Once the threat of COVID recedes we will need to tackle the enormous debt mountain that's propping up the housing market, Greg Ninness argues

Once the threat of COVID recedes we will need to tackle the enormous debt mountain that's propping up the housing market, Greg Ninness argues

By Greg Ninness

Much of the criticism directed at government and Reserve Bank policies aimed at stimulating the economy through lower interest rates, has focused on the corresponding leap in house price inflation and the inevitable problems this causes for first home buyers.

This is a serious issue, but a potentially bigger problem that will need to be addressed at some stage is the rapid growth in the enormous mountain of mortgage debt underpinning the housing market.

In August last year this country’s total residential mortgage debt increased by a record $2.142 billion, according to Reserve Bank figures.

That was the first time the monthly increase (new lending minus repayments) was more than $2 billion.

But that record didn’t last long.

Total mortgage debt continued to rise and in November, the latest month for which figures are available, it jumped by $3.13 billion, to $296 billion.

That compares with a monthly increase of $1.89 billion in November 2019.

Since then, lending will have slowed along with the housing market over the holiday-affected months of December and January. But early indications are that the housing market is starting this year in just as buoyant a mode as it finished last year.

It’s likely that as the market winds back up after the Christmas break, the mortgage debt mountain will start increasing by more than $3 billion a month again and it has probably already passed the $300 billion mark.

So why is this a problem?

Let’s not forget that the reason so much cheap money has been pumped into the economy either directly by the Government or through the Reserve Bank, has been to stave off a severe pandemic-induced recession, and the miseries that would cause from things such as high unemployment.

Those efforts, combined with the Government’s policy of “go hard, go early,” have been largely successful and New Zealand’s economy is in much better shape now than that of many of our trading partners, which is something we should celebrate.

COVID-19 will likely remain a significant risk to the economy for much of this year and perhaps into next year, but the debt that has accumulated to fight the crisis it induced will be with us for much longer.

The mortgage mountain that has grown so rapidly during the COVID-19 crisis could be with us for the next 20-30 years.

Consider this.

In the September quarter of last year, the total value of residential mortgage payments due to be paid was $4.39 billion, according to the Reserve Bank.

That was $4.39 billion that was not available to be spent in other parts of the economy.

Of that, $2.6 billion was mortgage interest. So presumably, $1.79 billion was in principal repayments.

Principal repayments are not such a concern because for every dollar in principal that’s repaid, there is a reduction in debt owed, resulting in a corresponding increase in the borrower’s equity.

But the interest portion is another matter.

The main beneficiaries of money sucked out of the economy in interest payments are the banks.

And the more money that is paid in interest, the less there is to be spent elsewhere in the economy.

At the moment this is not a major problem, because falling interest rates mean the total amount being paid in interest has been declining, even though the total amount being borrowed has been rising.

Reserve Bank figures showing the amount of interest charged on residential mortgages go back to the September quarter of 2014. These show the $2.6 billion charged in mortgage interest in the September 2019 quarter was the lowest it has been in any quarter during that period, and was well below the peak of $3.11 billion in the fourth quarter of 2017.

So as long as interest rates keep falling, or remain around current levels, there’s not a problem.

But what happens when interest rates go up?

At the household level, the payments on a $500,000 mortgage at September 2020’s average two year-fixed rate of 2.72% would have been about $2034 a month (for a 30 year term).

But if mortgage rates increased to 4.7%, which is where they were in September 2017, the mortgage payments would go up to $2594 a month.

If interest rates increased to 6.13%, which is where they were in September 2014, the mortgage payments would rise to $3040 a month.

That would be an extra $1006 a month in mortgage payments compared to current levels, which the household would have to find by cutting spending elsewhere.

When that is applied across the banks’ entire mortgage book, the economic implications become significant.

If mortgage rates rose from 2.72% to 4.7%, a rough estimate by Interest.co.nz is that it could push the country’s total mortgage interest bill up from $2.6 billion a quarter ($10.4 billion a year) to around $3.31 billion a quarter, or $13.3 billion a year.

If mortgage interest rates increased to 6.13%, which is where they were just over six years ago, then the quarterly mortgage interest bill could increase to around $3.88 billion, or $15.5 billion a year.

