Increasing household debt levels are not just a first home buyer problem

Property

David Hargreaves has a deeper dive through the Reserve Bank's latest figures on mortgage lending by debt-to-income ratio and finds that buyers across the spectrum have been stretching themselves further

19th May 20, 1:58pm by David Hargreaves

House buyers across the spectrum - and not just first home buyers - have been increasingly stretching themselves financially, according to the latest Reserve Bank figures on residential mortgage lending by debt-to-income ratio (DTI).

As we reported on Monday, the figures show that the FHBs were continuing to borrow more money on high debt-to-income ratios right up to the March lockdown.

Given time now for a deeper dive into the (very detailed) figures, we can now say that while the FHBs are the most spectacularly geared up group of buyers, the other owner occupiers - by far the biggest group of buyers - have been fairly seriously upping the ante in recent times too. All this just before the lockdown and the freezing up of the housing market.

According to the figures, in March 2020 other owner occupiers (not including FHBs) borrowed $2.53 billion across the whole country. Of this, $852 million - or 33.7% - was borrowed on DTIs in excess of five times annual income.

Go back a year to March 2020 and owner occupiers as a group borrowed $2.508 billion, of which $731 million - or just 29.1% - was borrowed on DTIs of over five. So, that's a fairly significant climb in the numbers of more pressured buyers.

And yes, in Auckland the figures are even more stretched than that.

In March 2020 Auckland owner occupiers (not including FHBs) borrowed $1.041 billion. Of this, $491 million - or 47.2% was on a DTI of over five.

A year ago, in March 2019, the Auckland owner occupiers excluding FHBs borrowed a total of $955 million, with $410 million, or just 42.9% of this on a DTI of over five. So, again a significant ratcheting up of the financial tension in the past 12 months.

You borrowed how much?

It's worth at this point putting a little colour around these figures by giving some indication of the size of mortgages involved.

For that we need to look at the breakdown of the individual loan numbers.

Referring back to our earlier article on Monday, and talking about the DTIs of the first home buyers, we could see that in Auckland in March an eye watering 57.5% of the mortgage money borrowed by FHBs was on what could be considered high DTIs - with the amount borrowed being over five times the annual income of the borrowers.

Across the country as a whole the comparative figure was a touch under 40%.

In terms of the individual number of loans involved, in Auckland there were 428 loans made to FHBs at DTIs of over five in March 2020. These loans collectively totalled $286 million. So, and it's a bit rudimentary, but if you divide the $286 million by 428 loans you get an average-sized loan of over $668,000. That's a big dollop for a first home buyer with a stretched debt to income ratio.

Working on the same basis for the national figures (which include Auckland), we've got FHBs taking out 809 loans with an average value of over $562,000. Again, these are loans on a DTI of over five.

If we do the same calculations with other owner occupiers (not including FHBs), we can see that nationally there were 2117 loans taken out on DTIs over five with an average value of over $402,000, while in Auckland there were 996 loans on DTIs over five with an average value of nearly $493,000.

It's all a lot of money.

But we can afford it - kind of

Thanks to very low interest rates the serviceability of loans has hit new lows. According to the latest RBNZ information available on this (for December), interest costs were soaking up only about 7% of household disposable income - well down on the 14% for example seen during the Global Financial Crisis in 2008.

But the loans have got a lot bigger of course. The interest costs are down, but the amount of principal to be repaid is now massively bigger. Real Estate Institute of New Zealand figures for April 2020 suggested a national median house price of $680,000 and an Auckland median of $925,000. I would be a bit sceptical of those figures because of the potential for distortion from the huge impact of the lockdown, but for argument's sake we'll use the figures.

I like to compare figures with the prevailing situation prior to introduction of the Reserve Bank's (now removed) loan to value ratio (LVR) restrictions in 2013.

So, if we go back to April 2013 the national median house price was $390,000, with an Auckland median of $555,000.

To use Auckland as an example, seven years ago a 20% deposit (of $111,000) would have seen you needing to borrow $444,000.

Now, based on REINZ's April 2020 figures, a deposit of $185,000 would be needed - and debt of $740,000.

But, servicing even such large amounts is, as we can see, doable with interest rates so low.

