By Bernard Hickey
Most fans of Monty Python will remember the scene from the restaurant in 'The Meaning of Life' movie when John Cleese offers the stonkingly obese Mr Creosote a 'tiny wafer thin' mint to finish off his meal.
At first, the vomit-soaked and "absolutely stuffed" Mr Creosote refuses. But then John Cleese insists: "Oh sir, it's only a tiny, little, thin, one..."
Fans will remember what comes next. Mr Creosote ingests the morsel and then explodes in a shower of intestines and gruel. He is left sitting at his table, ribs dripping and heart beating, exposed in front of his fellow diners.
My favourite part is when John Cleese places the mint on Mr Creosote's tongue and then sprints off to find cover behind a wall. He knows what is about to happen, but doesn't seem to care much because he simply gets paid for each morsel he can stuff down the diners' throats.
This week I heard about a 'tiny wafer thin mint' moment in New Zealand's housing market. A mortgage broker mentioned in passing to me that one of the big four Australian-owned banks had offered an Auckland rental property investor a 30 year, no interest mortgage with a loan to value ratio of 95%.
I had thought this sort of housing bubble behaviour had dried up and gone away during the Global Financial Crisis. It seems it's back as banks grapple with very weak lending growth.
Banks make money by lending more and then charging more for that lending. They're finding it very difficult to keep their shareholders happy, who are used to double digit profit growth and returns on equity. So they're trying again to tempt households and property investors that are already stuffed with debt to take on yet more debt.
Luckily for the economy and the households themselves, most are refusing the extra mints. Household lending growth is running at a record low annual rate of 1.2%, down from the 15% plus seen through much of 2004, 2005 and 2006.
That's why the Reserve Bank seems reasonably relaxed about the return of some of the bubble type practices.
Westpac has been advertising 95% home loans for months. ASB and BNZ have also been very aggressive with deals offered to rental property investors. But Governor Alan Bollard said he was more focused on the actual lending growth figures, rather than the practices themselves.
Households realise they are stuffed with debt and many are having second thoughts about whether the game of hoping for tax-free capital gains will actually keep working. Firstly, there hasn't been any capital gains for nearly four years in just about every area except central Auckland.
Also, the removal of depreciation allowances for property investors has fired a shot across the bows of many investors. Many of the more experienced property owners and investors have become more cautious.
The real danger though is a new generation of home buyers desperate to get onto the property ladder are tempted into taking on a life-long mountain of debt that may prove unsustainable if interest rates increase and, heaven forbid, they lose their job.
Let's hope also that the banks are being careful and are happy for their shareholders to take the pain, rather than the taxpayer through any new bailouts or guarantees. I want the bankers to hang around after they have placed the mint on the tongue of borrowers.
Just in case Mr Creosote blows up again.
46 Comments
According to mortgage broker Kris Pederson , up to 40 % of all new mortgages signed up in hectic pre-GFC of 2006 & 7 were the 30 year , interest only loan .
..... but you do have a free will , so if the banks bother you with their offers , just paraphrase Mr Creosote , " no , I'm stuffed already , I don't want any more money .... now bugger off . "
It is the nature of a certain sort of scheme we have come to know all too well, begins with P and end in I and sounds like Fonzie.
Indeed Roger we do have "free will" and could say we are "stuffed already", but far too many won't, else why bother with the punt? So, should those of us who will inevitably end up funding the bail-out be so nicely laissez faire, about the whole affair, or should we not expect those who should be fair with those of us who will fund the bail-out, not to allow this lazy fare, eh Rog?
Know wot I mean.
Know who I mean?
I mean, who governs banking, lending, borrowing?
Anyone? And I mean that sincerely.
I went to a valuers conference recently and a bank mortgage manager was there explaining that they (and the rest of the big banks) were back doing 95% loans. One of the audience members said something to the effect of 'well it looks like you've learned absolutely nothing over the past few years' and it was very interesting to see how incredibly uncomfortable she became, her body language showing her desperation to get out of there asap. Funny how the human face of banking crumbles under such mild pressure, her reaction showing that she clearly knew what she was doing was in some way wrong.
My morbidly curious side wants these unsafe lending practices continue unabated, if only to see the gloriously destructive outcome, although my realistic side tells me the prudent savers will be paying for their mistakes in the end.
