Opinion: Neville Bennett explains why mortgage borrowers are suckers that need more creditor friendly laws and low rate, very long term fixed mortgages

Opinion: Neville Bennett explains why mortgage borrowers are suckers that need more creditor friendly laws and low rate, very long term fixed mortgages

By Neville Bennett

There are times when I feel that home buyers, who mortgage themselves to the hilt, are suckers.

There are a dozen reasons:

Reason #1. They assume that housing is not too risky. But I will show that it is risky, and there is a bust every generation.

Reason #2. Kiwis are over-exposed to property. Compared to other countries New Zealand households invest the highest proportion of their assets in the housing market.

Reason #3.  In other countries it is regarded as prudent to have a diversified portfolio, with substantial foreign assets to lessen the risk of living in a small, relatively undiversified economy.

Reason #4. Housing assets incur high transaction costs compared to bonds. Selling is hit-and-miss as prices are inferred from 'comparable' transactions. The market is illiquid, and many sellers have to wait for an extended period to clinch a deal. Some deals fall through because the buyer’s circumstances change … and so on.

Reason #5. There is a timing risk. It is best to time buying when it is a 'buyers' market when one can do proper assessment in a languid market where sellers get increasingly realistic. We tend to wait until hysteria rises into a 'sellers' market and we sometimes rush in and make silly offers because we fear being gazumped and  missing out in a rising market.

Reason #6. We sometimes get a valuers opinion but rarely get an engineer or similar to check out the building and its land. People take huge risks in this area but perhaps it is  a good idea to find out if the house needs re-wiring, is riddled with dry rot, and the land is prone to liquefaction, slippage, flood and bombardment by malevolent rocks.

Reason #7. We particularly prize dangerous locations and pay a premium to live by a river, seaside, or on a cliff or a delicious fault line. The earthquake has destroyed the most valuable houses by a Fendalton stream or the sea views on the hills. I am amazed that we tolerate settlements in floodplains and new residential homes on arterial roads.

Reason #8. Mortgages are a form of leverage. One pays a deposit and then borrows the rest of the purchase price. It is a kind of speculation, although most home buyers would object to that term. Perhaps they think that buying a residence is morally superior to other forms of real estate activity. My point is that leverage is risky and if you operate leverage in other investments you usually have options to reduce your exposure. But you are stuck with a house, even if it has a huge fall in value.

Reason #9. Mortgages could be buyer-friendly but are in fact creditor-friendly. If the mortgagee fails to meets their payments, the creditor can demand the full repayment of the contract. In other jurisdictions, the debtor can walk away and forfeit their home when the equity position is negative. Americans talk about 'jingle mail’ when lots of keys are posted back to banks. In NZ the mortgagee is responsible for the full loan and cannot walk away.

Reason #10. Mortgagees assume a huge ‘location” risk. Typical dangers are the neighbourhood goes down: imagine the effect of bikies moving next door. Houses can lose relative value too through planning changes: your house is threatened by a new motorway. Perhaps the local schools lose prestige. We Christchurch people have found many problems with home ownership in an earthquake-ravaged area. As new insurances are not being issued, buying houses is problematic: the liquidity risk of being able to sell has increased.

Reason #11. Mortgagees assume most of the risk of a sustained increase in interest rates. This can be very nasty. When I bought my present house, it had a mortgage at 11% p.a. Shortly afterwards it was cranked up to 22%.

Reason #12. A Reserve Bank study said the banks could easily assume the interest-rate risk but they heap it on customers. Denmark for example has long term, fixed rate mortgages with low-cost options to modify terms. Few people know that. We  have not demanded change - we are suckers.

Exposition

While I have raised points against housing, I must balance it with the positives. Housing assets provide shelter and often access to other nearby amenities. Moreover, historically it has been an appreciating asset, partly because taxation is low on houses.

Prices have not dropped in the last decades except in inflation-adjusted terms. Our banks stand out internationally because housing is a large part of their assets. It used to be around 20% of assets but has risen to 50%. Thus the household and banking system are very exposed to housing. Is this too many eggs in one basket?

We ought to be aware that NZ houses declined by 37% in inflation-adjusted terms from 1973-1980. I remember the eighties with horror as my mortgage rate was 22% at its height; although I had a high salary, life was tough.

Housing busts are deeper and last longer than share market busts because households and banks have bigger holdings of housing assets than of shares. Another problem is that building demand collapses, and this lowers GDP. A housing bust leads to banking busts: a pattern that has occurred repeatedly across a wide range of countries.

Banks are drawn into excessive exposure to housing because it tends to be more profitable than other assets. Their return is called the 'weighted average margin’ for mortgages. An interesting point is that NZ banks increased their exposure while the margin was falling. Perhaps they thought the risk was diminishing. It has been suggested banks had 'disaster myopia' in underestimating their vulnerability to shocks.

The market is vulnerable to shocks which will tend to drive up interest rates.