No problem...until you lose your job

And it's not even necessarily a problem if the house price falls and reduces the equity in it, maybe even to the point of the dreaded negative equity - providing there is continuity of income. Ah, providing there is continuity of income...

The latter point of course is the rub, with the huge economic shock we've had. The real crunch comes when people lose their jobs and regular income to service the debt.

According to NZ Bankers Association figures nearly 54,000 bank customers with mortgages of just under $19 billion have gone on the six month repayment 'holiday', which was offered in March.

In addition, a further 59,000 customers with mortgages collectively slightly in excess of $19 billion have reduced their loan payments since the end of March.

Put them together and its 113,000 bank customers with mortgages of $38.2 billion that have either stopped paying their mortgages for now or have reduced payment on them.

That $38.2 billion figure equates to 13.7% of the total amount ($278 billion) outstanding to banks on mortgages in this country as at the end of March.

It's a significant chunk.

Holidays as we know don't last forever and generally come with a big bill attached at the end. And the mortgage 'holiday' will certainly have a bill attached.

If we therefore put all these things together - the stretched household income to debt ratios, job insecurity, a faltering housing market - well, you can see we've got a lot to keep our eyes on in coming months.

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64 Comments

by murray86 | 19th May 20, 2:22pm 1589854938

Some of these numbers are terrifying, and David only talks about if your job was lost. But what if inflation went up as many were calling that it would?

But the biggest concern is the banks position on these. This is surely maximum risk, even beyond some business loans? And who pays for that risk when it goes bad?

by Audaxes | 19th May 20, 4:56pm 1589864217

Can't wait for the RBNZ May 2020 Financial Stability Report.

by blobbles | 19th May 20, 3:56pm 1589860611

It will be hilariously out of touch, almost guaranteed.

by unaha-closp | 19th May 20, 4:48pm 1589863680

With the OCR being at record lows and heading lower, the banks are probably going to be financially secure enough.

by Audaxes | 19th May 20, 4:56pm 1589864170

I suspect a drift to negative rates will impact banks' profits - Germany is a good example of what the future holds NZ banks. Link

by Toppertee | 19th May 20, 2:35pm 1589855712

I see David that you refer to loan sizes.. do the first home buyer loan numbers match the number of transactions that first home buyers have made? Or could aggregated loans That make up a mortgage mean that the true DTI’s Are even higher. Is this worth investigation? I remember reading in the comments section last year that the loan numbers for first home buyers have them a disproportionate level of purchasing.

by company of heroes | 19th May 20, 2:39pm 1589855943

Thanks David Hargreaves. This article explains why such high housing price is unsustainable. Only 4 weeks of lockdown, see where this has been taking us to? RBNZ and Treasury are so afraid of housing price collapse, then flood the market with free money to save the housing market with huge cost for next generaions in New Zealand. What can we take from this? Our economy and financial system is extremly vulnerable and unstable. If there is another crisis coming, we are all doomed, yet they are still not willing to correct this and continue to blow the bubble.

by Independent_Observer | 19th May 20, 2:53pm 1589856796

Bizarre right - one of the RBNZ mandates is financial stability, yet their inflation target policies are causing instability (dropping interest rates and debt levels growing out of control). DTI's should have been introduced a decade ago to reduce risk...but politics got in the way.

by Speechless | 19th May 20, 4:47pm 1589863679

Yeah I don't get it either. We have this unelected institution that seems to do the exact opposite of what it's supposed to do and there's nothing we can do about it. What the actual f-k?

by gingerninja | 20th May 20, 8:30am 1589920231

Company of Heroes, it doesn't actually work like that though. RBNZ is making lending to banks very cheap (or "free" as you put it). However, if you look at the history of this Central Bank intervention and the consequential behaviour of banks, you will find that there isn't necessarily a correlation. The money that central banks make available to retail banks is not money that you or I can spend. The money that you and I spend is created by the retail banks in debt, or created in the economy via production. Unless banks decide to lend, in response to the OBR and jawboning from RBNZ then the money remains hypothetical. It is just sitting in retail bank reserves. If you look at the GFC, central banks did much to ensure liquidity in the banking system, yes. But if you look at where the money went, you will see less lending and higher bank reserves. Banks only return to merrily lending on the central bank money once they feel more confident about the lending environment.

Put simply. Central banks can flood the system with their banking tokens all they like, but that doesn't become money in the system until banks lend. Banks won't be lending like they were previously in this environment.

