

If an OBR event occurs and people loose their savings I don't know what civil unrest would occur. There would be a large amount of very angry people.

I am sure the bank will forgive me for not renewing one of my TDs at negative interest rates,and instead spending it on upgrading my house insulation,a rainwater tank and new recliners.maybe help the recovery in a small way as well as my quality of life.

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So speaking of bank collateral, who is up for a bank run?

If the banks decide to become "kind" and "forgiving" and "pragmatic" - they will be using their customers savings to finance this generosity. At the first sign that a bank begins to move in such a direction, all savings would be well advised to exit that bank.

I think the argument is that banks should be run like social welfare institutions.

It would be interesting to see that reflected in their reports to the banking regulator.

And with absolutely perfect timing we get:

New Zealand's most expensive home ever is hitting the market

https://www.afr.com/world/pacific/new-zealand-s-most-expensive-home-ever...
Good luck selling those!

We shall have many well connected people ensuring that the bazooka funds and QE cash the state floods into NZ's economy is directed well. It is tiring work ensuring that all that free cash is delivered efficiently and effectively, so these people will absolutely need a 2 floor skyscraper topping mega-apartment to relax in. Life isolated from all of the poor people in the street and their incessant demands will help them to focus on achieving projects of great national significance. [/sarc]

Seriously QE has delivered stratospheric wealth to the wealthy in the EU and USA, bound to happen here too.

"Scott says that 85 per cent of the building's apartments have already sold."

Project scheduled to complete in October 2020.

I wonder how many buyers will either:
1) cancel (or walk away from non - refundable deposit)
2) be unable to get financing to settle (as bank valuation estimate is now below the purchase price)
3) look to sell immediately after settlement

Remember this off the plan buyer for Sugartree apartments in Auckland?

https://www.stuff.co.nz/business/114799219/student-battling-to-recover-a...

Then she tried to recoup her losses via setting up a Givealittle page

"The fact Campbell has since changed the purpose of her Givealittle page to "raising money for the Prostate Cancer Foundation" probably indicates that she realises she's been caught out - or that she, at least, should have done a lot more due diligence before her deal went unconditional."

https://www.stuff.co.nz/business/114814271/if-flicking-an-apartment-was-...

"Oh, you know that money we loaned you - well, you don't have to pay it back. This one's on us."

I wonder what that would do for the capital ratios that government demand of the banks.

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Let’s be pragmatic then! House prices need to drop 30% +. We can simply not operate a functioning healthy and progressive economy/society while they remain so disjointed from affordability.

So tired of the bull dust out there about returning to normal...as in the madness of the last 10+ years - a period more removed from normal than any other time in history.

Most of nz remains in the cookoo land of disbelief and denial. This is a reset children.

Absolutely. If we don't let this be righted now, we will have to face something far worse down the line.

Didn't the govt cover loans to 80% of their value. Maybe just my imagination. Didn't all those mortgage payers just take a holiday?
Didn't everyone just get paid by the govt? And I'm fairly sure rbnz said they will print a total of $63BLN, and quite prepared to go to $90bln, or, "whatever it takes".
The free market died a long time ago, and the economy now lives 100% in a Disney fantasy.
Doubtless the charade will continue, until 1 day, it no longer does. It will take something extraordinary to bring this economy
to it's senses.
A solution cannot be found within the status quo, and an alternative will not be adopted via a banking system fattened on greed, suddenly joining a benevolent, "let's be kind" new genre of social responsibility. The system, and the greed, fomo , "let's live well beyond our means" attitude, needs a silver bullet, and the shot required will not be coming from today's financial elite. More debt is no solution to massive debt.
There are alternative societal models, we don't need central banks, especially not privately owned ones, we don't need a govt to own everything in order to keep markets happy, yet we do need markets, and society generally works well with money, and this system can be decentralised.
Such choices will not be made while the greater majority are looking to protect their position.
Only a complete collapse will make such alternatives apparent, as people start to figure out for themselves why and where it went wrong.

Nobody is "forced" to buy a house.