The cause could be a pandemic, terrorist interruptions of travel, natural disasters, even a cyber attack. There is a probability that the major powers may blunder in their macroeconomic policy and disrupt markets, driving up interest rates. The worst that could happen is a double whammy of a shock resulting in high interest rates at a time of increasing unemployment. If Australia has big shocks they could be quickly transmitted here via our banking system.

There could be defaults on mortgages following a shock. The banks are ready: “the time it takes to enforce a debt contract and the cost of enforcement are significantly lower in NZ than in other high income countries." according to the RBNZ (page 31).

Banks have strong shock-absorbers. These include earning, reserves and capital which are high by international standards. Their biggest risk is funding which tends to be short-term and vulnerable to rapid change.

In contrast, households have fewer buffers.

The US has many debtor-friendly laws while NZ law is more creditor-friendly: Kiwis cannot get relief from creditors simply by forfeiting their homes as they will be pursued for the shortfall. We keep tightening up financial compliance but it always supports the institutions. Perhaps we should have a look at some American practices which are more consumer friendly.

Americans have less interest-rate risk as they usually get 30 year mortgages at fixed rates. In NZ households take interest rate risk as rates change quickly and long-term mortgages are rare. A visiting American research fellow has observed: "the allocation of interest-rate risk to households seems inappropriate and inefficient. Financial institutions can support or transfer this risk in capital markets at much lower cost that households can hedge it". Ibid page 45.

NZ should be more like Denmark.

It has long-term, fixed rate mortgages, incorporating low cost prepayment opportunities. We should have them too, but we are suckers.

--------------------------------

* Neville Bennett was a long-time Senior Lecturer in History at the University of Canterbury, where he taught since 1971. His focus is economic history and markets. He is also a columnist for the NBR.
nevillebennett@clear.net.nz
www.bennetteconomics.com

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Perhaps you could go even further Neville and say 'criminals'. That is what it is when you participate in something fraudulent, which is our money supply.

Haha, great piece that shoots straight!

#7 If we look back to the 'Ten Books on Archicture' by the Roman Vetruvius they contain sound adive on how to locate a town. We seem to think we know better?

One of the lessons we should be taking away from the ChCh Earthquakes, is that risk mitigation should be a higher priority than "dense urban form". "Dense urban form" in high risk locations (like on all the faults in Wellington) is just setting your nation up for a massive "fail" one day - not a question of "if" but "when".

Call it Karma, Nemesis, Fate, whatever - NZ is "playing chicken" with it.

Wrong lesson to take away from Christchuch and also recent events in Japan. The truth is it perfectly possible to build tall buildings in central cities that hold up under massive earthquakes. It is a matter of a well-regulated building code and pro-active enforcement. Certainly doesn't validate your aesthetic preference for suburban sprawl.

That could prove one day, to be a "Titanic" mentality. ("Even God couldn't sink this ship....")

But regardless of that, there are numerous forms of disaster, and it is ridiculous to deny that low density, dispersed population, would represent mitigation of risk of all kinds. Especially in Wellington.

Hane is right in terms of seizemic, I would add psychological risk to your other forms of disaster.  Anything above four stories is injurious to mental health it really isn't necessary to go higher.

Ten stories is the worst in terms of the wave period because taller buildings become longer than the wave and absorb it.

I would love to see the report on the CTV building as from the pictures is looks like the staircase held up okay. That looks to me like it wasn't sufficiently isolated from the rest of the building and so centred the bracing at one point, leaving rest of the building to throw itself apart.

With regard to density or expansion, I have watched the green belt around Christchurch dissolve, hence Bexley, Brookhaven etc. It isn't as though developers are immune to building wherever they can make a profit and run.

Oh, yes, developers are like Jews in Nazi Germany. Never mind "demand", or that the proles need places to live.

The result of this mindset, ironically, is that more and more money is made in capital gains in land prices, (until the crash comes) while actually building houses for people is becoming higher and higher risk, and with little profit either way.

We can have affordable houses with developers making little profit (because of competition), or we can have unaffordable houses with land bankers making a killing and developers still making little profit (because they are squeezed between what people can afford, and the land prices).

Bottom line: it is the people who rake in the capital gains who decide whether housing is affordable or not. The developer is just poor b----y convenient scapegoat for the eco-Nazis and the racketeers to blame.

Ahhh, great news. Neville Bennett is turning his considerable powers of analysis to this issue. I don't know where to start with commenting on specific points. A great analysis, Neville. Perhaps you are going to move on to look at the role of "supply" now?

Perhaps the banks in Denmark do not get criticised if they "self police" regarding how much they will lend people? If our banks "self policed", they would get prosecuted under anti-oligopoly laws. Same for the USA. What are banks supposed to do when a bubble gets underway thanks to distortions in the market? Are they supposed to quit the industry and lay off their staff until sanity has returned?

