Westpac sees red flags for the economy in high and rising household debt levels on the back of low interest rates and high house prices

Westpac sees red flags for the economy in high and rising household debt levels on the back of low interest rates and high house prices

Westpac has warned New Zealand's household debt is rising at a faster pace than other developed countries and this could put a brake on long term growth.

A Westpac Institutional Bank IQ Report on household debt prepared by Westpac senior economist Satish Ranchhod said a build up of household debt was one of the key issues confronting the New Zealand economy. Ranchhod made a similar point as recently as April, and Westpac's chief economist Dominick Stephens also rang alarm bells last month.

In his latest report Ranchhod said total household debt was equivalent to 163% of annual household disposable income, with much of the recent growth in lending secured against housing.

"A key contributor to this trend has been historically low interest rates," the report said.

"Low interest rates have provided a powerful boost to asset prices, particularly for housing."

And house prices had been boosted further because housing supply had not kept pace with population growth, particularly in Auckland.

"And as has historically been the case, strength in the housing market has seen some home owners spending some of the windfall they perceive when the value of their home rises, while aspiring buyers must borrow more.

"The net effect is an increase in both borrowing and spending," it said.

That did not mean the economy was about to topple over, because low interest rates meant households' debt servicing costs remained modest 

"Nevertheless, the build up in household debt still raises important concerns for the longer term economic outlook," the report said.

That was because rising household debt couldn't boost growth indefinitely, because households would eventually need to repay their debt, which mean more of their income would go towards debt servicing at some stage.

And higher debt levels also made the economy more vulnerable to unfavourable changes in economic or financial conditions.

"In this respect, there are some red flags on the economic horizon," the report said.

Maximum interest-only lending terms reduced

Separately, Westpac has announced it's reducing interest only lending terms from 15 years to a maximum of five years as investors continue to dominate the housing market.

"Reserve Bank figures released late last month show more than 40% of new mortgages by value are interest only and in Auckland 47% of the lending in May was to investors," the bank said in a press release.

The reduced term for interest-only home loans is to provide customers with a check point at the end of the interest-only period to assess if they are still comfortable with, and able to meet their obligations, the release quotes Simon Power, the general manager of Westpac's consumer bank and wealth, saying.

“With the way market conditions are we see this as a prudent and timely move. The last thing we want is for customers to overstretch and get into difficulty while interest rates are at historic lows,” Power said. “This gives the customer the opportunity to reassess their needs and financial situation.”

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10
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There's so many "Red Flags" in NZ's economy .... most of the people must be colourblind! Oh! Need some funding for that!

The RED FLAG New flag referendum!

Borrow Glares (sunglasses) from national and will not be able to see any Red Flags but only stupid people who are out shouting and giving warning.

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When the tears come nobody will be able to say that there weren't warnings. Plenty of red flags, yet what I hear on the street is complaints from first home buyers because "they cannot borrow more since they haven't saved enough deposit".
No, the fact that houses increase by $3,000 is only a problem when you are not already a mortgage owner, and that's why the "problem" seems to be that it's not easy enough to access further debt.

Great future for NZ!

When common sense fails maybe it's time for a government and central banks to take action?

I'd say the opposite...how often have government and central banks shown common sense? Answer: almost never. The central bank is destroying savers and pension funds and the government seems to be on a Stalinist path to central planning....how much more of this lunacy will help us is beyond me. Perhaps you'd care to elaborate...?

Let us not loose sight that as a country we are only 4.5 million people - Surat, a city in India has the same number of people.

A top US regulator has sounded a new alert over banks’ commercial real estate lending, adding to concerns that bubbles may be forming in parts of the country’s property market. Read more

Are NZ's over indebted immune this time round, given the US regulator might as well have yelled 'FIRE'?

"And as has historically been the case, strength in the housing market has seen some home owners spending some of the windfall they perceive when the value of their home rises, while aspiring buyers must borrow more."

Well, No law can protect fools, So is it up to the banks now to control people's spending habits?? what's coming next ?? this is really preposterous .... if people chose to spend borrowed money they don't know how to repay or borrow to spend on leisure, then they will learn what burning fingers feel like, the hard way ... why should everyone else suffer because of these clever duds?
But that is NZ , can take the whole country down for the sins of a few idiots!!

This issue will drag on and on until Sept next year .... Crunch time!
It is sad that "Everyone" involved is taking this matter as competition and political account settling contest instead of putting their heads together to find a practical solution to it .. Pitty !!

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Again, you completely miss the message of the article. I'm beginning to understand why JK and BE disseminate the rhetoric that they do.