Also, deflationary forces are MUCH stronger at the moment.

by Big_Data | 19th May 20, 2:49pm 1589856579

As a FHB in NZ who's been watching and waiting for some time (frankly, hoping the prices would come down to realistic levels), this is actually quite scary. Much as I'd like home prices to be more affordable, the impact of what looks like it could be a monumental crash would be far-reaching and do damage we can't even imagine.

=>>113,000 bank customers with mortgages of $38.2 billion that have either stopped paying their mortgages for now or have reduced payment on them" =

You've basically got *at least* 113k properties in some state of distress. Even if 90% of these people are back on track in 6 months, 11,000 repos hitting the market would be fairly catastrophic.

I feel a bit nauseous at the thought of the $1,040,000 property we had an offer accepted on in February. If we'd listened to our (very helpful and effective) mortgage broker we could have had a significant DTI ratio, on the basis of the imaginary 'lodger' we could have rented a room to. Fortunately it went pear-shaped and now we're sitting back with popcorn to watch this play out.

by pin3cone | 19th May 20, 3:06pm 1589857576

I'm in the same boat as you, but as others have pointed out, we stand to essentially pay for the over-leveraged to be bailed out. This government will do whatever it takes to prevent mass poverty at the expense of you and I funding welfare packages directly or indirectly. If this blows up pre-election, expect debates about how 'housing is a fundamental right' to prop up as reasoning for stimulus to keep people in their homes. The irony is on a whole new tier.

Edit: who knows what the blue government would do, they're probably brainstorming their campaign angle right now with acrostic poems

by Big_Data | 19th May 20, 3:09pm 1589857758

Maybe...Prop ups can only go so far. If it was easy, nowhere would ever crash. I'd still rather be sitting in my nice rental as I am and feeling a bit annoyed about a potential bail out, than sitting in my over-priced McMansion feeling sick to the eyeballs about my lost deposit, and potentially, lost house and credit rating. Even if they do bail out the market, those who bought in the last couple of years won't be left in a great position. These things can take years to recover from.

by SimonRo | 19th May 20, 3:24pm 1589858669

Someone in your position can be described as lucky, or perhaps just having their head screwed on straight.
And yet, it feels like a genuine chance that the government will in the next 12 months start (in some sense) taking from you, and giving to the others who jumped aboard the houses-always-go-up ladder.

After all you have $200,000 of deposit sitting there waiting for house-price deflation, and may still have your jobs. It would be awkward if they start trying to take it from you, savers-be-damned style.

by Big_Data | 19th May 20, 3:04pm 1589857468

The ratio of 'liar loans' (also referred to as stated income loans) happening recently in Aus is also very alarming:https://www.businessinsider.com.au/liar-loans-australia-ubs-mortgages-r…
I'd assume we have a pretty similar situation here in NZ, and judging by the casual way our broker suggested we inflate our DTI, I'd imagine it's endemic. Be interesting to see how that affects things when the rubber hits the road. This was an extremely common lending practice in the US prior to the GFC. For some crazy reason I wasn't expecting this practice to be business as usual in Aus and NZ...

by loganmdonnelly | 19th May 20, 6:22pm 1589869344

Just to reinforce this. We were looking as FHB two years back. We were in early stages and just wanted advice on how far away we were.
We were encouraged to get a family member to "say" they would love in for $XX amount weekly on paper. So definitely a common practice.

by stuart786786 | 19th May 20, 3:21pm 1589858494

Everyone streched themselves so FOMO affected not only FHB but everyone as the only econony in NZ to get rich was housing economy.

If the house market falls more than 15% in NZ - domino affect may lead to crash based on DTI data.

https://m.youtube.com/watch?feature=youtu.be&v=0uTC4gNOCdU

FHB have heard that anytime is good time to buy a house BUT remember can have a Better time to buy if wait sometime to get more for the deposit/equity and aviid RE Agents trying to play on FOMO

by Speechless | 19th May 20, 3:23pm 1589858606

Almost as if house prices are completely driven by excessive debt growth or something.