That’s a huge amount of money to be found by diverting household spending from other areas and it would put many households under severe financial stress.

So the policies being adopted to tackle the relatively short term economic problems caused by the COVID-19 pandemic have the potential to create some reasonably serious economic problems in the longer term.

The difficulty policy makers face is how to stop the mortgage debt mountain from growing to even more monumental proportions, and possibly even to start shrinking it.

The Reserve Bank has signalled its intention to start limiting mortgage risk by reintroducing high loan-to-valuation ratio restrictions on new mortgage lending, and by asking the Government to allow it to introduce debt-to-income ratio restrictions as well.

That would be a useful start, but in terms of reducing the size of the mortgage debt mountain, it probably amounts to little more than fiddling around the edges of the problem.

If any serious attempt is to be made to rein in mortgage debt, much sterner measures would be required.

What we need is a war on debt.

Perhaps not right now while COVID-19 still threatens our peaceful shores, but perhaps in a year or so as that threat recedes and we return to some new kind of normal.

We need to take a long hard look at the economic structures that have allowed house prices to spiral out of control and mortgage debt to balloon out to current proportions.

Although falling interest rates have been the main focus of attention for those concerned about rising debt levels and out of control house prices, other factors have also made a major contribution to the problem over the years.

A generation ago the standard mortgage term was 20 years, but that has now stretched out to 30 years.

The immediate impact of this was to make mortgage payments more affordable.

The payments on a $500,000 mortgage over 20 years at 2.72% would be about $2700 a month.

The payments on the same mortgage over a 30 year term would be just over $2000 a month, saving the borrower almost $700 a month.

The downside for the borrower is that over a 20 year term they would pay almost $150,000 in interest (if it was unchanged over the 20 year term). But if the mortgage was for 30 years they would pay around $232,000 in total interest.

Of course if interest rates were higher, that problem would be a lot more significant.

However the benefit of lower mortgage payments provided by stretching the mortgage term out to 30 years was probably short lived.

Ultimately stretching out the mortgage term feeds into higher house prices, pushing up both the size of the deposit required to buy a home and eventually the mortgage payments, just as lower interest rates do.

That also means the total amount borrowers pay in interest over the life of the loan is increased substantially, meaning they have less money over their working lives to save or spend on other things

So longer term loans are good for banks, not so much for borrowers.

The Government could look at setting a cap on the term of mortgages, say at around the current 30 year level, and then reducing it over time.

This would need to be done slowly, perhaps by reducing the maximum loan term by 12 months every two years, which would take it back down to 20 years over two decades.

It could also allow longer terms for first home buyers than for investors or existing home owners looking to move up the property ladder.

Another possibility would be to remove the tax deductibility of mortgage interest for residential property investors.

Being able to offset the interest component of their mortgage payments against their rental income for tax purposes gives investors a significant advantage over first home buyers and other owner-occupiers.

Removing that advantage would level the playing field, helping to cool the housing market and crimp demand for mortgage debt at the same time.

Unfortunately, the Prime Minister may have backed her government into a corner on that one, at least in the short term, by promising during last year’s election campaign not to introduce any new taxes, although it could probably be argued that merely changing the rules of what is deductible for an existing tax is not the same as introducing a new one.

So there is no shortage of tools the Government could use to start bulldozing down the mortgage debt mountain and bringing the housing market it supports back to affordable levels.

It’s a question of whether the Government has the political will to do so and the guts to see it through.

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95 Comments

26
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Yep. Remove mortgage interest rate tax deductability.
Maybe end interest only mortgages.
Remember: The ultimate benefit flows to owners. So we need to be a nation of owners, not of borrowers.

14
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But they are legimate businesses ... 6am till late, full of toil and graft and hard earned capital gain
slum lorders are people too

Actually it is pretty hard work. I'm repairing holes in the walls, papering and painting after Harcourts put crappy tenants in my house while I was overseas.

Good luck. Dealing with the Tenancy tribunal is a joke.

That would make the situation even worse, though.

The alternative would be to extend those tax breaks to everyone, not just investors. Then everyone's on more of a level playing field. That's how it works in the US already.

Would cost the government a lot of revenue; guess they could get that back with land / property tax. But of course we aren't allowed to talk about new taxes until 2023 at the earliest.