I would love to look into how the "supply" side in Denmark works, and whether they have successfully avoided having a house price bubble.

Bust follows boom. Buy when the shockwave from the bust has gone by. Sell when the media scream boom and before an election is over.

Looking into the Denmark situation a bit more, it looks like they have had as bad a house price bubble and bust as anyone, and slow response of "supply" is implicated again.

http://www.oecd-ilibrary.org/docserver/download/fulltext/5kgk9qhrnn33.pdf?expires=1315890390&id=id&accname=guest&checksum=6BC970317E8850A1CB7D7F5EE942EC1A

It is the speed of responsiveness of supply that is crucial. Late, large quantity responses (after prices have risen - the response is often chasing the higher prices rather than the underlying demand that started the process) only make the eventual "bust" worse.

While Neville is partly right that long term, fixed low interest rate loans make buying a home safer; an even more important point that NZ-ers need to stop being suckers over, is that a smaller mortgage at a higher interest rate is far easier to pay off, even regardless of future interest rate movement risks, than a larger mortgage at a lower interest rate. The wealth transfer from you to the banking sector, is lower under the former case, and higher under the latter. Look into this, Neville -  I am on the level. (I am a poet and didn't know it).

I have also started to strongly suspect that the land "supply" issue is one area in which regulatory distortions to markets, has caused the finance sector to enlarge at the expense of the "main street" economy.

It all makes sense. For some it may even be good advice. Nevertheless I'm not in any great hurry to sell up.

I'm retired, with a modest income on top of New Zealand Super and I own my own house. I'm quite comfortable.

Like the vast majority of people I learned too late about the intricacies of investment, exponential growth, and leverage. Anyway, if we were all entrepreneurs there would be no profit in it.

:)

If I had not raised a mortgage I would not have a house. My small excess of income would be going to a landlord. Many retired Kiwis who don't own their own houses are living lives of quiet desperation.

The alternatives for the financially unsophisticated are hopeless.

  • I can put money into Rabobank and on present rates, after the IRD take their slice, it will double in about 17 years. Taking inflation into account it may well be worth less than it is now.
  • I can throw myself on the mercy of someone who knows more than I do - like my wife's Kiwisaver account in Garth Morgan's "Growth" fund which, despite a recent spurt, is still worth less than has gone into it.
  • I can go and live with the kids.
  • I can become a sharemarket investor. But as you sophisticates are well aware, without a specialized knowledge or uncommon good luck, I'm unlikely to do too well out of it.

I'm very happy with my house thank you, as are my home-owning children and my house-buying grandchildren.

Perhaps what you don't see is that by having a mortgage you have participated in getting us to the debt problems we face today.

If everyone refused to take out a mortgage then the prices would not rise, well not as fast anyway. By borrowing leveraged money you have played a part in forcing prices up. 

I bet you think that you have never been suckered into a pyramid scheme, well unfortunately you and your family have.

I may be economically naive, but I'm not totally ignorant. The debt problems we have today were not an issue when I first raised a mortgage. For starters I couldn't borrow without a 20% deposit - that tended to keep the banks under control.

Our present problems arise from a failure of regulation, not a failure of the system.

A capital gains tax, minimum cash deposits for real estate purchases, and regulations to limit the existing amoral hire purchase practises and credit card excesses would go a long way to fixing the system while still allowing ordinary people to gain a foothold in the capitalist system by owning their own homes.

In the world you're envisaging we end up with 90% of people living in houses owned by overseas investors and the money manipulators.

I can't accept your reasoning sorry Alan, just because the terms 'seemed' more sound when a 20% deposit was the norm doesn't make it so. All that means is that you were earlier to enter the pyramid scheme rather than later. You may have one out, in that your first home may have been prior to the exit from the gold standard in 71.

The relaxing of credit terms just means that the pyramid was entering the later stages and needed more tools to get the last few suckers to buy in. But you can't go past two incomes and 100% mortgages, so the chickens come home to roost soon.

It is not a failure of regulation, a fiat currency is flawed from the outset. All fiat currencies have failed, with the average life expectancy of 35 years. The fiat currency has been bastardised even further by allowing fractional reserve banking.

To remain guilt free of involvement you would need to withdraw from the banking system, except perhaps for transcactions. No deposits and no loans. I have done it, why can't you and your family.

You may have missed this link posted the other day about renting and real estate prices. 

You have children scarfie?

Indeed I do, why do you ask? Are you looking for excuses and think having children provides one?

So do you want a capitalist system or don't you?

If it is based on debt then by the very nature of the word it isn't capitalism. Think about it.

I think if you dig back further you will find the same problem at the heart of the matter. The masters have just changed from barons to bankers.

Most also fail to see the fundamental differences in the way people think & act. Personality type can be very successful in predicting the way people will behave, finances included. Some people are simply not geared towards the accumulation of wealth because they are focussed elsewhere. Artists, musicians and even your humble nurse.

