The government has been concerned “for some time” about the risks rising interest rates would have for mortgage holders already near debt-servicing limits, Prime Minister Bill English says.
In the end, responsibility lies with borrowers who take on mortgage debt with their “eyes open,” knowing the risks, he said.
And despite potential concerns that some individual borrowers are at risk in terms of serviceability, the financial system as a whole could handle the scenario of mortgage interest rates hitting 7.5%. Rates were also not likely to hit that level in the near future, he said.
English was speaking to media at his post-cabinet press conference Monday afternoon, having been asked about Reserve Bank advice in January to his office detailing the impact rising interest rates could have on mortgage holders.
The Green Party Monday morning released the advice, obtained under the Official Information Act, that rising household debt levels in New Zealand created a vulnerability to rising interest rates.
“Early data from our revised debt-to-income collection suggests that indebtedness is particularly high among new mortgage borrowers, owing to sharp increases in house prices,” the January RBNZ note to the PM’s office said.
Affordability pressures were most acute in the Auckland region, where a typical debt-to-income ratio for first homebuyers was 5.5 times, it noted. RBNZ staff said the fact most NZ mortgages were on fixed terms meant the full impact of rising rates would take time to show through.
“Although this provides time to adjust to higher housing costs, we expect that a significant increase in interest rates would eventually create material financial pressures for indebted households,” the RBNZ said.
The Bank said revised DTI data showed a typical first home buyer outside Auckland was likely already committing about 43% of net income to housing costs. In Auckland that figure was closer to 60%.
“At a mortgage rate of 7.5[%], assuming that incomes and debt levels remain at current levels, these ratios would rise to over 50% and 70%, respectively. Some other owner-occupier incomes would also be stretched at a mortgage rate of 7.5. For example, at least a quarter of other owner-occupiers in Auckland would have housing costs exceeding 70% of their net income.”
English said on Monday that it was always the case that in a fast-rising market, people stretching themselves to borrow a lot of money were vulnerable to interest rate increases. He also noted the danger that property prices could fall – as they had done in other markets with similar dynamics.
“We’ve always been concerned about it, and said so publicly,” he said. ““In the end, it’s a matter for the borrower. They take a risk by really stretching themselves, and they will have to deal with the consequences of rising interest rates if that’s what happens.”
English noted that banks do make lending decisions with built-in buffers of whether a borrower could afford a higher rate before allowing a mortgage.
In its advice, the RBNZ has said banks “generally test loan applications by applying interest rates that are significantly above current mortgage rates and examining whether residual income after servicing the debt is sufficient to meet the borrower’s other living expenses.” In recent times this had typically involved a stressed mortgage interest rate of 7-7.5% being applied, the RBNZ said.
However, they added that: “While this approach should help to ensure that borrowers are resilient to interest rate increases, we have some concerns as to whether allowances for essential expenditures in these calculations (which may differ across household types) are realistic.”
A significant number of households, particularly in the upper quartile range of DTI ratios, would have to materially reduce consumption spending from normal levels given a mortgage interest rate of 7%, the RBNZ said.
“New borrowers in Auckland especially are less cushioned against interest rate rises given their higher DTIs and larger proportion of income spent on mortgages, leading to a significant likelihood of financial distress given a rise in the mortgage rate.”
'Eyes wide open'
English said the Reserve Bank had then raised the prospect that being able to limit debt-to-income ratios could help. The government earlier this year kicked the potential macro-prudential DTI policy into touch until after the election.
However, he stressed that the advice related to household pressures, and that there was no suggestion the outcome would be a threat to the stability of the financial system.
“The households go into…this level of borrowing with their eyes open, knowing that they’re taking a risk on interest rates in the hope of getting into the market, getting into the house and maybe getting the value uplift that goes with a rising market,” English said.
It was good that the Reserve Bank and banks were taking steps to ensure the financial system wasn’t threatened by the prospect of rising interest rates, he said.
“Why would anyone else take responsibility for [a household’s] risk? The system does what it needs to, to ensure the system isn’t at risk. Quite happy that the Reserve Bank and the banks have taken reasonable steps there. But in the end it’s up to households to take responsibility for their own level of borrowing.”
‘Fundamental issue remains housing supply’
Interest.co.nz asked English whether there was extra the government could do more broadly, such as levelling the tax playing field for housing against other types of savings products. This follows economist Andrew Coleman’s public lecture on the subject last month.
“I understand those arguments are being made. We’ve made some changes to the tax regime which we think are satisfactory,” English said. “I don’t think you’d want to get it out of proportion.”