It's all very well Hugh waxing lyrically about the days of 3* income multipliers and as much as I can agree with the soundness of your advice the reality is that banks are too big to fail.
Thanks to the 2008 government bank guaranty which as you know essentially assigns bank looses for poor bets on the public instead of the shareholder we as society are now looses in a corrupt American lead banker occupation.
Should Cantab's be allowed to buy land and build houses at affordable prices of $200,000 this would undermine the banks existing portfolio forcing banks to take a 50% loss on their asset portfolio and existing home owners to be stuck in the same scenario.
There is no easy way around this impasse that I can see except to educate the public of the evil of banks and our fiat monetary system.
In America currently the top 20% of people own 84% of the countries assets, the top 400 people own about 50% of the countries assets and 60,000,000 people live below the poverty line.
All due mainly to bankers greed and peoples stupidity what was the middle class has been decimated.
This is the trend that will spread to our shores as it has to America, Ireland, Greece, Spain ext...
Ha-ha that's what I mean Hugh - housing used to be affordable and now that it is not affordable to change the situation people and banks will need to take a haircut. This is why I think you have support for your work with the demographia survey through politicians and no support from the same people at the same time.
Are politicians taking us to the cleaners? Yes, I think your average politician in this country doesn't understand fiat money, property bubbles, international monetary supply, capitalism and floating exchange rates, so they travel along with the consensus.
Are we right to grovel? No, as you yourself Hugh are a prime example of a Kiwi standing tall making a difference, I would not call voicing an educated opinion groveling.
At the end of the day with regard to property values somebody will take a loss if bank bets go pear shaped and so far (think South Canterbury Finance), it wont be the shareholders of the banks unless more people are educated and stand up to Mr John Key and Co. when it comes time to vote.
National approved the bank guarantee scheme with the full support of Labor and there was not a word of protest from mainstream media commentators so is it any wonder your average public are not informed that capitalism applies to everyone else except banks who are free to privatize profits and socialize losses.
Iceland is a great example of a country where the government proposed bank bailout went to a referendum and the people voted NO!!!!
Could you imagine if Hanover Finance and other financial companies had still been around and the share holders got a bailout - what a great system it would have been to invest in s**t companies to socialize the losses while privatizing the profits.
No Hugh, you completely miss Roadys point.
Within the ponzi monetary system we all use (Fractional Reserve Fiat), it is not a possibility to go back to how it was in those days.
Our system requires exponential growth of the money supply to perpetuate itself, and exponential growth cant go on forever by definition.
http://www.youtube.com/watch?v=F-QA2rkpBSY
http://www.youtube.com/watch?v=EewGMBOB4Gg (the first half before it goes all Marxist on us)
Irrespective of whether the politicians are working in our best interest or not the system requires exponential growth in debt.
Thank-you Banksterbasher, you are correct.
I agree with Hugh that housing is over valued and I fully support the work that Hugh does how-ever I also agree with you that the monetary system requires exponential growth.
Everybody remembers the 101 economics lesson in third-form where the teacher shows how putting aside a little money with interest in the bank over time creates savings and how this chart becomes an exponential growth curve after a number of years.
Unfortunately the teacher doesn't explain how year on year the increased money supply that occurs in the background devalues the value of each dollar saved so that in real times bank savers are net looser'.
It's the bank borrowers that have been the winners and these people have invested some would say recklessly in property, with the rubber-stamp of approval coming from their bank, as a means of storing and building their wealth.
To undermine these investors with affordable housing even in earthquake ravaged Christchurch would not only be political suicide but it would wipe out our countries middle class as it has done in America.
Keep in mind I'm not saying that wiping out the middle class here would be such a bad thing as unlike America our country I believe has the ingenuity to grow.
You won't need to worry about CHC Hugh, I see the commerical boys are taking their money and leaving CHC. i guess when you have a council who decides what a future CHC will look like without involving the people who will pay for 80 percent of the rebuild, then they can't see why they would re invest in CHC. I said this many times, without getting the commercial district up and running first, you can forget about the urban spread, the jobs will disappear.
Everything is cyclical. I didn't think that this would start happening again so soon but but banks are in the business of making money for their shareholders and as soon as one steps out into the market with a loan like this the others will have to follow to protect or attract market share.
For those investors with property wanting to exit the market this could be good news as eaiser credit will certainly strengthen asset values (for now) and make it easier to sell.