The banks aren't protecting the masses/'fools' - they are protecting themselves.
There is no altruism here, simply prudential risk management on their part.

I did not say or mean they are protecting the masses , in fact they are controlling the masses and there is a big difference , although I don't believe that there are huge numbers of these kind of foolish people who borrow to spend to make a dent in the market ( compared with cash buyers). It is counter intuitive that the banks are worried about their customers (like a barman) ... and the move to reduce interest only period mostly effects property Investors who are there for the long haul.
I think the whole things started looking like a circus !

...

Do you ever read what you comment?

has happen before, in 2007 a fellow workmates husband was rung up by the bank and asked if he wanted to increase his mortgage as house prices were soaring, he did and went out and brought himself a new car, when she found out mad was not the word, so to appease her he brought her a new car as well. then came 2008 2009 opps they were now under water and the bank was no longer friendly.
eco bird is right a fool and his money are soon parted and banks are not your friends they see you as a money machine, and when economies change thats when people find that out

Please ask finance minister if it is a warning or not as no one but them will know for rest have no understanding and intelligence as national leaders have

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I love it. Corporations, whose sole raison etre is to make profit, are acting more for our interests than the people who are meant to be looking after us - namely the government. Beyond crap.

No. Westpac is simply covering its ass. You have to think about the motivations behind the message. Westpac doesn't love you or care about your well-being more than any other institution, including the govt.

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That was my point. A blood sucking Ozzie bank acting purely in its own interests has more of a positive effect on the people than our government who are meant to act for our good. Doesn't give us much hope in our leaders.

OK, but I'm not sure that Westpac is perceived as being any more benevolent than the govt. It's simply about how they want to be perceived. The govt cannot deliver similar messages as it conveys that they're irresponsible.

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Westpac complaining about debt levels seems like a barman complaining there are too many drunks in their bar.

In relation to alcohol, Westpac is more like the Woodstock brand. Get em while they're young.

"In his latest report Ranchhod said total household debt was equivalent to 163% of annual household disposable income, with much of the recent growth in lending secured against housing.

"A key contributor to this trend has been historically low interest rates," the report said.

"Low interest rates have provided a powerful boost to asset prices, particularly for housing."

So why not bite the bullet and raise interest rates. Yes there will be tears in some quarters but somehow sometime debt has to be repaid and rising interest rates would surely stop people borrowing more and more, especially on the "perceived windfall" on the increase in their house value.

Greed is what it is all about, nothing more.

Total household debt was equivalent to 163 percent of annual household income. Auckland house prices and household debt are not ,and should not be interchangeable with New Zealand. Why do all these institutions deny the absurdity of Aucklands household debt, and hide it amongst others as if to deny the reality.

Yes i agree with many comments. And westpacs actions have nothing to do with their own credit ratings now does it. The property market wouldnt be a problem if these banks didnt inflate the market with money they never had to start with. What a complete sham. So are these banks going to buy bulldozers next? They will need a few to demolish all the surplus housing stock which they will suddenly find themselves owners of in the aftermath of this debt fuelled nonproductive economy which we all think is just so great. Its like a harvey norman add... buy buy buy when in reality you know what you are buying is just overpriced crap. Time for reserve requirements to be slapped on these banks before its too late. And interest only mortgages should be banned. There you go rbnz... two policies that you do have available in your blunt toolkit. Now use them.

"The reduced term for interest-only home loans is to provide customers with a check point at the end of the interest-only period to assess if they are still comfortable with...."
Whaaaat???? I thought that the bank would be the one who has to "still be comfortable with" the amount of debt/ repayment ability of the customer not the other way around.
But maybe they are just saying it this way to make it sound less ominous.

I find it rather humorous that we have had two EX reserve bank officials in the last couple of weeks come out and say that house prices should fall 40%, and blame the government.

Well if this is the case why has the RBNZ remained quiet on the issue? Sure they have come out and said they are concerned. But to date they have just been tinkering around the edges.

Are they letting past officials do the dirty work for them. Or is this more jawboning - by stealth?

If the Reserve Bank is that concerned, then this implies that there is 40% risk of a market correction now.

Why then am I NOT seeing:-

a) banks recapitalising; and

b) interest rates rising to reflect that risk; and

c) the banks moving RISK WEIGHTINGS up on residential back mortgages; and

d) the Reserve Bank imposing a LVR limit of 60%.

Or a combination of all if the above.

All of these measures could be introduced without directly penalising the productive sector, or the dairy sector for that matter. So I'm afraid the arguments against dont wash with me.