That was TOP's policy, deductibility for all along with a deemed rate of return. That went down like a cup of cold sick.

"The alternative would be to extend those tax breaks to everyone, not just investors" - great way to encourage MORE debt and higher house prices with that .
It is true this exists in the US - however anywhere else it has pretty much been abolished - or being phased out.

Funny how this article talks about the need to reduce debt, while another article on the same site says QE is here to stay forever which favours the borrowers and not savers. So Debt Reductions are not going to happen, right ?

23
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My money is on the procrastinator in the corner.

I voted for JA (mainly because of their Covid response), but I would take a bet that this Govt doesn't have what it takes to fix this crisis. Shame on them.

19
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Wow people voted for JA just because she closed the boarders at least 2 weeks to late ? Talk about saved by the bell after 3 years of doing nothing. Now we are going to get another 3 years of doing nothing, better hope for some other emergency to come along last minute. Climate change is looking like the next big thing to take everyone's eyes off the ball.

10
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Better than National who would not have closed the borders. They would have done a Trump/Boris response and wished Covid away. Our economy would be a wreck and thousands dead. So yes JA and the coalition deserve some kudos.

I agree, however, at the time of the election National weren't in good form. Guess that makes me a swing voter as I like action and less talk.

Earthquake in Wellington. Jacinda will be there on the ground to be the peoples' saviour.

Don’t worry I think they will manage to drag Covid out until the next election.

Don’t worry I think they will manage to drag Covid out until the next election.

The blue brigade did the same kinda nothing for 9 years. Politicians are all so beige these days.

Should have done more research before you voted. Just have to live with it now

The mortgage market structure does not appear well designed for modern society. It seems better suited to the 1950s or 60s. Taking on a mountain of debt for the 'Kiwi dream' seems to be a ludicrous proposition in Jan 2021.

20
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Given that the Kiwi dream is now a three bedroom townhouse on the fringe that's three times more expensive than a standalone on a central quarter acre section, it begs the question as to to what the 'Kiwi dream' is even aspiring to these days. Unless it's 'going backwards in living standards despite the massive technological advances of the last 40 years' then something might be a bit off.

Unless it's 'going backwards in living standards despite the massive technological advances of the last 40 years' then something might be a bit off.

In a modern, developed society, the cost of lower-order needs (food, shelter) on the hierarchy should be less of a burden on an individual or family unit. That means more time is able to spent on emotional and self actualization needs. Even the whole tertiary education system is being thrown on its head (the Google 'degree' and stance / Edtech). NZ doesn't really seem prepared or ready for change.

12
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Historically, New Zealanders are very adaptable and more than happy to embrace change, provided it's beneficial to more than a few. What we're currently experiencing is a perfect storm of technological change meets crony capitalism. The reach of the market into areas of life where there is a public good is where we've gone wrong. Education is a very good example and I speak from bitter experience as someone who was shown the door over a mother's loud objections to her daughter being asked to re-write a plagiarised assignment. Management were more concerned about 'brand' and placating, than upholding academic standards. Perception matters more than evidence in this brave new world. Time for a reset?

Given that the Kiwi dream is now a three bedroom townhouse on the fringe

More like a tiny home, on a communal section 1hr + drive from the CBD. They've got a name for those places overseas - trailer parks.

Reserve Bank figures showing the amount of interest charged on residential mortgages go back to the September quarter of 2014. These show the $2.6 billion charged in mortgage interest in the September 2019 quarter was the lowest it has been in any quarter during that period, and was well below the peak of $3.11 billion in the fourth quarter of 2017.

Surely, this means there has been a reduction in collective bank retained earnings, hence a drop in regulatory bank capital capacity to underwrite new loans without calling upon shareholders to dip into their savings?

This translates to loans being extended to government and other low risk weighted asset classes to the detriment of productive enterprise which attracts higher capital risk weights due to its necessary risk profile to create competitive goods to pay wages.

So in your world the banks are lending money to the government while in the real world the government is giving money to the banks to lent out. Lets not forget that the government is an issuer of money in its own right and it doesn't need money from the banks. You are very stubborn in your misunderstanding of our financial system.

"You are very stubborn in your misunderstanding of our financial system."