You want to be careful about throwing around that naive tag.....

You actually just proved my point with that nonsense. But my guess is you are too arrogant to get it.

It is you that is using the fallacious arguments and are now completely off the point. Showing yourself as an academic type that likes to dress your argument up in an attempt to display some sort of intellect.

 

Your first words to me A rather nieve view there scarfie. 

 

Ah, someone who knows a bit about the history of property ownership.

Consider this: without decades of bringing agricultural-rent land into the urban economy on the fringes, and keeping urban land prices down to a level determined by agricultural rents; why would rising incomes not have steadily capitalised into rising property prices; and how would the ownership of urban land have ever been "democratised"?

You are wrong about the means by which the centuries-old class system of landowners and renters was finally broken down. We owe it all to sprawl. Fact.

As long as urban development is strictly controlled, it can be captured by powerful interests. If we had had as strict controls as we have today, all along, we still would all be renters, renting off a few powerful land owners. Instead of just owning London's core, the "London Dukes" would own the whole of London. A free market in urban development beyond the fringe, is the only way in history that this "class" has ever been beaten.

It is worth reading Fred Foldvary: "A History of Ground Rent Seeking in the USA". Urban development based on radial rail routes was always captured by powerful speculators. It required "automobility based sprawl" to beat them.

We are seeing today, economic growth nations like China and India, having their socio-economic progress derailed by this very phenomenon. No nation is going to match the first world's progress without using "sprawl and automobility" to beat the landowning class. And the first world's progress will end (and already has) because the racket in urban development has been re-instated in the name of environmentalism. Environmentalists are the land racket operators useful idiots.

Prof. Bernard Freiden wrote "The Environmental Hustle" back in the 1970's just as this stuff was getting going - he saw through it.

So would I be right that the development you talk about happened in the absence of fractional reserve banking? Or fiat money?

What about New Zealands case where a large percentage of coast compared to land mass made transport by water accessable? Bicycle and good?

All sorts of questions.

I look at zoning as a failed theory by modernists, but it seems to have its application in class war. Is zoning a way for banker/developers to try and gain the upper hand again?

Nothing new in this so called "analysis". Property investment, not unlike any other investment, is not risk free and has its specifics that a prudent investor should be aware of.

Signing off for a while - sorry if I have hogged the thread a bit, but I want to point Neville in a promising new direction. I posted the following comments on another thread yesterday:

Alan W Evans was for years the Director of the Centre for Spatial and Real Estate Economics at the University of Reading in the UK. He had 2 books published in 2004 which should have made him famous: "Economics, Real Estate and the Supply of Land" and "Economics and Land Use Planning".

I quote:

"....the planning system has had a significant economic impact on the UK economy since it came into effect 50 years ago, and that as a result the British GNP per capita is lower than it would otherwise have been......This negative impact is not usually noted by economists seeking reasons for the low rate of growth of the British economy, but that is because few economists have any interest whatsoever in planning. Their whole training leads them to ignore matters related to land and location, so they tend to consider only those factors conventionally considered "economic" - investment, training, labour relations, management, etc. But since the planning system is designed to restrain physical development, it would be strange indeed if it did not restrain economic development as well...."

Evans' conclusion at the end of "Economics and Land Use Planning", is that

"....though welfare economics can justify intervention, the intervention that does occur is not of the kind justifiable in this way. Therefore, an altogether more difficult problem faces the economist analysing planning - to indicate the way in which the intervention that does take place, actually REDUCES welfare. It is a more difficult task since, however correct may be the arguments marshalled by the economist, the intervention that does occur is electorally popular and for that reason, unlikely to be changed. To point out the costs of the policies pursued, and that they benefit the vocal few at the cost of the many, is therefore an unpopular course for an economist but one which is very necessary, in the hope, but not the expectation, that some improvement can be made".

Anyone who reads those 2 books, knows more about urban economics than 99.9% of economists, and 100% of urban planners.

These books absolutely should be the required text books for any degree course involving urban economics and/or urban planning. And that should mean, every economics degree course and every urban planning degree course.

Not learning urban economics properly, and then embarking on a career that intersects with urban economies socio-economic outcomes, is like becoming a scientist without learning the periodic table of elements. Yes, it really is this stupid. The mess our economies are in today, and the utter lack of any coherent explanation or remedial advice, is the evidence.

Farewell green and pleasant land (Hello Koch Brothers)

Forget ‘community plans’, it is big business that is set to gain from the weakening of local government’s planning role

Imagine a country where big business is preparing to pounce on prime development sites, unimpeded by town hall officials branded ‘enemies of enterprise’ by the prime minister.

In this ultimate free-market world, long-cherished checks and balances that are meant to protect the English countryside from the ravages of US-style sprawl – namely, the planning system – would be effectively scrapped.

http://opinion.publicfinance.co.uk/2011/06/farewell-green-and-pleasant-l...

