By Bernard Hickey
In the last couple of years borrowers and bankers alike haven't thought of money as something that was in short supply.
If you could afford a loan with interest rates at 5% you could expect your bank to say yes with a big welcoming smile.
You could even expect them to fight among themselves trying to lend you that money.
Thousands of dollars of 'cash-back', 'free' flat screen televisions and tablet computers are now the norm for mortgage borrowers.
Your banker is now more likely to suggest you borrow more than you think you can afford than the other way around.
A third of all new loans are now for loan to value ratios of over 80%, which is double what it was a year ago.
Annualised lending growth has almost quadrupled to 4% in the last year. Banks have no problems finding the funds to lend out with LVRs of 90 to 95%.
It's only in recent months that lending growth has exceeded growth in term deposits, and even then, it's easy and cheap again for banks to supplement their stocks by borrowing in hot money markets offshore.
Just like the stacks of 3 litre bottles of Coke at the entrance of Pak'n'Save, mortgages are piled high and going cheap.
The implied threat that borrowers should buy now while stocks last just wasn't credible after almost 5 years of record-low interest rates and an escalating series of mortgage market skirmishes between banks.
Until now.
The Reserve Bank finally got serious this week about dismantling those big stacks of Coke and putting them back on the high shelves away from the fruit and veges section.
In a surprise move, it announced it was seriously considering increasing the capital requirements for high LVR loans.
In one fell swoop this would force banks to ration those high LVR loans, most likely by increasing the interest rate for them.
That contrasts with the current situation where often it is the riskiest loans to the most stretched customers with the least equity that get the lowest interest rates as banks fight for market share.
We know the Reserve Bank is serious and the banks are worried because the banks said they were surprised and disappointed at the regulator's 'hasty, unjustified and poorly researched' proposal.
So what does that mean for borrowers?
If you were thinking of waiting until later this year or next year to get a high LVR mortgage then you might want to get a wriggle on.
The Reserve Bank has given the banks until April 16 to respond and seems keen to move quickly.
Meanwhile, it is also working on so-called macro-prudential controls that could include actual limits on LVRs, which would physically stop the banks from offering 95% loans. These rules could be in place later this year.
Even the National-led government seems determined now to nip the housing boom in the bud to avoid the Reserve Bank using its blunt instrument of an interest rate hike that would hit all borrowers, regardless of whether they were home owners, high LVR borrowers or businesses.
Perhaps the banks will be changing the marketing campaigns for the flat screen televisions and 'cash back' to include the exhortation: 'Buy now while stocks last!'.
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This story first appeared in the Herald on Sunday. It is used here with permission.
28 Comments
Right on the button. A whole list of measures need to be taken to ensure that in the future kiwis are able to own their own homes. I believe it is so important, that non-resident foreigners be taken out of the equation, we need to look at something like the state advances loan system for low incomers, and a capital gains tax.
For those of you suggesting that people who would normally look in areas like Mt Wellington now start looking in Manurewa, Papakura I ask yet again, where do the people who already live there go. Each area has become too expensive for what it is, and Manurewa and Papakura and the likes have become too expensive for themselves, so you solve zip with that stupid argument.
It is the lower incomers who also need to have HOMES not rental houses/dives. The people who aren't able afford to buy are middle incomers, who can't afford where they would naturally have found themsleves.
No, this on its own, will only make the problem even worse than what it is. Hand in hand with other measures it may be a little more realistic
Future first home buyer here. I don't feel out of the market at all. I'm aiming for a 20-25% deposit on my first home later this year.
All you need to do is resist the cheap bank credit. The ANZ mortgage calculator said my partner and I could own a house worth $1m+. But I will politely decline that offer and buy a house half that price.
Your banker is now more likely to suggest you borrow more than you think you can afford than the other way around.
Not for much longer, hence the RBNZ's belated action to curb banks' risk taking.
....... depositors are increasingly coming to the realization that deposits in their local bank are not 'safe' places to put their spare cash, but are in fact loans to extremely leveraged businesses. Read ZH article
The best news of all is that when LVRs are restricted, rents will go through the roof.
Thousands of first home buyers and those with small deposits will have to keep paying the Landlord until they save a much bigger deposit.
How can you save a large deposit and pay higher rents at the same time?
Look like many will become renters for life.