The house greedy that over extended (and pushed prices higher) should not be bailed out.

Yeah exactly. Forced to buy a house? I don't think the banks have a debt bondage policy, but I wouldn't put it past them...

100% agreed BL.

Faced with the sudden realisation that loan repayments are drying up, it has always seemed that at this point the bank becomes, well, all 'bankish' on it and says, agitatedly: "HEY, give me my money back!"

Well, I think we really are all in this one together.

Depositors certainly are and remain unsecured creditors of bank IOUs offered up to purchase borrowers' IOUs. No money here, just promises to pay. Nonetheless,

According to the Reserve Bank, the new capital requirements mean banks will need to contribute $12 of their shareholders' money for every $100 of lending up from $8 now, with depositors and creditors providing the rest.

Incorrect. ANZ have $84bn of housing loans for which their internal model calculates $17.4b of RWA. They hold capital against the RWA, so 12.5% x $17.4b = $2.2b capital. So for every $100 of housing loans they hold $2.60 of equity.

Pretty leveraged huh!

It's actually even worse, their minimum reg capital requirement for $90b of home loan's is only $1.4b, so $1.55 of capital for every $100.

Page 86 on this link. I will give you housing dgm's this - that is extraordinary leverage!

https://www.anz.co.nz/content/dam/anzconz/documents/about-us/wcmmigratio...

Yeah I remember watching a Martin North DFA clip on the Aussie banks and how much leverage they had against their property market. I'd be making brown marks in undies if were them.

Those numbers are ANZ's NZ operation, not Australia. They will be very similar.

You should take a look at RMBS warehouses if you really want to see leverage alchemy.

Savage Gareth Vaughan and the RBNZ if you are not approving, they are the author and source respectively - and did anybody mention low RWA residential property loans specifically, for a particular bank?

Agreed, but housing is the bulk of lending and 99.9% of the commentary here.

Banks have capital ratios and liquidity ratios that they need to maintain.

A borrower with a high LVR or who is deferring their mortgage payments may result in the bank requiring a higher amount of capital in the capital ratio calculation due to a higher risk weighting of that loan.

They will get regulatory forbearance on that for now. The rules get suspended when times get tough.

The bigger issue is when real losses kick in. The banks here will have no skilled workout teams. They've probably made money on 99% of their repos in the last decade or more.

This sort of thing really shows how a big house price bubble could leave banks exposed if house prices start to go down. I see in Australia, they appear to be going to give 50k to people to put towards building a new home, which appears to be a form of helicopter payment focusing in on housing. I really hope we don't see that here.

Maybe if the banks don’t play ball, we will resurrect something like the Mortgagors and Lessees Rehabilitation Act 1936 (repealed in 1917) which mandated debt forgiveness - by allowing mortgages and leases to be ‘adjusted’ to ensure farmers and home owners did not owe more than the value of their property, and could afford to pay their debt and and stay on their farms or in their houses. http://www.legislation.govt.nz/act/public/1936/0033/latest/whole.html

May as well just give everyone a free house, eh

You talk of the banks as an industry.

This may well come down to survival and each for his own.

Making "pragmatic" decisions could roll on into a collapse and leave savers getting a haircut.

IMO they should follow a sound approach, if it looks like a customer has to sell then that might end up being the best for both parties especially if the price falls escalate, some mortgage holders would be better coming out with some equity or a small amount in the red than a great big cavern of red.

Around the corner from me two for sale signs went up today within 50 meters of each other. Now is the time to dump and run.

If you are going to panic, panic first.

Exactly.

"If you are going to panic, panic first."

If lots of other people are going to panic, panic first.

1) https://twitter.com/MrBazza/status/1242049698992717824?s=19
2) https://youtu.be/lcAyza0bmFQ

An ''expert'' on Newshub said that NZers have 65% of their wealth tied up in property ad was predicting hard times ahead for the next 2/3 years but claimed a boom from around 2023 not because of the virus but the nature of booms and busts.

We haven't had a bust in housing for a long time. A house is only worth as much as someone will pay for it.,

"We haven't had a bust in housing for a long time."