What a bunch of twits those Poms are.

Green belts benefit a well-placed few at the expense of the young, the lower income earner, and the economic future of the nation. Without land use law "reform", Britain's economy is doomed to under-performance and stagnation, and socio-economic pressures will be continually worsened. (I am the first to say that personal responsibility matters, but I am prepared to see something in the mindset that results from knowing that one will never be a property owner, regardless of how modest. I understand the average age of a first home buyer in Britain is now 39). By the way, the Japanese economy has hit a kind of "limit" due to the same effects - and Japan is far more highly populated than Britain. Britain can avoid these consequences if it had the wisdom and the will to do so.

Because of basic geometry - green belts are outside the circumference of a city - Britain's green belts contain approximately the same amount of land as is "urbanised", and which took well over 100 years to develop to its current stage. All the negative effects of arbitrary growth countainment behind a boundary could be avoided for well over a century, by allowing development on half the the area currently occupied by green belts, with the other half preserved as enclaves of green space rather than "belts". Development outside the green belts could also be allowed other than in areas to be preserved as enclaves. Enclaves do not have the negative effects that a "choker" ring does, and result in far more democratic access to and enjoyment of, the green spaces.

It would be possible for a country like Britain to double its urban coverage and improve the access to and the enjoyment of "green space", for the most. (In fact, it would probably be possible to triple and quadruple the urban land coverage and improve the access to and enjoyment of green space, for the most). The current planning system is highly inequitable in its outcomes. It is "green space for me, but high-density squalor for thee". Britain is currently around 8% truly urbanised, with green belts being another 8% of the total land space. (Source: the Lincoln Institute's Atlas of Global Urban Land Consumption). People's perceptions are highly distorted by the view they get "driving around Britain". One needs to take the "Google Earth" approach to estimating urban land coverage.

If strategic considerations of being able to feed one's population are valid, then Japan invading other countries to secure the necessary farmland for their population, would be valid too. It is actually just as cheap as long as peace reigns, to import food as to produce it domestically, especially under sub-optimal climatic and political conditions.

The Netherlands is another nation that can claim to suffer from shortages of land. They too have very strict anti-sprawl regulations. The difference between the Netherlands and Britain, and what has made their economy largely escape the negative effects that I mention above, is that they have used "powers of compulsory acquisition" to keep the price of land for urban development, low. In Britain, the planning and permission system creates inflation in the value of land when rezoned from agricultural to residential, of a factor in the hundreds. It is now common, in Britain, for negotiations to drag on for years, between land owners, developers, speculators, financiers, the local government, consultants, lawyers, local interest groups, etc - regarding who will get what share in this "planning gain".

This is far more immoral than the worst of the infamous "pork barrel politics" of Chicago, only bowdlerised, in full view, and even "respectible". Of course, "the environment" is being preserved, sprawl is being reduced, and a whole host of high sounding reasons are marshalled to bowderlise the racket. The "benefits" accrue in large amounts to a few, the claimed benefits for all are illusory, and the ultimate negative impacts on the vast majority of the population, are considerable.

And they have the idiocy and the hypocrisy to frame the pro-reform argument as "playing into the hands of fat business interests.....". Oh well, its often the way with pea-brained socialistic thinking.

"Green belts benefit a well-placed few at the expense of the young, the lower income earner, and the economic future of the nation."

To start with those greenbelts have been there a long time and NZers choose to have such things instead of turning our cities into over-developed cesspits....its a choice we make.  So this is your opinon as a libertarian....it isnt mine.

Economic future, again this is your opinon and want as a libertarian....it isnt mne....or it seems quite a few NZers. (that is if it wasnt wanted it would be voted out).

Not to worry the coming depression caused by the BBs and the bubble they caused by the explotation / greed will see that value wiped out and prices back to the norm.

regards

So what your saying is that someone wrote some books you like.  They should have become famous, but inexplicably haven't.  Anyone that hasn't read these books you like is an ignoramous and knows nothing.  Anyone that disagrees with what's in these books you like is also an ignoramous and knows nothing. 

Yeah, there is no chance Alan W Evans is another Galileo, Newton or Einstein. We must be on our guard against such a dangerous thing as wisdom. Especially in the aftermath of a global series of housing-bubble related economic crises that no-one yet has credible solutions for, apart from a few people we sneer at rather than listen to.

We have a competitive and open residential lending market and , as Neville says the banks are keen to lend against housing.

If any lender thought long term fixed rates with low impediments to exit were a good way to grow the book, I am sure they would be out there. Reason they are not is probably something to do with ratings agencies and the way they look at duration risk for a lender.

As someone once said ( maybe Paul Keating?) the only thing worse than banks making too much money is banks making losses. Ask anyone you know from Ireland or Iceland.