Yet thats just a small %. For instance the 8k?AU that the OZ Govn paid first time buyers is credited with turning around a slumping housing market last time and before that with boosting a market. In effect its a change in the LVR for the worse, hence LVRs dropping is likely to cause house prices to drop......depends on the size of the effect.
regards
Dont you mean lower LVR and not higher?
Foreign buyers dont matter they pay cash plus they seem to be a small % in high value areas? maybe theie effect is overblown. Im not so sure that the buyers are buying for profit but as a way to turn USDs into an assest and hide it somewhere else....kand see those ppls mindset of course mores the pity. Lack so much info..........
regards
Why not. What the banks do today is a combination of accident and policy mixed with inertia. What we have ended up with is a market of essentially 4 banks completely dominating New Zealand. Trouble is due to a whole bunch of factors, all they do is lend against property. The are empowered by the people of New Zealand to create NZD through the process of creating debt. This is a very important 'right' that requires oversight from New Zealanders.
Our banking market is not a real market of course. 4 banks dominate. So at some level what banks do is 'our' business in a way that what your local cafe or hairdresser does is not 'our 'business
Most ( not all) of the other registered banks in NZ are either very small local providers of debt and a place to deposit with a whole bunch of others invloved in International Finance that has little or nothing to do with New Zealand except that a NZ Banking license gives them some legitimacy. HSBC has recently been fined 2 Billion Dollars in the US for Money laundering.
Not exactly relevant to the story however, A very nice response to an article in the FT about Nuclear Industry privatisation in the UK with strong parallels to our own energy privatisation's
This perfectly sums up today's world. The endless lies about our "market" economy. And lowering of taxes and/or debt. Why not put a 6bn price tag on it? Who gives a hoot? It is not like its customers have anywhere else to go. Nuclear reprocessing plants, as well as dump sites, are rare and extremely hard to build. So if investors bought this thing for 6bn, they would simply double the usage charges. And would their customers complain? Hell, no - it's not their money. They will simply double electricity charges to the consumer. But, good news!, the consumer is free to choose his electricity supplier. Sic erat scriptum. So, yes, the public purse pay back 3bn in debt which presently has a servicing cost of ... ZERO. To make this happen, the private purse has to take on a mountain of debt at ... well, substantially more than zero. Taxes may go down, yes, but electricity charges go through the roof. Yet since every tax payer is also an electricity consumer, I may consider the total cost of electricity simply another tax and so the total tax burden on society actually increases as a result of this deal. And when we drill down from the collective of tax payers come consumers to the individual household, we notice that a family will thus experience a higher tax increase than a singleton and the poor, as a percentage of their income, a higher increase than the rich. And so this conservative government once again shows its true colours: stuff families and f*** the poor.
There is only one tiny consolation in this. With every idiotic privatization like this, GO moves further and further away from getting the economy growing and it is yet another nail in the coffin of this clueless administration. Good riddance.
And not before time too , that we tightened up on the LVR ratios ........ back to 80 % or less ....
..... too many inexperienced yobbos have been buying their first homes !
Leave it to the professionals , you ingrates ..... the deep pocketed investors will continue to buy up large , and house prices will continue to rise ..... as it should be ...... if you're fawning & subservient enough , they may rent you one of their magnificient abodes ...
.... keep the rank amateurs from crowding out the field from those benefactors of our society , the almighty landlords , bless 'em ..
This is long overdue - for the RBNZ to finally start encouraging more prudent lending by the main banks - which is increasingly in the non-productive housing market.
Related to that is the total lack of safety for depositors in the same banks - for which the RBNZ is pursuing a unique academic approach (OBR). See Rod Oram's cogent analysis of the RBNZ failures in this regard -
http://www.stuff.co.nz/business/opinion-analysis/8490711/Oram-Reserve-B…
NZ depositors deserve better - and John Key and Bill English (and the RBNZ) would do well to stop their glib explanations of why they failed in the one attempt to protect depositors - and to implement a deposit insurance scheme.
Oram's link to the Bertram-Tripe article entitled Covered Bonds and Bank Failure Management in New Zealand should be mandatory reading for all officials defending OBR, followed by a public explanation defending offered up excuses as to why New Zealanders cannot afford to self-insure their deposits.