by bw | 19th May 20, 3:24pm 1589858648

As long as the market holds together for another 3 days, I'm happy.
Fingers-crossed, we'll have extricated the last member of the immediate family from the property quagmire and leave him free to find a new way in life.
FHBers ( as he and his partner were - 2 X Kiwisavers compromise to do it) don't know that life doesn't always go according to the script and it is those 'owners' who might find the going tough for a while.

by THE MAN 2 | 19th May 20, 3:39pm 1589859553

So what I have been saying for years is that it is not the property investors that force up prices, is true.
First home buyers and owner occupiers will always pay more than an investor, as an investor will always want to be buying as cheap as they can get a property for.
If the figures do t work a professional invest will just pull out and leave it to the ones that are buying with their heart Rather than their head.

by Big_Data | 19th May 20, 3:47pm 1589860043

TM2, I refuse to believe you don't understand the basic principles of supply and demand in respect to price? More investors in the market, higher demand, limited number of properties, higher prices.

by Speechless | 19th May 20, 4:19pm 1589861982

"I refuse to believe you don't understand the basic principles of supply and demand in respect to price?"

I take it this is your first time meeting TM2...

by THE MAN 2 | 19th May 20, 10:46pm 1589885181

I tend to buy mostly when I haven’t got competition.
Best way to buy and always proven to be the best money maker, competition not great for getting a bargain,
People that go to auction keen to sell

by bw | 19th May 20, 4:04pm 1589861052

TM2. If you believe that and it makes you happy, that's fine.
I can only say, it's not my experience.

by THE MAN 2 | 19th May 20, 10:47pm 1589885258

Where do you live BW?
Auckland?
You need to widen your field!

by lastredact | 19th May 20, 6:50pm 1589871050

Buyers and sellers, TM2, buyers and sellers is what it comes down to. And be they owner occupier or residential investor, the motives for buying are far & wide. Not to mention that Kiwis have a cultural predilection towards “safe as houses” investments.

by CN | 19th May 20, 7:54pm 1589874889

"As long as the market holds together for another 3 days, I'm happy."

BW,
What's the latest news with your relatives with the 7 newbuilds? How will they meet their construction financing costs? Will they sell or rent out?
From memory, they're all in West Auckland.

by waymad | 19th May 20, 3:33pm 1589859192

Michael Reddell has an Interesting piece on the notion of a Debt Jubilee (short version - doesn't apply to our times when real interest rates are tiny: it was necessary in Bronze Age times when real interest rates were north of 30%). But this little aside in the piece caught my eye, as it bears directly on the vexed issue of Land (and hence House) prices:

Keen, for example, emphasises the high level of housing debt in countries like New Zealand and Australia. But it is mostly a symptom not of hard-hearted banks but of governments (central and local) that keep on rendering urban land artificially scarce, and then – in effect – compelling the young to borrow heavily from, in effect, the old to get on the ladder of home ownership. I count that deeply unconscionable and unjust. But the primary solution isn’t debt forgiveness – never clear who is going to pay for this – but fixing the problem at source, freeing up land use law. The domestic-oriented elites of our society might not like it – any more than their peers in ancient Mesopotomia were too keen on the remission – but that is the source of the problem. Fix that and then there might be a case for some sort of compensation scheme for those who had got so highly-indebted, but at present – distorted market and all – the highly indebted mostly have an asset still worth materially more (a very different situation from a subsistence borrowing in the face of extreme crop failure).

by house hunter | 19th May 20, 3:47pm 1589860039

Our cities have plenty of land to support their current populations. Bump up the population density and problem solved.

by unaha-closp | 19th May 20, 5:02pm 1589864556

The problem being that to "bump up population density" on expensive land is expensive and so people need to take on much higher levels of debt than they otherwise would.

by murray86 | 20th May 20, 7:53am 1589918038

That Keen statement raises the question of population size again. How much population can the land support, and how many do we want? These questions must be debated, because the answer impacts almost every part of our economy and every person.

by El Torso | 20th May 20, 9:31am 1589923913

I would like to see a debate on the ideal population of New Zealand. Increasing population seems to drive more wealth and it is nice to be able to afford the boat, but this is not much use when the harbour is fished out.