I have recently read a bit about Danish mortgages. If my understanding is correct the mortgages are funded by long term bonds issued against pools of mortgages at fixed rates (covered bonds essentially). Borrowers have the right to purchase the bonds back at par or at market value at any time thus if interest rates rise the bond can be bought back at a discount. This can mean in a falling property market (and lenders requiring a higher interest rate to compensate for extra risk) the drop in value is shared between the lender and the borrower.

Specialist institutions called MCI's not banks are typically the issuers of the bonds but banks may provide small second mortgages as there is a requirement for a 20% deposit.

The system has coped with falling property prices without major damage to the MCI's.

Neville Bennett, please take your "low rate, very long term fixed mortgages" and p**s o*f. This is only going to inflate the cost of houses further and transfer more national income to the financial sector. This is exactly what has been happening as lending terms have been extended to get us into this mess. Housing used to cost 2-3 times annual wages meaning a house could be fully owned after 10 years, and these days it's 5-10 times annual wages meaning a house is owned after 25-30+ years.

You can take your condesending "mortgage borrowers are suckers that need more creditor friendly laws" and s**ve it  as well. Though you might want to change it to "debtor friendly" laws which your article is talking about. I don't think anybody needs to be condescended to in this manner while being expected to accept that "Banks are drawn into excessive exposure to housing because it tends to be more profitable than other assets.". If the sophistocated financial system can't see a global crisis coming and end up being accidentally drawn in you can hardly condescend to individuals.

"low rate, very long term fixed mortgages"  My understanding was that some countries such as the US had 25 years fixed term mortgages?  that didnt cause the madness until the last 15 or so years.  Depedns on what you mean by "low" of course....say 6 or 7% fixed for 25 years might appeal to some....maybe even me.

regards

This is a systematic choice, not an individual one. For an individual the choice is

a) Pay rent to an inbetween party taking a percentage and probably supporting a large mortgage to the bank.

b) Pay the mortgage directly to the bank for an expensive house (the cheaper but more risky of the two).

There are no more cheap houses, and if you have any insight into how the financial system works, it becomes obvious that mortgage lending causes house price inflation directly. The converse is also true, as people repay their existing mortgages and stop moving up the property ladder house prices drop, especially if they are in a bubble.

Anyway the main cause of the financial crisis was extended terms of lending (allowing the financial system to make larger loans and profits as home buyers out bid each other) creating a massive debt bubble in the US. Eventually this burst causing the financial crisis.

The suggestions of Mr Bennett will lead directly to the next and bigger crisis, this sort of solution is called 'kicking the can down the road'. Fix the financial system, it's the only reasonable choice.

 

Excellent Neville. This is a fascinating area. There is a massive imbalance of power here. The credit owners and their agents are protected at the expense of the equity owners. The banks end up with the surplus our society produces. The productive sector shrinks and the finance sector grows. We all end up poorer.

All rather unfortunate really.

Yes, about sums it up. However we did do it to ourselves.....we did have the choice not to play the game, but greed got in the way.

Maybe the Arabians/Muslims had it right when they said money shouldnt be lent with interest....

regards

Until governments worked out how to debase the currency, the price of anything in gold (or similar standard) consistently went down. This is because there was a stable amount of money chasing more and more goods. This is why, for most of the history of money, smaller and smaller units had to be introduced - the opposite of what we have been doing in more recent decades, abolishing the smallest units.

The effect of this, was that if someone lent money, it would be worth more anyway when it was paid back, and interest was unnecessary. So it made perfect sense for the ancient Mosaic law (which the Muslims recently copied since) to describe interest as "usury", and forbid it.

Debasement of currency was a term used to describe what was done to silver and gold coins by successive Roman emperors - well before government as we know it was invented.

A gold standard is not a guarantee against currency debasement.

European christian nations tried it for hundreds of years but it ended up with some unintended consequences.

"There are times when I feel that home buyers, who mortgage themselves to the hilt, are suckers."

Is the issue "home buyers" or "mortgaged to the hilt"

If the subject is "mortgauged to the hit" yeah yes piont taken.

A home buyer who buys sensable with a reasonable deposit ineffect enters into a long term investment which ineffect becomes a complusery saving, and establishes a secure place to reside/rase a family....without having the 'home' if rental sold out underneath them, and able to knock a wall out, paint , hang pictures etc.

Nothing wrong with that.

We particularly prize dangerous locations and pay a premium to live by a river, seaside, or on a cliff

Yes there are risks, but lets face it , the number  owner owned "homes" in NZ compared to the number that have issues is very few..and then we can eliminate so many of them...Not do what an Ex long standing Auckland mayar did.....build his retirement dream home on a clift that has has subsidence issues for 50+ yrs..then complain !!! a local mayor of this standing ..its unbelievabe could happen.

Lets look back to our forfathers..would build just over on nth side of ridge, on high ground, with water...or if on the flat, high piles... not next to a river , or right on a clilf or right on the sea side.....Its funny how these people who do are those who buy this very expensive , stupid real estatle, and seem to have no trouble claiming insurance.