So are you treadlightlightly... You preach pure MMT straight from the book..
Like most "theories" it is just a Map that tries to describe the way things are... Some maps are better than others.
The MMT world that u think already exists ... does not. ( just because MMT says the egg comes before the chicken, does not make it a truth )

The reality is that Govt does raise money ( borrow) from the private sector.
The reality is that the Private banking sector creates most of the "new" money ( in the form of credit) that enters an economy...and NOt the Govt.

The theory (as far as I know) behind the endogenous nature of our Monetary system is that the private sector/mkt economy is a better allocator of resources than a command style Govt could ever be.
ie Capital formation , which leads to innovation , productivity wealth creation etc.... has been pretty incredible in my lifetime. In the negative.... the same system has lead to profound growth in wealth inequality..

MMT is NOT the holy grail.... and in my view is naive, in that it presupposes that Govt would be wise and knowledgeable administrators of a MMT system....
A quick study of history shows thats probably wishful thinking...

just my view..

"MMT is NOT the holy grail.... and in my view is naive, in that it presupposes that Govt would be wise and knowledgeable administrators of a MMT system...."

well said
the system is largely self organising
its works to increase efficiency in maximising resource use
Govts role in theory is the counter; ie to provide the safeguards to restrict absolute decimation of resource bases (cough)
But its credit is no different

What we have is hard limits that dont shift with more credit

Just your view, exactly. You should spend some time studying it before getting all hot under the collar. Mainstream economics lacks logic and common sense. How do you explain QE, where does that money come from? The government cannot return money to the banks if it has spent it. It is buying back its debt so obviously it never needed the money to finance itself. Money creation is a government function and the government is the monopoly issuer of our currency and it cannot legally come from anywhere else. Banks can only create money as credit under the licence and control of the government.

not hot under the collar.. Just responding to what smells like dogma... to me. I think this because your view never goes beyond financial accounting with its focus on money as a "unit of account", within the paradigm of the MMT map.

You dismiss mainstream economics as lacking common sense but never go beyond your sectoral balance financial accounting , flatland derivative ,view of a wider underlying economic/social reality...
I think its MMT that lacks commonsense.. eg.. u argue that Govt deficits increase private sector savings.... so Govt deficits are good. Economics might argue that real savings is in the form of wealth, which has nothing to do with Govt deficits.. but are the results of productive endeavours.
Do u think Govts can produce wealth by printing money ?

QE is Central Bank created money ,with the intent of influencing long term interest rates.
QE is an extraordinary monetary policy tool. ( used during GFC )
As far as I know , the intent of QE had nothing to do with Govt buying back its debt.
Where did u get that idea from..?

Like I said, vast majority of money created has been/is by the Private Banking system. ( Our money Monetary system accepts Bank created credit as Money ). Govt does not have the monopoly on money creation, in this context. ( And I do know the difference between inside/outside money )

yeah... just my view, which changes as I learn more...

The government does buy back its debt, QE is just an asset swap bonds for bank reserves. Where did the bank reserves first originate? through the governments spending is the answer, government spending creates bank reserves, bond sales drain these reserves and QE returns them. There is much information on the internet, an example here. https://positivemoney.org/2016/09/qe-101-quantitative-easing/
The Reserve Bank is part of government by the way and is inseparable. Adrian Orr tells us here, " the Reserve Bank balance sheet is just part of the Crown balance sheet. It's just that operationally we are set up independently to achieve a particular goal with the instruments that we are".
https://www.stuff.co.nz/business/money/114923477/why-reserve-bank-govern...

Give it a rest: Banks are not submitting these government guaranteed bond assets in return for Fed created reserves

Adrian Orr tells us, "The effectiveness of interest rate changes, even into negative territory, made it preferable to other types of policies such as quantitative easing, which is where central banks invent money to buy Government bonds to force down longer term interest rates". https://www.stuff.co.nz/business/money/114923477/why-reserve-bank-govern...
Reserves and bonds both rank equally as bank liquidity and so it makes little difference to them which they hold in that regard. https://www.rbnz.govt.nz/-/media/ReserveBank/Files/regulation-and-superv...
Banks are required to do as the Reserve Bank instructs them as it is the supervising authority.

How about introducing a (progressive) tax on debt? Put simply, the more debt a borrower acquires the more tax she/he would have to pay the government each year.