by mikekirk29 | 19th May 20, 3:32pm 1589859127

“Until you lose your job”
Spot on. Problem is less income across economy to service more debt
This will mean 25% drop in house price medians by end of 2021
This will be NZ biggest recession in 50 years

by THE MAN 2 | 19th May 20, 3:44pm 1589859847

Mike, you ave to live somewhere, and with interest rates so low, the only ones that Are selling are business owners that have been squeezed by the over done lockdown.
If Ardern had opened up the economy two weeks earlier then things would not be looking as dire for many businesses.
The extra 2 weeks was an absolute load of crock as the no.s have shown and the media has played along with the govt. because they are state funded.
When you can buy a property cheaper than the interest cost of a mortgage, you would be plain crazy to be renting nowadays.

by Albert2020 | 19th May 20, 4:13pm 1589861617

Spoken like a true real estate agent....

by THE MAN 2 | 19th May 20, 10:50pm 1589885443

Albert, I am not a real estate salesperson nowadays!
Professional property investor, providing accommodation to people that require it.
Far more satisfying than selling with all the stupid paperwork they brought in.

by Quiet Desperation | 20th May 20, 9:22am 1589923370

You've made it very clear just how much you enjoy providing accommodation to people that require it / taking it real easy while collecting large portions of other peoples incomes, as they try to save what little is leftover, to have a chance at owning a home of their own.

by Speechless | 19th May 20, 4:23pm 1589862211

I don't even know where to begin with this trash pile of Hosking logic.

by lastredact | 19th May 20, 6:53pm 1589871221

Mediaworks isn’t state funded. Nor is NZ Herald, stuff.co.nz etc. But whatever, you’ll just only try and look at whatever fits your own personal narrative.

by THE MAN 2 | 19th May 20, 10:51pm 1589885484

TV1 isn’t state funded?

by Big_Data | 19th May 20, 3:45pm 1589859904

I fear you may be right, Mike. I hope it settles within a couple of years as I still want to buy a house, but I won't consider it until a couple of things happen:
1 - Property market no longer falling (up and down on the bottom for a while is okay - and I know it's impossible to time the market, but you know for sure when they are actively falling, it's not a good time!)
2 - With 20% down, it's equal to or cheaper than renting (including with maintenance and property management)
With those two things in place, should be pretty safe, as you know you can rent out your primary if you need to without being in the hole every month. Pretty basic criteria I know, but I'm a pretty basic person.

by bw | 19th May 20, 4:02pm 1589860968

After a BIG fall, it's way cheaper to own than rent. I bought in London during the last correction and it was 7% cheaper to buy (sacrificing money on deposit) than rent.
The problem was, banks weren't lending! It didn't matter what the maths said, they had enough on their plates with the crop of defaults they already had and didn't' want to add to it.
People 'trapped' still had to move for work etc, so had to rent out theirs, and rent out someone else to move - rent went up in places of employment.
The idea that the equation becomes self-balancing at $zero ( rent vs owning ) doesn't always apply.

by loganmdonnelly | 19th May 20, 6:27pm 1589869657

Thanks for sharing. Would banks still be this way with secure jobs?
My wife and I have been pre-approved but don't want to buy right now.
But we are afraid we will leave it too late and the banks will become to risk adverse.
We currently only have 12% deposit but both have secure jobs (education).

by IT GUY | 19th May 20, 6:34pm 1589870078

banks will not count overtime or bonuses
banks will appoint there own valuer
banks will require a greater then 10% deposit for sure

but you are still better off waiting

by Speechless | 19th May 20, 6:15pm 1589868903

The other big thing to keep in mind with the rent v buy equation is that it's extremely sensitive to the inflation (or deflation) of the asset during your period of ownership. The NYTimes has a great rent v buy calculator though it looks like it's now paywalled. I'm sure there are others out there you can fiddle with. Bottom line is even if it's significantly 'cheaper' to buy than rent, even a surprisingly mild level of deflation in the asset price throughout your ownership period can leave you significantly worse off.

by loganmdonnelly | 19th May 20, 6:28pm 1589869727

I'd still take owning and not having to have flat inspections, being able to have pets, make any changes etc! But a good point to be made aware of.

by Speechless | 19th May 20, 6:43pm 1589870613

I feel ya mate, but bear in mind as the rental market tanks landlords are going to become a lot less cocky so you are likely to have a bit more pull for the foreseeable future if you are a good tenant. No landlord wants to risk a long vacancy in this environment. I will take the inconveniences of renting over the potential for a decade or more of negative equity.

by Speechless | 19th May 20, 6:54pm 1589871292

Also, if you think flat inspections are bad wait until you see what the banks are going to be like to deal with over the next few years.

by Mike1 | 20th May 20, 11:49am 1589932177

The market timing thing is interesting. Its promoted by people like Buffett who very much engage in market timing.