I hope that the lessons of the past three or four years aren't lost on borrowers though. Capital gain and asset value is an illusion until crystalised by a sale into hard cash and when the going gets tough the banker always wins!
Everything is cyclical. I didn't think that this would start happening again so soon but but banks are in the business of making money for their shareholders and as soon as one steps out into the market with a loan like this the others will have to follow to protect or attract market share.
For those investors with property wanting to exit the market this could be good news as eaiser credit will certainly strengthen asset values (for now) and make it easier to sell.
I hope that the lessons of the past three or four years aren't lost on borrowers though. Capital gain and asset value is an illusion until crystalised by a sale into hard cash and when the going gets tough the banker always wins!
Not a bad little place in DC Ive been keeping an eye on, great area walk to NZ embassy, georgetown parks,Zoo, still a bit expensive, they have dropped the price but still a bit steep
you need to go to street view at the bottom toi get a view of the front
http://www.zillow.com/homedetails/3708-Fulton-St-NW-Washington-DC-20007…
Do you really believe the mortgage broker?
If such an offer was made by a bank - then perhaps it would be for a property the bank owned - resulting from a mortgage gone bad - and they are trying to sell the property to someone else at the wildly inflated value they've already been stung once on?
More details would really be appreciated, otherwise this is just heresay and I don't really think it could be representative of what is happening in the market.
I believe the mortgage broker and it's consistent with other things that other brokers have been telling me. Westpac has been openly advertising 95% loans.
The loose lending criteria are back and the banks are desperate to lend.
The difference is this time most borrowers are being much more cautious, except for the ones that aren't...
cheers
Bernard
Bernard, it's not the 95% I'd query (that's been understood to be the return to pre-GFC practice for some time now) - rather it's the no interest over 30 years that I was wondering about.
Surely that cannot be common practice - and if true could only have been for a one off particular property that the bank wants off its books. For example, a few years ago I was interested in a Raglan property that went to mortgagee auction twice without selling - and I can imagine that HSBC might have been prepared to offer a no interest loan over 30 years if someone as stupid as them was prepared to risk the ridiculous amount of capital they had sunk in that one!
some new papers and charts
relaxed lending standards and decreased saving-this article links to a real academic paper and more charts
http://www.macrobusiness.com.au/2011/09/lending-standards-and-the-cad-curse/
current account balances
http://en.wikipedia.org/wiki/List_of_countries_by_current_account_balance
I can't speak for property investors, but my husband and I just took out our first mortgage at 95% lending, and boy did we have to work hard for it!
That said, we eventually borrowed a lot less than the big banks were prepared to lend us based on our incomes - so by managing our lifestyle, we've avoided any over-commitment in the income ratio stakes.
If the big banks weren't prepared to consider low-equity lending, we would still be paying rent just to live. Now at least we have some kind of long-term investment that we're directly able to influence.
I have a lifelong interest free mortgage as well now, my loan is $0.00 as of last Friday. Now, what shall I do with the extra $5000PM I used to pay off my mortgage? Any suggestions?
I feel for people who had my original mortgage, $315K in 2003 in these uncertain times.
Kiwibank is offering a 'special' 6.95% five-year fixed home loan rate. More on it here - http://www.interest.co.nz/news/55472/kiwibank-offers-book-rate-home-loa…
And here's Susan Edmunds at NZHerald on bank practices
http://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=107…
Mortgage broker Kris Pedersen says they made up a large chunk of the lending he did between 2006 and 2008.
"If it was at the beginning of 2006, they probably would have gained equity but for borrowers in 2007, a large number would be in negative equity now. It would be thousands."
He says some borrowers were taking out loans of up to 110 per cent of their home's value and 100 per cent for investment properties.
It is the financially illiterate who push up the house prices. Unfortunately, those are:
1) desperate home buyers
2) wanabe 'investors' who don't know what they are doing, but mostly 1)
Unfortunately Banks these days all encourage the above to spend spend spend.
The only way (and simple way) to control house prices is:
1) reduce loan to value ratio, or lending ratio from 85% - 95% we have now, to say 60-70%
Reduce the ratio, and see house prices fall!