Globle warming, riasing ocreans, predictable disarster looming, yet we still build on sand dunes and clifs.....can only be described as educated stupidity..

There is nothing wrong buying ones own home...If use commonsence...which our devalopers, banks, builders, archetics and their University educations  seem to lack in incredable amounts.

For once Im not in full agreement with Neville..yes I see wher he is coming from , I see his piont, but righting off buying ones own home because of these reasons is not logical...On the other hand if written as "Things to be awere of when buying"  that would be far more appropiate.

You are exactly right - "mortgaged to the hilt" is the problem.

But put yourselves in the shoes of a young person working hard and saving for their first home, with prices rising faster per year, than what they can save - and this on a decent income, too.

The wise thing, financially, is to become a renter instead of a buyer, and wait for the prices to resume sane levels. This can take more than a decade. It might take more than 2 decades.

Meanwhile, you are barraged with spruiking from your parents, relatives, possibly the girlfriend too, the banks, the RE agents, the media, etc etc and told what a fool you are not to own your own home.

"This can take more than a decade. It might take more than 2 decades."

The time period would seem to be the one area of contention, it could be as little as 3~5 years.....Japan is taking 2 decades but it slumped while the world carried on, now its the World....

If you work on Peak oil causing massive disruption and a chnage of attitude globally then I cant see 20 years of decline.....and then there is the Great Depression a global event that hit bottom in 3 odd years....

"fool" well if you act like a lemming and blindly accept what ppl tell you, more fool you.

"mortgaged to the hilt"....and at that point it takes years to be able to get room to maneuver....or you crash....and if you go into neg equity, you are finished you might as well default...and go bankrupt...its quicker to get out of.

regards

".....The time period would seem to be the one area of contention...."

I agree that it is an "area of contention". I also think that there is never going to be a "science" that can be relied on to forecast time frames of bubbles and crashes.

But "the one area of contention"....? Hey, there are still people out there who regard the housing market in Australia, let alone NZ, as "not in a bubble".

The "cause" or "causes" of these bubbles also is still an area of contention, completely unecessarily if one honestly examines the mounting evidence from numerous bubbles over decades. The one essential precondition is low elasticity of new housing supply. The second-tier condition, is a demand shock of any kind. If the essential precondition is satisfied, it is a question of "when", not "if", a house price bubble will occur. A housing market with no demand shocks is rare.

I tell you in all honesty Philbest...were I 20 again and facing this wall of financial shite...I would be away to aus in a flash and work at anything to pay for a prospectors outfit...not a donkey but a big grunty Toyota and trailer outfit...and I would go bush and bugger being a serf to a bloody bank wasting a lifetime in some crap occupation.

Wolly, you were pretty close to describing my own sentiments. But I'd do my best to get into the USA and find something to do like what you describe, only without going bush, in a heartland State. Housing affordability bliss, even while you work.

Wolly: You should check it out. Lot of opportunities for grey nomads in outback remote communities. One of my clients is a retired professional and he goes bush twice a year for one month at a time up the far north. Flys in, flys out. Good pay. Required: pair of shorts, pair of thongs, a tee-shirt. Plenty of time for other things. 

Yeah the temptation is awful icon. Family matters prevent me doing that. Thing is I don't need the gold...I did need it when I was 20...but back then the detectors were crap and the price of gold also. I would be eating the flies for no good reason.

It's a young blokes game mate. The nuggests are there to found.

What a load of rubbish. Seeing prices doubled from 1999 to 2007, obviously 2007 was not anything like "as good a time to buy" as any other.

It is not hard to predict that mortgage foreclosures and bankruptcies will be much higher in the cohort that bought at the top of a bubble cycle. That is how it works everywhere this has happened.

Your kind of advice just leads young people to ruin in an age of house price volatility. You should be ashamed of yourself. I am sick and tired of reading preachy stuff from people who tell us how wise, thrifty and hardworking they were, and how young people today are just whingers - when the previous generation had house prices 3 times incomes; if you go back far enough, there were subsidised loans from the govt, and mortgage interest write-off on your tax return.

All these conditions of "easy credit" did not result in endless price inflation as long as there were no greeny and NIMBY assholes screwing it up for the young.

I said way back up near the top of this thread, that a low price at high interest rates is much safer and less costly than a high price at low interest rates. So I am definitely NOT saying that people who borrow at a high interest rate will be ruined; nor did I say that. I am talking about the price of houses under a bubble situation.

The people who once bought LOOOOW priced houses at 20% plus interest, would have committed themselves to LESS of a payback to the bank over their lifetime, even at the time, than the people who in 2007 and since, were committing themselves to at low interest rates for a HUUUGE loan. And when interest rates are over 20%, what is the likelihood that they will go higher, or lower, over the course of the borrower's term?