You can confidently say that a market is cheap (2010 - 2012) or expensive (2018 - pre covid 2020). My experience with this is US based not sure things ever achieved "cheap" status here.

by fundonomics | 20th May 20, 7:14pm 1589958897

Speculate, speculate, speculate.

by FCM | 19th May 20, 3:45pm 1589859903

Yes and although the wage subsidy has helped in first few months and till August, for a large number of companies it is just avoiding what is about to hit. Anyone who thinks the borders will open this side of November is kidding themselves, we may be getting zero cases but we are the exception. The Job losses will start to mount quickly, and I'm not sure how long the banks will let you have a mortgage holiday..(like I said this is the last card you play- at least go interest only first)

by Brock Landers | 19th May 20, 3:46pm 1589859992

It's delusional to think house prices will drop much.

The crooked RBNZ won't allow it to happen.

by Big_Data | 19th May 20, 3:48pm 1589860084

I'm sure I remember hearing people saying something similar in Arizona in 2007...

by Independent_Observer | 19th May 20, 4:59pm 1589864356

Yes and they only fell 50-60%

http://www.jparsons.net/housingbubble/phoenix.html

by alittle | 19th May 20, 4:34pm 1589862840

This time it is beyond RBNZ.... can slow the fall but with world economy fallen apart cannot avoid the inevitable.

by Speechless | 19th May 20, 4:45pm 1589863512

Ah yes the almighty RBNZ, unstoppable in its power to conjure up a rinkydink commodity currency at will

by RickStrauss | 20th May 20, 10:42am 1589928166

If the RBNZ destroy savers to prop up investors I would not be surprised to see them having a Petricevic of a time when popping out to restaurants in future. Old folks don't take kindly to having their hard-earned savings destroyed through others' misadventures.

He was soon approached by an elderly man, who appeared to be the friend of someone who had lost money when Bridgecorp collapsed, owing investors the small matter of $450m.

"The old guy said 'I don't think you should be down here'," the witness said.

Things only got worse for Petricevic when he entered the al fresco dining area. The witness looked over to see the former financier sprawled in the gutter with another punter on top of him. A bouncer had to step in, he said, while another customer pinned Petricevic against a wall and said: "F--- off, you're not wanted here."

http://www.stuff.co.nz/business/money/3106541/Angry-investors-rough-up-…

by Boatman | 19th May 20, 4:24pm 1589862295

You get the feeling we are wading into a fast flowing river , and we have no idea how deep it it

by waymad | 19th May 20, 4:28pm 1589862490

And the leader of the crossing party is waving a white stick around.....and the rest of the crew (that would be Us) are Tied to 'im.....

by IT GUY | 19th May 20, 5:06pm 1589864785

Read the below

The average property price in Turangi rose by 41% over the past 12 months, and in the past two years have risen by whopping 73%. In the last quarter alone, OneRoof reported that Turangi property enjoyed a six percent increase, with the median value in Turangi now at $260,000.Jun 5, 2019

Now just think that through for a bit...... and then it went up a bit more...

by Speechless | 19th May 20, 5:19pm 1589865547

Turangi is a vibrant upcoming centre with property prices firmly underpinned by strong fundamentals. The DGM yearning to pick up prime Turangi real estate for tuppence-halfpenny will be sadly disappointed once again.

TTP

by IT GUY | 19th May 20, 5:30pm 1589866250

I will wait until I can see the whites of their eyes TTP.... I'm in my 50's I know this game...

by Carlos67 | 20th May 20, 9:30am 1589923842

I recommend you watch the following video, its pretty long but it pretty much outlines the bigger picture of whats going on. Your never going to see any of this in the MSM.
https://www.youtube.com/watch?v=9-rsQT4HScA

by fundonomics | 20th May 20, 6:18pm 1589955511

Debit all credit accrued because of CV19 to a temporary organisation, abolish the organisation and pay off all debt so it becomes perpetual credit with no creditors and doesn't inhibit economic activity.