“The fundamental issue remains [housing] supply. And whatever the house price level, you are going to find households who stretch themselves to get enough debt, and they’re always going to be vulnerable to rises in interest rates. That’s a risk they take.”
Hobsonville working closely with HNZ
Meanwhile, more specifically on the supply issue, English was asked about the government’s upcoming announcements on Auckland housing supply, expected before the 25 May Budget.
He responded that the Hobsonville land company had been working closely with Housing New Zealand regarding other potential densification projects on Crown land in other parts of Auckland.
88 Comments
oh gosh, this guy is Mr. Keys twin.. he has developed the same smirk when answering questions.... he is so cool about households overstretching themselves. when it was his government that encouraged SPECULATORS to go on a buying spree pushing up house prices.. it was his government that claimed that overseas buyers had NO impact on our housing market.. now its us kiwis that are going to pay for their misgivings...
Nothing to see here:
http://www.nzherald.co.nz/property/news/article.cfm?c_id=8&objectid=118…
Vendor -> (Peter Lee -> Jane Wang) -> Chung-Wie Chen
How is it that Peter Lee and Jane Wang (of Barfoot) are acting as conduits and gatekeepers of Chinese capital, and are arbitraging the S*&t out of of it! Why didn't Chung-Wie Chen just buy the house from the vendor instead of buying it on the same day through Lee and Wang? That is seriously messed up. (although not as messed up as the fact that we're hocking off all of our AUckalnd houses to foreigners)
Anyway the subtext of the Herald article is actually: "Dont panic about falling prices, Look how desperate Chinese capital is to get into the Auckland housing market"
No surprises here for me. Just yet more anecdotal commentary from Bill on what has already happened. Typically Bill and John never did anything about anything then reacted half cock after events overtook them. Lie, deny, respond with tepid actions then blame everyone else. My favourite is that the big migration influx is primarily Kiwis coming home and we can't stop that. If that is true Bill how come by the Government's own statements 1 in 3 Aucklanders will be Asian by 2020 (parts of Auckland are already predominantly Asian, just drive around and you see). I have real difficulty reconciling these two "facts".
Yeah, I distinctly recall Bill English saying in H1 last year that houses were much more affordable than in the past, effectively encouraging Kiwis to jump into expensive houses.
And now he wants to abdicate responsibility, after as Finance Minister advocating for Kiwis to invest?
We just allow rampant immigration and foreign investment on your houses and its your fault you panic as you see house prices move out of reach. We let the banks rip you off as much as they can and allow them to lend at 10 times your income because you panic, and struggle to make a really tough decision.
The reason we are suppose to have government and so called intelligent people is to look after people who cant look after themselves, to be caretakers of this beautiful country. Not someone who stands up in front of people and says its your fault your in this mess, nothing to see here, smoke and mirrors, is what we are about.
The more I hear from English and Joyce the more bitter the taste becomes.
maybe there is a motive by the national party to import voters,
The study, backed by local Chinese media company World TV, claims to be the first in-depth study of New Zealand Chinese voting habits here.
Three quarters of ethnic Chinese voters will cast their vote for National if an election was held tomorrow, a survey has found.
I am surprised about the number going to vote for NZ first
http://www.nzherald.co.nz/nz/news/article.cfm?c_id=1&objectid=11851380
This is where you've been mislead swapcrate. Our politicians are no longer leaders and visionaries, but instead are slaves to the masses - or in Nationals case, about 40-45% of the masses. They have simply become people pleasers.
Ask yourself, what is the vision for New Zealand? Where is this government taking us?
If you looked at the 'reality of the situation' 'at the end of the day' of John Key's legacy here's what we have:
- polluted rivers from intensive diary farming
- excessive demand on infrastructure
- the worlds most expensive houses
- limited salary growth
Where is the leadership in this? If a business had a strategy, it sure as hell wouldn't have results like this. But the problem that National face is that if they do the right thing, they'll get ousted by their supporters - who in my opinion have little/no moral/ethical compass, other than that they like the fact their houses have gone up in price because of Nationals policies, or that they're making money from the farm without having to be accountable for the damage they're doing to the environment.
Your right I had this sense politicians wanted to create a better country and help people out. Yep salesmen and people pleasers, or basically its a job interview, say whatever you can to your employers to get the job. Once you get the job then cruise around, tinker around the edges and be first at the buffet with the free drinks.
Make sure your limo has tinted windows so you cant see the people while your driving to the airport and see the homeless on the streets of Auckland. Then once in the airport race through to the Koru lounge so you dont have be among the masses. Not that I have anything against the Koru lounge though, food and beer.