The tax burden would serve to limit borrowing in the same way that interest rates would have done (had they not fallen to such a low level). The tax could be targeted: say at property investors with more than two rental properties.

My landlady has a big smile on her face at the moment - she's just a bought a new Audi. Time she was given a poke with a sharp stick........

TTP

There is already a "tax" TTP ..its called interest. Unfortunately central banks under their own mandate have reduced this too nearly zero.

Removing the ability to deduct mortgage interest would be much simpler to implement while having a similar effect.

I'll take shorter mortgage terms and short term sacrifice that I can drive at a personal spending level over not having to plump for prices so high they require an extra decade of borrowing to maintain the veneer of affordability. In. a. heartbeat.

"short term sacrifice" is akin to LESS demand in the economy

And less demand is something a flatlined economic system cant afford

Our current system requires me to make the same level of sacrifice, by default, over a much longer period of time. How is that possibly any better?

because we arent interested in the future ... we need spending NOW! Think like a politician
capital repayments effectively take money out of the economy while interest is a bonanza to provide profits and growth
longer term repayments mean more available to spend now

That would be fine if prices hadn't also just kept spiking - they have. So I'm still effectively losing the same % of my income, but the time by which I can resume discretionary spending on a significant level is closer to retirement, when I'll be less able to do it.

But one of the points from the article is surely that the increase in total mortgages means the banks soak up that extra spending money not the rest of the economy. Banks are not leeches hahahaha.

to distribute as bonuses / dividends and buy verve cliquot ...

In Australia.

11
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ahem
DEBT pays everyones wages
In the absence of actual wages, we need to use leverage of property as a money machine

No way round that one

But, yes, its a ponzi

You're right. Consumer debt, to be precise, is helping us maintain first-world living standards despite our rapidly shrinking industrial base. Our export-oriented economy has been bringing in fewer export $s / capita with each passing year.

Yes, but is that due to less $$$ or more capitas?

I thought the Government had already introduced ring fencing of rental losses?

https://www.ird.govt.nz/pages/campaigns/ring-fencing

They have. GN suggests going a step further and removing deductibility of mortgage interest. So IRD will tax the rent but give no relief for the costs of earning that rent e.g. $500 rent a week with costs of $100 (e.g. rates, insurance) and interest of $400 equals no taxable income now, GN would require landlord to pay tax on $400 "profit".

This all great stuff, very sensible, but politically too optimistic, I think.
The RB is not going to raise rates meaningfully. It's not. Doesn't matter how much the real economy craters, that's not in their remit. They want stability, and when you're in a massive debt bubble, stability means keeping the bubble inflated.

Some advice Trump should have taken on board during his tenure.

What caused the GFC? It wasn't government debt but private debt, in fact governments had to come to the rescue and bail out the banks. Sovereign currency issuers can never become insolvent and in fact do not even need to issue debt instruments, as economist Prof Bill Mitchell explains here it is a historic anomaly from the days of the gold standard.
http://bilbo.economicoutlook.net/blog/?p=45106

I'm interested to know how Keynesians and MMTers deal with the historical reality that fiat currencies all go to zero. The reason I ask you this is because there is always the assumption that the monetary paradigm is based around what is existence right now since Bretton Woods in the 70s. Is there an assumption that the current monetary system will never change?

Anything can be changed, MMT describes how it works at present. We could go back to beads and sea shells. As Bill Mitchell explains the gold standard was dropped because it caused problems of its own. We have economic and social problems because our politicians refuse to understand how things work now. They are still stuck in the days of the gold standard where they need to find money before they can spend. You must be happy with our levels of poverty and homelessness?
Neo-liberalism is the problem as it promotes monetary policy above fiscal policy, it's OK for the banks to create unlimited amounts of money but governments should run budget surpluses and keep government debt at 20% of GDP.

The record is spinning but is it going anywhere?

We arent short of credit (Whether the banks issue it or the govts issue changes nothing ... its all fruit on the on the magic money tree that divys up who trades in their money claims for stuff)

Its the STUFF that actually matters ...We are actually short of resource bases to plunder .... resources available per capita and how in reality resource bases are limited & that they ultimately need to be NET energy positive to be of any use - debt can pull the wool here temporarily..)
Think back to your lunch - Was it the dollar note that was tasty or the burger?