Gary
Gary: Totally agree mate... 80% LTV ratio maximum. Would up the savings rate of NZ and keep house prices in check - it's a win win all round. Only people that (maybe) lose is the banks as they will surely see lending fall if this happens - it takes time for people to save a deposit! The banks only did this from 2008-2010 because they were incurring a lot of impairment losses and were fearful of taking on too much more risk.
I cannot understand why the govt has not thought of this one already.. National are you listening?
It is not the financially illiterate who push up house prices. The biggest impact is from first home buyers. Every new mortgage creates new credit, which expands the money supply, and drives price inflation.
A 60-70% deposit would probably cause a significant price drop, primarily by pricing out first home buyers from the market. But this size of deposit used to be quite normal. There was house price inflation then as well.
Every purchase expands the credit supply and so pushes up prices. It does not matter if it is made by a financially illiterate idiot, or an apparantly sophistocated investor (like mist42nz). The credit supply remains expanded for the term of the mortgage loan, and often to sustain this it is necessary for the central bank to either create more base money to support the expanded credit supply, or the central bank can reduce margin requirements of the banks. This then allows the credit supply to expand further, so you can see that this process basically debases the money supply and its systematic. It also makes property un-affordable for many over time.
The only thing which financially illiterate buyers can do is effect the rate at which this happens, but this means that they need to be well off enough to maintain their loans.
First of all to address, 'borrowing "brings forward" the money-value'. This could be a correct position if the level of debt was constant or falling compared to GDP. In this case you could still have a rising absolute debt level. This would mean that loans were being paid off in aggregate as fast as they were being created (or faster). However if you look at any statistics you see a rising debt to income ratio over time. Today in the US it's about 270% of GDP, I think NZ is a little bit lower but still over 150% of GDP.
I think saying 'value-deficit' you have put what is called 'financialisation' in different terms. There are basically two kinds of capitol in some ways, there is capitol for real investment (like machinery, renovation, expertise, etc...) and then there is capitol for speculation (e.g expecting a profit without influencing the asset in any way). As asset prices rise the asset sector tends to pick up more speculative debt, and when the bubble bursts you get a massive drop in asset prices. Today we are talking about countries de-industrialising which is basically the transfer of all their capital into speculation rather than investment. In New Zealand people talk about citizens not investing in the share market enough, or being over invested in property.
In fact population growth is the only way in which this economic system can sustain itself for a long period of time. Growth tends to bring new buyers into the market, allowing speculative investments to be replenished. However after a while any asset bubble starts to look like a Ponzi-scheme, and will come to an end.
In general migrant workers are from lower wage countries and are more happy to work for less, so migration tends to supress wages in New Zealand (a little). If New Zealand had a completely open borders migration policy then it would be a minimum wage economy. Similar effect from having a separate lower youth minimum wage. The reason for the economies problems is not that workers are too well paid or have too many privelidges, in fact the opposite is basically more correct.
Intermission!
So who is to blame?
Well you can't blame home buyers for being financially illiterate. The financial sector didn't see the crisis coming so you are pretty far off the mark blaming their clients. Some people say that people are not behaving in their own best interests according to the financial system (so not investing in the share market, but buying property). Well no, a financial system should be fit for a society, not a society fit for a financial system.
Can we blame the financial sector then. Well in general no, though in the case that the law has been broken or deception is involved of course, yes. In fact the hundreds of millions of dollers of bonuses paid by the banking sector are probably justified by the size and prestige of the financial system as it stands. They are just acting in their own best interests according to a bad system in my opinion.
Can we blame the central bankers for devaluing the currency then. Well no, as I said before it's actually the high street banking sector which devalues the currency. The central bank has to function as a safety net that is its purpose. The same goes for blaming politicians for devaluing the currency or even for poor investment of government funds.
First of all a lions share of blame goes to the main stream, neo-classical school of economics thought. This is the school of economics which does not consider debt in their models and didn't see the financial crisis coming. The reason that their school of thought was able to get so far away from reality is that they never apply any of their theories to reality with any riger.
and the rest of the blame rests with the politicians (and constituents) for not understanding the monetary system. The national monetary system has been privatised and is now created and maintained by the private banks.
Finally is there a better way? Well actually yes. An alternative was proposed by Irving Fischer after the great depression. It's called full reserve banking, and returns management of the national money supply to the central bank. Yes, you can still have loans and interest under this system as well.
