The latest Real Estate Institute of New Zealand (REINZ) monthly housing figures, released on Thursday, make sobering reading for people who bought their first home during the period of record low interest rates in 2020-2021, with the REINZ House Price Index down 17.5% from its November 2021 peak.
This adds to the sense I have that those buyers have been let down by the system. Along with people who may lose their jobs as the Reserve Bank tries to engineer a recession as a step to stabilise prices and rein in inflation, they risk being the sacrificial lambs of an extraordinary period in NZ's economic and financial history.
In 2020 there was a sense that we're all in this together, we've got your back, no one will be left behind. Do your bit, borrow and buy. Now, just a couple of years later, some of those first home buyers face being thrown under the monetary policy bus.
When the Covid-19 pandemic hit in March 2020, tipping the world into what was probably its greatest period of uncertainty since World War II, the Reserve Bank slashed NZ's benchmark interest rate, its Official Cash Rate (OCR), to a record low of just 0.25%.
It also embarked, for the first time, on quantitative easing, or QE. This saw the Reserve Bank buy about $53 billion worth of government and local government bonds from a range of banks including ANZ, BNZ, ASB's parent the Commonwealth Bank of Australia and Westpac. This increased the supply of money, helped suppress interest rates, provided liquidity to the banking system encouraging banks to lend, thus helping drive the explosion in bank mortgage lending and house prices in 2020-2021.
Additionally home lending banks were able to access $19 billion of three-year money priced at the OCR through the Reserve Bank's Funding for Lending Programme, and the Reserve Bank removed loan-to-value ratio restrictions on low deposit mortgages as Governor Adrian Orr urged banks to be "courageous."
At the same time, with Covid-19 restrictions in place, the Government introduced a Wage Subsidy Scheme, and teamed up with banks and the Reserve Bank to implement a mortgage deferral scheme for struggling borrowers.
Then, with borders closed, lockdowns implemented and vaccines emerging faster than anticipated, the dire forecasts from both the public and private sectors as to the potential damage Covid-19 could wreak on both people and the health system, fortunately didn't materialise.
With low interest rates, job security, encouragement from the authorities, enthusiasm from lenders, plus media stories and real estate agents inducing FOMO, or the fear of missing out, New Zealanders plunged into mortgage debt boots and all. The value of new mortgages taken out during that peak period was running at an annual rate of about $100 billion as banks shoveled money out the door.
In February 2021 Shayne Elliott, CEO of Australia's ANZ Banking Group, parent of NZ's biggest bank ANZ NZ, highlighted record volumes in ANZ's NZ home loans business saying; "we’ve been really run off our feet there in terms of supporting Kiwis into homes."
ANZ NZ, for which housing now comprises 71% of its total lending, certainly wasn't alone. In the two years to March 2022 BNZ grew its housing lending $9.7 billion, or 22%, to $54.5 billion. As a share of BNZ's total lending, housing increased to 55% from 50% over that two-year timeframe.
Ultimately some tension emerged between the Reserve Bank and the banks it oversees.
Questioned in October 2020 against the backdrop of a housing market taking off, Orr said rather than reining themselves in "the [banking] industry always just wants to have it done to them." The point here was that whilst the Reserve Bank influences how the playing field's configured, it's the banks themselves that do the actual lending.
I put Orr's comments to ANZ NZ CEO Antonia Watson in May 2021.
"If someone comes to me with a good deposit and wants to buy themselves a home, I'm not going to turn them away. What I am going to make sure is that they've got a decent deposit and I've got some equity and some protection in their loan. I'm going to make sure that they can afford to pay a higher interest rate because that's always one of the risks that interest rates go up and your [mortgage] serviceability gets different. So we make sure customers can pay around 6%," Watson said.
In May 2021 the average bank two-year carded, or advertised, mortgage rate was about 2.5%. Now it's about 6.5%. That's because as inflation began its surge, a Reserve Bank copping criticism from all directions, started increasing the OCR in October 2021. It's now 500 basis points higher at 5.25%.