Or are you still saying winning lotto tickets all round can bring us out of poverty?

We would all be in poverty without money which enables trade as one persons spending is another's income. Have you ever heard of deflation? That is when there is not enough money and economic activity shrinks and people loose their jobs. The difference between the money that the banks create and that the government creates is what it it ultimately used for. The money that the government spends is used for supplying all of our public services infrastructure and welfare. What the banks create and lend on housing just inflates the price of houses, a big difference.
There is always spare capacity within the economy that the government can put to work. Unemployment is a sign that the government is not spending enough, it should adjust its budget to match what is happening in the private sector so as to maintain full employment.

This reads a bit like theory not practice. Why arent people piling into starting up businesses and using this untapped potential?
Is it because it not actually viable?

"Unemployment is a sign that the government is not spending enough"

Are you sure?
This sounds like the road to Japanification & jobs for manning the zebra crossings...
It doesnt sound like capitalism
To have legimate output, you need a viable customer ...

"Have you ever heard of deflation? That is when there is not enough money ..."

Correction - Not enough affordability OR purchasing power - theres plenty of credit out there
And a Govt's purchasing power is ultimately linked to OUTPUT ... which comes back to requiring more than manning zebra crossings...

The level of government spending adds demand to the private sector and so it will increase employment in that way, the government could be building a lot more houses for instance as long as the resources are available. MMT promotes a job guarantee for those who wish to have one.
Economist Pavlina Tcherneva explains it here on YouTube. Take some time and listen to her. https://www.youtube.com/watch?v=3YnHT2A3a6Y&t=902s

Have you heard of stagflation? That is when there is too much money and economic activity shrinks and people loose their jobs.

The only inflation that we are experiencing at the moment is in housing. Taxation takes care of most of the money that the government creates, and what is left after that adds to our savings. Sectoral Balances (S-I)=(G-T)+(X-M) by economist Wynne Godley who worked for the British Treasury. https://en.wikipedia.org/wiki/Sectoral_balances
A government deficit equals a private sector surplus and only the government can create net financial assets for the private sector. Bank lending creates assets and liabilities equally and so cannot add to our net savings.

11
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Interest rates WILL NOT BE ALLOWED TO RISE!
Think about this, the entire world is powered by cheap or basically free credit, on rates that have only been dropping over the last 20-30 years. Look at the few times rates have actually gone up and you see it rapidly is reversed. Look at what happened when the fed started to reduce their QE supply during sept 2019, the whole system had a melt down and over night rates shot up to 7%+.
If bankers raise rates, the multitude of zombie companies (companies that do not make enough profits to cover their interest repayments) have to declare bankruptcy, which in todays day and age is not allowed. Again which is why the fed is literally buying public stocks to prop up the market.

Now to NZ, if we do start to get some sort of decent cpi inflation over 4%+ (we all know real inflation is a lot higher than this already) Then the RB has one option, and that is to raise interest rates to try and cool the economy. The catch 22 there is pushing up mortgage repayments, which owners can not afford, ergo houses get dumped and the market crashes. And landlords need to raise rents to remain profitable, but since there will be a flood of supply to the market, they will be unable to, and will more than likely have to lower rents or be forced to sell.
In this case you will end up with a heap of empty houses that no one wants to, or will be able to buy (banks will cut lending in this environment due to their risk assessments), and a flood of homelessness as houses will be sitting empty on the market.

The problems that being able to print money out of thin air can cause eh, the 50 year Fiat experiment still has a lot of kinks to work out...

Also to add to this, inflation reduces the pourchasing power of your savings, so holding cash reserves is bad in that sense, esp when you are making 0 return on them.
On the flip side, inflation makes the repayment of debt easier as in nominal value terms it takes less $ to pay back.
Using the inflation calculator, 100k worth of goods in 2000 is now worth 153,000, or a 35% reduction in your purchasing power. But the $ value of your wages has gone up (not the purchasing power but $1 is still $1) so it takes less "purchasing power" to pay back the same $ value.
So for wages, if you were on 30k in 2000, you would have to be on 57k today. Ergo 100k in debt compared to 57k income is a lot smaller than 100k of debt for 30k income.

I hope I kind explained that well enough...