In New Zealand, there has not been a house price crash (in nominal price terms) for at least 55 years. This is the reason many people believe that house prices do not fall by much in NZ. It is outside the realm of possibilities for many people, as they have never experienced one firsthand.

Many other commenters on interest.co.nz have experienced firsthand a housing price crash.

It's good that the banks here have been acting quickly by dropping their mortgage rates to help buffer current mortgage lenders with high debs against Negative Equity risks. Not only that but I bet there's still a lot of borrowers that will be coming off their 'interest only' mortgage periods and being moved on to 'capital repayments' which can double the amount their installment pay rates in most cases.

Moving them on to a much lower rates will help to reduce the risk of property repossessions (Mortgagee) and help to soften a risk of a price crash that can take two years to play out.

Not sure if will entirely hold of big price drops, that mostly depends on overall employment figures.

Of course, a majority of households have a mortgage, and therefore it seems counter intuitive to hold rebellious thoughts towards the banking system. To ensure even more loyal holders of debt, banks go into temptation mixed with fear overdrive. Lower interest rates, and make sure everyone knows that deposits aren't insured, or guaranteed.
Next we'll get the big social shaming on people with "savings", being "hoarders" of money.
And we should all be familiar with how the negative connotations of that word has kept everyone regularly throwing out, oops, decluttering, in order to make way for the next lot of "stuff" we are convinced we need.
The lockdown has given many people the time to realise they don't need to go buy that stuff.
Not to mention the realisation that it would be more prudent to perhaps build up that rainy day fund they never actually started on.
I hope they look for alternative ways to store their wealth other than in fiat currency, in bank accounts they feel they are being pushed out of, into stocks or property.
It's true, the banks did not force everyone to take loans they couldn't afford, the loans were taken willingly, and yet perhaps this is an example to many of how evil enters a person's house through the front door., it's welcomed.

It is ironic that we were previously told to save, to make sure we have plenty of money to fund our retirement. People who have retired, have to have their money in somewhere low risk and safe without market volatility. If someone is retired and has 800k saved where do they put it that is safe and guaranteed?

Hi Rob I would suggest KiwiBonds - while not guaranteed (and nothing is really), these are term deposits issued by the NZ government only to New Zealanders. In my view it would be most unlikely for any NZ government to default on its own citizens. However, you will have to trade off security for low interest returns. Return of money, rather than return on money.

0.5% before tax. It’s a pittance. We ended up putting 2 years worth of expenses in there. They can be redeemed within 7 days. Also think about cash. We are covering 3 months with that although it’s slow getting to the goal amount with current ATM Withdrawal limits. For real apocalyptic outcomes a bit of Gold doesn’t hurt, although buy and sell margins are large, approximately 8%. We went with Swiss Bullion as it’s universally accepted. This DGM planning is fun. No toilet paper hoarding yet.

I have been withdrawing some cash myself . I wonder if they are seeing more people doing this, as I imagine they could have an issue if too many people do this. IMO people need to feel that their money is safe in the bank, as people do in Australia for example, with a 250k guarantee per bank. That same amount in NZ so we are consistent with them IMO makes sense.

Just as with Covid-19 what they know and what they say are two different things. They will see the cash withdrawals and move into KiwiBonds, but they are not going to scare the horses by highlighting it. I hope I’m absolutely wrong with my paranoia but I see no real downside in moving into KiwiBonds when they are safe and liquid and Bank TD rates are low. I want to pivot into a second property if inflation takes off so liquidity is important. Early retirement scares the heck out of me with inflation debasing my savings.

Thanks. I feel exactly the same as you on this.

If you have the security of owning your own home why would you have 800k all in low risk, spread the love with a mixture of investments and risk levels

A lot of retired people will need that certainty that their money won't drop in value, because they may not have the time to let the market recover. Especially in this crisis because we don't really know how bad the number are going to get. Housing is the other that a lot of retired people seem to have gotten into more recently.

"A lot of retired people will need that certainty that their money won't drop in value, because they may not have the time to let the market recover."
"Housing is the other that a lot of retired people seem to have gotten into more recently."