Borrowers who've refixed their mortgage are feeling this in the pocket. Statistics NZ's household living-costs price indexes rose 7.7% in the 12 months to March, with mortgage interest costs up 38%.
Falling house values & rising interest rates
If you bought a home for the first time in 2020-2021, the value of your home may now be lower than what you paid for it, and the interest rate on your mortgage is either significantly higher, or poised to become significantly higher.
In its recent Financial Stability Report the Reserve Bank said about a quarter of total outstanding mortgage stock was taken out in the period from late 2020 to late 2021, with about a fifth going to first home buyers. That's a total of about $87 billion, of which first home buyers' share would be more than $17 billion. Many of those borrowers are now paying interest rates above the level banks' stress tested their ability to repay at.
Thus in interviews with the CEOs of ANZ NZ, BNZ and Westpac NZ following their banks' recent interim financial results, I raised the spectre of negative equity and mortgagee sales, which all three CEOs played down.
Negative equity is when a house price falls in value to the extent the owner owes more on their home loan than what the house is valued at. A mortgagee sale can be an option for a lender when a borrower can't pay back money they owe to the lender and the lender sells the property to get back the money it's owed.
"Mortgagee sales, look they're so much a last resort I wouldn't even want to talk about them at the moment," ANZ NZ's Watson told me.
"Negative equity's only an issue if within relatively short order you need to sell," Westpac NZ CEO Catherine McGrath said.
With house prices down 17.5% since the November 2021 peak and borrowers refixing at significantly higher interest rates, the conversations between lenders and borrowers will get more difficult if there's not firm evidence of a changing trajectory soon.
No one had a playbook when the Covid-19 pandemic swept the world, and I acknowledge an element of hindsight in what I'm writing. In a rare move for a central bank, the Reserve Bank has acknowledged it should've moved sooner to tighten monetary policy away from the ultra low OCR and QE settings.
Nonetheless these tougher times for borrowers and workers are "business as usual with monetary policy" as Orr told a parliamentary select committee recently.
Perhaps that's so if you're sitting at the central bank and looking at the housing market from a macro perspective. But that's cold comfort for a struggling mortgage holder.
Hearing and seeing some contrition and empathy would be nice for people who were encouraged to make the biggest purchase of their lives and just a couple of years later find themselves in a very tight spot.
Sure they ultimately made the decision themselves to take the plunge. Caveat emptor and all that. But given the extraordinary times, encouragement they received, low interest rates available, and FOMO inducing headlines as prices soared, they could almost be excused for believing they were doing some sort of patriotic duty by buying when they did.
I believe the system risks letting down many of those 2020-2021 first home buyers and we need to acknowledge that.
Scarily in March 2020 the national median house price was a then-record high of $665,000. That's still $115,000 below April 2023's $780,000, which in turn is $145,000 below the November 2021 peak.
And at 7.2x nationally and 8.9x in Auckland, the latest house-price-to-income multiples are still way above a multiple of 3x which is traditionally considered a good marker for housing affordability.
Even by NZ standards 2020 and 2021 prices were massively overvalued. And it's easy to make a case that NZ houses are still overvalued, cold comfort indeed to 2020 and 2021 buyers.
A generation was burnt by the 1987 share market crash. Once this Covid-era bubble plays out, where might another generation's feelings towards home ownership be? Or maybe house prices will take off again, interest rates fall, and unemployment not rise significantly, effectively bailing out the 2020-21 buyers.
Either way the system still feels like it needs major surgery if home ownership's to be a more sustainable and less speculative option. But as October's election inches closer, there's nothing on offer from either major party that may lead our next government to suggest it's coming. That will only happen if enough New Zealanders demand it. Only then, if the politicians realise there are significant votes in it, will they be brave enough to campaign for major change to a system featuring debt serfdom and significant uncertainty.
*Also see: Would it be possible and/or desirable to engineer a housing market correction?
*This article was first published in our email for paying subscribers early on Friday morning. See here for more details and how to subscribe.
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