There is a concrete (and down to earth) proposal for the UK banking system here,
and a New Zealand political party,
Rubbish, I have been involved in house lending for 30 year and 60% to 70% deposit has never been normal
Banks might have gone to 66% to 75% but then Building Societies / Solicitors Nominee mortgages etc came in as seconds and third mortgagees.
In very early 1990 Counytywide Bank did 90% mortgages on both owner occupied and rentals.
Sorry, my mistake. I meant 30-40% deposit / 70-60% mortgage.
My understanding was that a 20% deposit was a kind of minimum when I purchased, but I was not that financially savy at the time. I might have thought that there were lending laws requiring a 20% deposit but I know now there are not. Took me several years of fairly consistent saving on two incomes to get to 20% as well. I am surprised any of my generation can afford to be property owners.
And wipe out equity so businesses wouldn't be able to lend, lay off more people and drive down prices even more!!!!!
A more pragmatic approach would be to hold prices on a long term (10 years plus) so equity is built up via debt reduction.
Also where would those savers live while saving given you want to see the end of property investors as well????
FYI from a reader via email:
Bernard,
House at 54 Grey St Onehunga (front roadside villa) sold for 37% above it’s 2008 CV at $740k last week at auction so it’s definitely on again. 2 bidders went at it. Onehunga villa end up around Jellicoe Park etc is tightly held and it’s proving even more popular now with the new train but still that’s ridiculous for the house which is small and on a half section as another house behind it. So not sure how this fits into the commentary that housing has come off the peak of 2007 or whatever.
So your other article about bubble is true but seriously already seeing crazy signs for houses in Onehunga where they go up and friends that were priced out of some of the suburb telling them to simply forget it. So I’d be looking if this is a sign of things to come in spring and pre xmas housing sales that OCR sadly will need to be bumped up. Need a minimum 10% deposit law as well ridiculous someone can not save a dollar and be allowed to borrow that much money.
Heard similar stories around Onehunga of prices well above the 2008 CV being got especially for character homes. Local apartments no idea but still shows money is coming from somewhere.
Cheers,
Shelter is a basic human need. It’s not like all the other investments and should be treated as such.
It is in society’s interest to provide quality standard and affordable housing for people; this reflects in the overall community’s health we live in. Property ownership makes a positive difference in people’s lives and the assets maintenance.
News, property shows and real estate entities hype the market up, Banks have feed it and Government provide incentives. We experience the best of human nature competitive, selfish, deception and greed; exploiting each other :)
Keynesian theory does not work in these types of human needs, a higher level of Government regulation/control is required so all people are provided a reasonable standard of living.
Not cut price but affordable. Viability in this world is relevant to the ability to pay for itself. The established economic system has become lopsided and unviable constantly in crisis largely due to over borrowing for the property market that has made it unaffordable.
All those basic human needs you mentioned need to be considered, some are OK others luxury.
People are not born with the same abilities or opportunities. NZ Government role is to look after all people – including levelling the playing field to maintain equality within society; along with providing affordable incentive for growth regardless if you’re the tea person earning $25K/pa or a high earner $3m/pa.
What exactly does determine what people are paid or pay? Who decided that number? Why can it not be changed? Why is it more important than the quality of people’s life? After all people created these “rules” why can’t we change them? The economy does change for the most unviable reasons – wars.
Let’s call it a right of life’s passage; A nice, eco friendly simple house is all that’s required to provide the necessary benefits economic, physiological...
Surely we can work something affordable out for that esential need shelter; keep your nicely priced viable house.
I have to agree with 2 Tooth - we used to talk about housing, and now we talk about property (to paraphrase Jeremy Hardy).
Housing isn't like other investments - it's about creating and maintaining a society that we want to be part of.
Property, on the other hand, as an investment commodity, is about maximising profits, supply and demand, debt:income ratios and leverage (the list goes on).
Housing is about people finding a place they love and maintaining it for their own sakes. Property is about finding a place that others can tolerate and maintaining it as far as is required (for the most part).
All sorts of factors influence the housing and property markets - low wage immigrants, overseas funded foreign students, bank lending policies, government policies, the list goes on and on. But it will always be a mistake to confuse the housing imperative with the property game.
Exactly.
And I think Bernard should go back to the source (the broker whose comments he refers to) and clarify that point - because there is a HUGE difference.
And not only did interest.co.nz run this story - but so did the Herald.
If it's factually incorrect - it should be amended.
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