The bigger picture is that ultimately every monetary system ever developed has collapsed under its own weight. The current one has been going a record amount of time so one would predict with the constant downward spiral its all going to end in the not so distant future. Looks to me there will be a new digital currency introduced. Bitcoin buyers must subconsciously think they have it already but I think it will be yet another currency that is created out of thin air. The danger is that it will only come after a major war because one of the big players will want to control it. One thing for sure, your going to be glad your living in New Zealand when the shit finally hits the fan.

But that goes back to the key problem. No new digital currency can be created with out someone creating it...ergo it has a leader who has the ability to change it. Even if they say they wont change its algorithm, why would trust them when I can use Bitcoin which is decentralised and has no central authority behind it, as well as a 12 year track record to back this up?
And of course the big players want to control it. But they cant stop me from using Bitcoin, it is an "opt out" system rather than "forced in" like every other currency.

And hell yea, even if its just for the fact that there's less people to fight for resources here than anywhere else in the world haha

Unfortunately, if the shit ever does hit the fan there's no chance we'll be left to our own devices down here.

See my question above to the MMT disciple

Mate im an Austrian and support Bitcoin, literally the opposite of an MMT disciple haha
But since I have a back up plan I am less worried about fiat currencies failing. It is becoming more and more likely that a UBI funded by money printer go BRRR will be implemented in most developed countries in hte coming decades. And then we are back to Socialism, that has never worked. period.
But that doesn't mean im not invested in traditional assets as well, have to hedge the risks.

Let's hope inflation is just confined to fixed assets then. You mention decent CPI inflation of over 4%, what if CPI inflation is over 10%? Can CPI inflation just be ignored? If it can, what a pleasure. 10% CPI inflation and wage increases through cost of living pay increases, one way to inflate our debt away......But then people will just borrow more due increased serviceability and loose credit conditions. Voila house prices continue to increase.

Why do you make the assumption that the price of labor increases with price inflation? NZ has already been reliant on migrant slave labor because the cost of doing business is too high.

How much lower should NZ wages be, in your opinion, given that they're already well behind Australia's in terms of both earnings and retirement schemes?

CPI inflation can't be ignored. But you can change how you measure it. I would expect the make up of the CPI to be altered to exclude things that are going up in price, making inflation look like its a lot lower than it really is.

sorry, reported by accident.

Absolutely correct - no rate rise possible
The big problem now being that the 0% interest floor
0% and below zero interest isnt a viable fiat money scheme

Indeed. And what I have been saying for 6 months now is that wages will not rise as inflation does so living standards will fall. So economy will tank if raise rates and if don’t. The fogged glasses will clear and people might then see again that they’ve been duped

Yes. This is what is happening, even as we speak. Incomes are going nowhere and possibly down.

QE was required but should have been used with checks and balances specially when everyone is aware that it has led to massive house price rise in just few months from 20% to 50% plus.

Hi Greg, Do you not feel that RBNZ and Government should have been proactive to control the rising house price just as they were fast and proactive to act and protect any chance (Fear) of falling house price in March /April. This is because government along with RBNZ are only concern of short term gain ignoring major side affects and it is because Mr Orr and now even Jacinda Arden believes that housing crisis is a Good Crisis like National.

Any government is supported and run by beuracrats and so called advisor who for vested biased reason convince any govt that if house price falls or even stabilise will be foom to economy and ministers believe as they too want to believe in it.

The more the bubble bigger, More dependency on the ponzi as is the monster created by RBNZ and Government

NZ like any country needs leader with long term vision and not politicans who only think of vote bank politics to be in power.

Even now if govt does not come out to put water on the fire, is real shame. Hope PM, FM and Mr Orr are having wonderfull holiday at the cost of average Kiwi /FHB.

Jacinda Arden is suppose to address housing issue but will she only try to address state housing issue as gets more media attention ignoring the aspiration of many FHB and average Kiwi who do not want to depend on social housing but want a home of their own.

Wait and Watch

What a painting!: the fall of Constantinople to Ottoman Sultan Mehmed II in 1453. Let's hope the great Kiwi housing ponzi bust is less drastic.

That canon was forged in place by an Hungarian mercenary

Great story that one!

When the majority of interests that governments MUST listen to agree that debt must be reduced. Then the inflation monster will be let out of its cage.