These two comments taken together would suggest that retirees believe that house prices won't drop in value, and hence their equity value is safe. So since they believe that their equity value is safe, they are willing to buy investment property for the higher yields to maintain their retirement income (retirement income has been falling in bank deposits due to lower bank deposit rates).

Reminds me of supposedly "safe" assets when investors reached for yield with deposits with finance companies.

This is very much the situation we found ourselves in, and made a conscious decision to be open minded about alternative forms of investment. I have become a gold bug as a result, yet started out quite a few years ago.
I recommend "the hidden secrets of money" with Mike Maloney, as an introduction to viewing the financial system from a different perspective.
I believe in educating ourselves, no matter our ages, as the last thing we want to do is race in without research and reflection.
Alternatives we have found, and use to one degree or another, include not just gold, but a precious metals fund, incl silver. Shares in the form of mines and some other interesting companies we found along the way, yet our exposure to shares is not large, and has become fun, and engaging. It's true, taking control of your own investments is fun, and rewarding. I have also taken a great interest in digital assets, it's an enormous field to investigate, and goes far beyond currencies. It can be tricky to actually start with a digital wallet, then buy some digital assets, so start v.small, while you continue research.
A friend the other day was saying how ridiculous it was trying to ensure everyone involved in his mother's medical care had trouble getting access to her records, and believe it or not, there is a digi especially for that, putting the patient in control of their own records, and preventing unknown selling of patient data to interested 3rd parties.
Of course cash, and a few currencies. Using transferwise, it's easy to buy other currencies, low fees. Study the fx cycles, buy usd when nzd high ( normally over our summer). Sell going into, or in our winter. Covid 19 interrupted these cycles, but I've averaged 12% for the last few years using this idea.
All have fees, gold and silver in particular, have high premiums at the moment, because of the demand for physical. The metals market is fascinating, and in researching it you will soon come across the "comex/lbma" fix. In general gold is an actual store of value, only ever buy allocated, and never store at a bank. Since taking a personal interest in our own retirement fund, we've never enjoyed our investments so much, and I never had such good returns either.
Way too long, I apologise. Enjoy.

Thanks for the thoughts. I’m old enough to remember GoldCorp so I only take physical Gold and store securely. 50g PAMP bars don’t take much space. I can’t get my head around digital currencies. I’ll check out Maloney on YouTube.

Ray Smith, his helicopter and Goldcorp. Happy days. Is he out of jail yet? Great business model. Similar to Grant Robertson's. And Grant's dad's one.

Yes education is the key to all these things be it property, shares currencies etc and the education should start in schools because the people coming through now will not have anything in latter life if all they ever sell is there own labour. I took it upon myself to learn about shares and what to look for in financial reports etc and you can normally find companies that are of personal interest to you it can be fun and as you gain confidence you can increase you holding and diversify to reduce your risk I only wish I started years before I did.

Is it really still true that a majority of households have a mortgage? I think around 2/3rds own their own home, but some of those will be mortgage free.

Hargreaves is a housing market commentator, ok so he has the modern day lefty liberal bent so many people subscribe to today, that is his choice and does not surprise me at all.
What I find truely staggering is Adrian Orr, governer of our reserve bank no less is asking banks to show "compassion" ! I would have thought someone in his position would have at least some inkling as to what makes banks tick, but obviously not .

Banks do not have to be "forgiving", they have a social responsibility due to the role they currently have, should they decide to not to meet that responsibility their role should be swiftly changed.

Banks never do anything inadvertently. If their actions cause house prices to go down, they will know all about it, and all their decisionmakers will have all sorts of projections, cause and effect stuff, and consequences of their actions right in front of them. The moral rights and comfort of their victims/clients will have zero place in their decisionmaking. I know this from personal experience.

I think Mr Orr has the banks attention now....

I doubt it .

Over leveraged speculators that think the banks are coming to their rescue are dreaming. It must be some sort of unconscious security thing that exists in that if the banks go bust they somehow write off all the debt they owe because there is nobody left to pay it to.

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