As far as I'm concerned the Reserve Bank by inaction are directly putting the economy as a whole at risk.

Watch it in all its glory folks. The death of the fiat. The rules of the current system of corporate trade are crumbling before our eyes. There's a lot of smart players, and a lot of games to be played out yet. But for the same reasons we're unable to stop the economic juggernaut from destroying our environment, our economic overseers are unable to halt their descent into the abyss of quantative easing and negative interest rates. Greed is the game, and all the players are at the table. Something something Nero fiddled, something something Rome burned...

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I moved to Akl from Christchurch and last year managed to free up the money from my house. My partner and I earn 500k a year between us. Not saying that to impress anyone, we are fortunate and work hard for our money. We have been actively looking at the utter madness of trying to buy a house in the current market as we are currently renting.
In short we are going back to Christchurch and giving up our well paid jobs in Akl because we are not prepared to pay millions for a bog standard three bed house within a sensible distance to the CBD. Red flags to the economy when top earners are heading out of town because they don't want to rent anymore and aren't prepared to join in the Ponzi scheme. When this blows......and it will NZ is in real trouble and the sub prime will look like child's play in comparison to what it will do to the economy.

I don't blame you. AKL is becoming like almost every other major international city in that to own a full house in close proximity of the city centre is almost impossible unless you have serious wealth. I was amazed when I travelled to South Korea a few years ago- literally nobody seemed to live outside the cities other than the odd farmer.
Part of the reason investors are buying up the property is due to the fact much greater density housing is on the way.

Our situation is very similar. Qualified in a field where I get around 3 recruiters contacting me a week via linked in with skills Auckland desperately needs. Have been in Auckland for 3 years hoping the madness would even out so out 500k deposit wouldn't get hit by a downturn. Now it's not just a case of hoping the market settles to buy, we're moving to a city that should be reasonably well placed when the GFC2 hits. The social and financial problems Auckland is currently dealing with are just beginning.

Self-defeating - Even blind Freddy could see this coming

Two highly skilled people no longer available ... next, employers will complain even louder they can't get the skills ... demand an increased migration program

Next, employers will be forced to provide inbound skilled migrants with guaranteed "suitable" upmarket accommodation which means the corporates will be entering the property market to fill that need

Sanity check your comment is just insane. If you earn 500k you would net around 300k a year right? So you are just giving up the high salaries because you think houses are too expensive in Auckland? But they are not too expensive for you. You could very easily service a large mortgage. With such high earning you must also have a sizable deposit too surely. I don't believe your story.

"That was because rising household debt couldn't boost growth indefinitely, because households would eventually need to repay their debt"
No you don't have to repay your debt, countries and their governments don't ever repay their debts.

no they just default and then rob their citizens to survive. only those that can squirrel their money offshore get to keep all their wealth
https://en.wikipedia.org/wiki/List_of_sovereign_debt_crises

I wonder if the politicians (all political parties) and the rbnz have any real understanding of how money is created. Nothing of what i have seen so far addresses the real issues. All they are talking about if fighting the fire. Not the actual cause of the fire. They rig inflation and make out its low because they exclude housing. How many other stats are rigged? What is the real unemployment rate? Its all a complete sham. Be wary of who you vote for. Political parties no longer act in the best interest of nz. They are self serving. All of them.

As I see it, all the Banks here have the finest deck chairs on the Titanic. And they don't want to get off. They have the remedy in their own hands but hey, that short term bottom line must hold so we will let people borrow more money to buy that over inflated house. And we are just too big to let fail!! Years ago the Banks would only lend on the basis of one income for a family. Certainly the biggest but it was based on only one income. They used to say 'what if one of you lost your job". So old fashioned!

They should bring that "old fashioned" maxim back of what if you lost your job etc. an acquaintance bought a new home with a $500,000 mortgage. Both were earning top dollars. Within the first week of moving in one was made redundant and the other fell ill! Panic!

The mortgage on that currently is about the same as rent. As they still need a place to live they might as well pay a mortgage.

Banks don't care. The moment they overstep and things get out of control ,they go for the bailout clause.
Banks are a business. A very privileged business, because almost all of their customers are voters.
And voters elect the govt, who then appoint the bank regulators.

Patricia - years ago you could afford a mortgage on one income but now it takes two incomes. The cynical persin might say the system has enslave both people in a relationship to having to work just to buy what one income could have bought. As for the banks, if they applied their old criteria they wouldn't be making any "new" loans. Financial ponzi foreshore