It is apparent, much like the broken shadow banks of this world, pledged repo agreement assets and collateralised derivatives could well eat into what lowly depositors are due after a bank collapse, unbeknown to regulators and citizens alike.
self-insure, so its A OK to have the following generations pay out this generations losses? because that is what you are saying.
So I dont agree....I fail to see why children and grandchildren already saddled with a climate damaged world, with 50% plus resources gone should use whats left to pay the debt generated today...
I think its highly immoral.
regards
My child and his children would be happy to pay a small sum to insure my funds lodged at banks to ensure the availability for his and their future use.
But they are totally aware I already subsidise the bank with low interest rate returns that totally fail to reflect the now obvious risk to unsecured depositors.
I think term depositors, in particular, need to demand rates approaching those the banks believe are necessary to recover capital exposure when lending to credit card borrowers.
The Government does not favour compulsory deposit insurance. This is difficult to price and blunts incentives for both financial institutions and depositors to monitor and manage risks properly."
Does the Government have any supporting evidence for this position? None was forthcoming from English's office this week when this columnist requested it.
The prime minister, however, added plenty of his own anti-insurance platitudes at his press conference on Monday. He did admit, though, he didn't know how much such insurance costs.
Actually, it is easy to find out. You can download the 2013 premium manual of the Canadian government's scheme at http://bit.ly/16Woduv.
Page 2 of the manual shows that the annual premium is 2.778c per C$100 of deposits. This is for banks that score 80 or more out of 100 on regulators' rating system on banks' financial health. Such banks are a good comparison for New Zealand banks. Read Article
Im sorry but who underwrites the "policy"? Someone somewhere will pay it aout and given the situation is akin to greece whos bonds if anyone was stupid enough to buy them would pay 33% ish % should tell you "small" wouldnt be the premium.
On top of that you are taking pork barrel, ie they want someone else to insure you ie me and my children so they/you dont lose their inheritance....has to be a small premium of course....
So what you are saying is I as a PAYE / tax payer should be forced to insure a high risk at a low premium?
and you think thats moral?
Now if you can insure your money with a private 3rd party Im all for it.
regards
Hey, the likes of Buffet's reinsurance operation surely has been a recipient directly or otherwise of US Fed printed money at some time or another - I am indifferent to who pays as long as our economy is predicated upon the US acting as it does for our benefit. Your PAYE contribution is dwarfed by the benefit of cheap finance you and your bosses enjoy via the US.
The probability of bank runs is dramatically increased if bank deposits are no longer considered a safe haven in a crisis. If enough people withdraw early then banks will have to offer higher interest to attract funds. The legislation will encourage bailout game-playing as hinted at in Rod Oram's article.
From my brief look at the rbnz consultation paper, it looks like the current .15 correlation requirement with the basal model is being met and for high loan to value ratios being exceeded by a lot (from the graph showing internal modeled banks risk weights over 1 correlation with basal model).
So any chances here won't have any effect? ?
Have I got something wrong?
Its nothing to do with the Govn, its the effect of receivership. The haorcuts go to clear the debts, the Govn steps in on TAX PAYERS behalf only if it needs to. The TAX PAYER then takes some or all of the hit...that shouldnt happen until all interested parties have been emptied first and if investors lose they lose. At some point the mortgages are onsold so in my case Im likely to be saleable at im only about 10%, maybe 20 or 30% if the house price losses are 50%~75%....(which I expect) Ppl with much above 50% today I think are in deep doo doo...80+% are gone...
Lets look at the OBR, in that event the shareholders get wiped first and then a haircut is taken. The only reason a bank goes t*ts up is that we have had a property collapse that could be triggered by a sector like, dairy or commercial or residential.
6%, no idea on the haircut but I cant see it being so smal myself....what were the losses from the finance sector?
regards
More hot money coming our way..buy more now when you can, so it can be flipped to these overseas buyers at a nice profit..
http://www.bloomberg.com/news/2013-03-31/beijing-shanghai-add-to-home-c…
"Cyprus, it appears, tied its entire fate to its banks. And as long as the government remains unprepared to change this, the country could well be headed for bankruptcy"
http://www.spiegel.de/international/business/leading-cypriot-banks-likely-to-face-insolvency-a-890182.html
NZ is different....the banks are not dominant here...not ruling the roost...making the rules....harvesting the loot....bossing the Beehive....creating the credit drugs that keep the economy in a bubble...
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