The people who bought back in the 20% plus interest rate era have come up smelling of roses big time. In any case, there were government subsidies and tax breaks then.

But when interest rates are historically and artificially low, what is the chances of them going higher, or lower, over the course of the borrower's term?

I stand by my point; that in every bubble nation and State, there have been elevated rates of foreclosure and bankruptcy correlating pretty directly to how high in the price cycle people bought in. Low interest rates are just a honey trap.

Distorted urban land markets and inflated land prices are themselves the means of slowing the economy down and causing a crash. Economies have found a historical normal equilibrium between urban land prices and total incomes. I do not believe that any economy in the world is going to sustain a distortion of that, for ever.

Look at Britain's house price cycles since 1947 (the enactment of urban growth containment). And the British economy is stuffed. The land price issues are something that the economics profession has largely missed.

THIS blog posting from the London School of Economics' "Spatial Economics Research Centre" is a useful summary of the very latest advances in analysis of this issue, with links to the relevant papers:

 

http://spatial-economics.blogspot.com/2011/07/productivity-every-little-...

 

Those people are probably the most advanced in the world, in analysing this stuff.

"But put yourselves in the shoes of a young person working hard and saving for their first home, with prices rising faster per year, than what they can save - and this on a decent income, too."

Well I have mentioned my Son , Wfe and family before...Bottom line..load od crap

If u want something , doesnt matter if 1800s  or 21st century u WILL get it..just depends what one is prepare to sacife to get it...My Son is cummunting to and from Aussie, working 6 weeks on 1 day off pulling 60 to 75 hr weeks....why because he and his wife want a secure and safe home...

And at this moment His wife , myself, her parents are looking at houses, seriously....for them. They havwe no intention of over borrowing, in the upper levels of rental market, with thr intention of being their 1st home, clear most of the mortgauge, keep as a long term rental and buy their home in about 2 1/2 years.....no quailfications hard work and both prepare to sacifice for a few yrs....

Hmm that rings a bell..thats what my generation did 40 odd yrs ago

There are those who gristle about stuff and those whio just get on and do the job....too many bloody windgers these days

Steptoe: You're wasting your time. You must be a home-grown kiwi. The BBBs (BB bashers) are all blow-ins (plus Hand-Grenade-Hiki and his Tonto Chaston) who both wage the war. Suspect they are being paid to run that campaign. You don't see any pakehas and waka blondes carrying on about it. They remain strangely silent. It's just the blow-ins.

All this preachy stuff fails to "get the reality".

Even if everyone works equally hard as everyone ever did, when house prices double relative to incomes, SOME increased proportion of the younger generation is NOT going to be able to afford a home at all, and ALL of those who DO still get one, will be deeper in debt for most of their life, than their parents and grandparents generation.

A yuppie couple will now be working their asses off like a blue collar worker 40 years ago who bought a home on a single income. And the blue collar worker now.....? Why should he even hope? I suppose he might make it by the time he is in his 40s, and times it right during the bottom of a bust.

 

Yep, he did a nice interview on Keiser report the other day

http://rt.com/programs/keiser-report/episode-182-max-keiser/

Got Gold or Silver?

 

We are all screwed, basically.  Nothing has been fixed.

 

World Financial collapse explained in 3 minutes.  Hilarious!  Just goes to show how stuffed we are!  http://www.youtube.com/watch?v=NOzR3UAyXao&feature=related

 

Donald Trump takes deposit payment in gold bars

http://www.zerohedge.com/contributed/trump-apmex-and-goldilocks

 

I'm still lurking around this board from time to time.  It seems that a few people are waking up, if not too late to do something about it?  People are scared, but self-absorbed, at the same time, methinks.  Nobody was talking about any of this a year ago. I will maintain today what I recommended a year ago - metal as an insurance policy.  The suggestion is usually ignored, it seems, until now, since prices doubling.  The money printing is only getting started.  I think we are at the stage now that protecting one's wealth is less of a priority as protecting one's life and sanity.  Storing food may be a better use of paper money at this point, because it's only going to get costlier.  

China can't bail-out the world.  So where does the money come from to bail everyone out?  The US dollar is up, but for how long?  This is more than just a Lehman Brothers event, this time.

Donald Trump, telling it like it is, and why it will get so much worse.  Where are the real solutions going to come from?:

 

"We are going to be gifted with a Health Care plan we are forced to purchase, and fined if we do not, which purportedly covers at least ten million more people, without adding a single new doctor, but provides for 16,000 new IRD agents, written by a committee whose chairman says he does not understand it, passed by a Congress that did not read it but exempted themselves from it, and signed by a President who smokes, with funding administered by a Treasury chief who did not pay his taxes, for which we will be taxed for four years before any benefits take effect, by a government which has already bankrupted Social Security & Medicare, all to be overseen by a Surgeon General who is obese, and financed by a country that is broke!! What the hell could possibly go wrong?" ~ Donald Trump