I have a lot of debt and inflation is great as it eats away at it. Cheers

'A generation ago the standard mortgage term was 20 years, but that has now stretched out to 30 years.
The immediate impact of this was to make mortgage payments more affordable.'

Yes, and it is the logic that is used to say houses, even though they increased in price, are more affordable, even though the increase was all non valued added cost. ie you are paying more for no extra amenity.

With this type of logic, ie the higher the price, the longer the term, the more affordable it becomes, then there must come a point when if the price is high enough and the mortgage long enough, they would owe you money?

People need to learn to do the math. Just an extra $50 a week slashed years off my mortgage. You also need to make the mortgage repayments as frequent as possible. There is no need to go to 30 years if you sort things.

You either missed the point or didn't realize I was being sarcastic.

You are correct in what you say, but if you can't afford it, hence the need for a longer mortgage term to lower the repayment amount, then it is a moot point.

For clarity what I am saying, is any 'saving' like longer terms, lower interest rates, etc., to make things 'more affordable' just get capitalized into the price ie you end up paying more.

This only happens because supply cannot keep up with demand. If supply could keep up with demand, then all these extra things like extended terms, lower interest rates etc. would not cause the house prices to rise. That is true affordablilty and savings.

3 years in and our mortgage is on a 13 year schedule. Our "top up" last week was taken out on a 10 year despite the bank's initial offer of 30 years.

Time in debt is your worst enemy.

Not when interest rates are this low.

I agree with refactorNZ, not when rates are this low. If the rate you are paying to borrow money is less than the rate of inflation, then it is the lender who is losing purchasing power, and the borrower was able to benefit buy using that money before it lost value.

Debt is your enemy end of story. Pay off the mortgage as fast as possible because you have no idea where interest rates will be in even 2 or 3 years time. Mortgage free you don't care if the value of your house goes up or down, you own it and you have control. Giving other people control over your life is where the problems start as there are to many idiots clambering over one another to be in a position to tell you what to do. The current low rates mean you can totally smash that mortgage early.

It’s not hard to figure out that low interest rates is why the housing prices has manly gone up to over ten times NZ average salary this is unsustainable people are just borrowing more and more just to live. A lot of people will be caught out because the USD is losing value ever day at some point the interest rates will have to go up in US to protect the USD from oblivion this will create chaos in most places around the world and hit NZ big time. Whatever the US put rates up NZD will need to go up more this over time will reduce house prices and create a spiral until we get to the point where mortgage will be only 4 to 5 time average income not 9 to 10 times any group or person who is highly leveraged will be toast.

Highly unlikely... there needs to be pain before people change their behaviours

At present high debt for housing is being rewarded with low carrying costs and capital gains, unless that picture changes then there is going to be no change

Debt.... The only reason it is so prevalent on property is because of the upsides of doing so (no tax on gain, and or tax offsets). We really need the Flat land tax. Unavoidable, inevitable. Just imagine....you could reduce income tax burden and drive the upside from actually working.

Question: pre CV19 why did we need all those OCR cuts? The economy didn’t need them. Oh, that’s right, we had to keep reducing so people could keep buying and prices could be inflated
What happens when no more cuts poss? Ponzi done

I am forunate, as i haven't had a mortgage since 1997-I am now 75- but both my sons do. However, they have sensibly maintained their payments at the level they were several years ago in order to pay their mortgages off significantly earlier. Thus, they and others like them have no fear of interest rates rising.

In past Colonialism time, the debt cost is to be serviced by the administered colony. Not much differ than today.
It's just the war need to be in softly approach, we called modern globalised enslavement method as a way to plug the hole.
This is the current 'delicate' balanced being played by the govt, how to keep interest down... up quickly as per 20% housing inflation cost? will be dire to NZ sole darling economy. With border still shuts, the QE in 2021-25 will flow again at least 200billion more (half for climate, half for lost of foreign exploit).

"Being able to offset the interest component of their mortgage payments against their rental income for tax purposes gives investors a significant advantage over first home buyers and other owner-occupiers."
To fully reverse the current system it would also then be necessary for owner-occupiers to pay tax on the assessed rental value of the accommodation that they receive each week from living in their own home and for any profit that landlords make from their rentals to be tax-free.