"Fundamental issue is still supply"
Seriously? repeating this like a mantra really is getting insulting. When our net immigration gain for the past 2 years is 70,000+ pa it is more about demand as all those people have to live somewhere, be it as tenants or owners.On a related matter; we don't keep any useful data on foreign buyers. Unaffordable housing and over leveraged buyers seems to me to be far more about the factors which stoke demand.
Any fool can see through their farce.
If supply is the problem - How are they solving the supply issue by increasing demand ?
SO CALLED SUPPLY CAN BE SOLVED : Increasing supply (needed and will take time) AND Reducing demand to ease pressure on supply by various means and could be done fast.
How come no experts have challenged the government on the very basic principal.
Corruption.
So what I take from this was if interest rates go above 7.5% then lots of people are seriously f****d. But that's ok because the banking system can survive.
I'm also not convinced 7.5% is the upper limit on interest rates. Why 7.5%? How did we pick this number? Given the debt people have taken on is a 30 year commitment, I see no reason why an interest rate over 7.5% isn't likely in the next 10 years. If you think economists have any idea about interest rates post GFC then just look at the predictions over the last 10 years.
This is concerning for two reasons:
(1) Are we really comfortavle a whole host of young New Zealanders and their parents (guaranteed their loan) be bankrupted because "they should have known better"? The government has spruiked this market and various politicians and commentators are guilty of inciting the borrowing behaviour.
(2) I'm not confident the economy could survive such a shock. If round one triggers a bunch of mortgage sales and severely contracts demand, round two (caused by round one) will clean out the next tier of borrowers. The impact on the economy will be severe.
Not everyone has bought into the Property Ponzi created by a deregulation in the Banking Sector in the late 1980's which then allowed the Banks to increase their standard mortgage borrowing terms from 20% down payment and a 20 year loan term to what we have today being a standard 30 year loan term with sometimes a zero deposit. Of course house prices were going to increase as easy money became cheap and the masses fell for it. One lesson I have learned is when you observe the masses all piling into one investment class all at the same time and that asset class starts going gang busters, run for your life in the exact opposite direction! As Warren Buffet once said, "Be fearful when others are greedy and be greedy when others are fearful". And that pretty much sums up the human emotional factor so heavily over-invested in a crapshack with a tin roof.
Tainui Babe ?
The 1980s I remember well also in Godsown
Try 23% mortgage rates !! No chance at all for young borrowers like myself to even get a mortgage
Oh yeah banking was so much better before Not
As for Buffet ? Pity he isn't so greedy himself and actually pay his secretary more to cover the tax he claims she pays more of than himself !
Hypocrisy and the mega rich again
I know many, many, many people who bought back then. Inflation was also very, very high (effectively eating some of that interest), house prices were low, and a number of them even had parts of their mortgage on the cheap 3% Housing Corp loans.
Funnily enough, home ownership peaked not long after this time.
Home ownership has declined massively over the last couple of decades as National has facilitated the Great Sell-off.
Privatise the greed, socialise the fear.
Read the writing on the wall: this is clearly setting everyone up for the possibility of having to take bitter medicine in the form of a swathe of mortgage default sales and/or an OBR haircut, and making them believe that they have only themselves to blame.
Bill needs to talk to his PR man mike, he says its not a problem, will never happen everybody is fine
http://www.nzherald.co.nz/nz/news/video.cfm?c_id=1&gal_cid=1&gallery_id…
Total nonsense delivered with confidence. It's what they pay him for. How many people will go on to ask themselves the question of what underlying boom drove Auckland price inflation. There were no mines, and no underlying industry with high wages, so what was it? Hysteria+influx of insurance money+foreign speculation? Gold rush with no gold.
And good god, what an atrocious jacket. He should be hooted at in the street for that alone.
He even gets the simple maths wrong in his example - "property rose 100% then dropped 9% so has it risen 91% or dropped 9%?" If prices start at 100, then rise to 200 ("rise 100%)' a drop of 9% will drop them to 182, not 191. And of course those are just nominal numbers which take no account of inflation as well.
And yes, what a shocking bad jacket.
Was in MacDonald's restaurant in small town NZ a few weeks back. Overheard a discussion at the next table, where a beneficiary was introducing another beneficiary to the benefits of being a landlord - effectively no income tax, and rampant capital gains. The full procedure was listed, along with ways around various government departments, and banks.
When property speculation and tax avoidance gets to this level, I'm afraid there very well could be a bust...
Flipping houses to each other and tax avoidance is not the way to build a better life for NZ residents!
At this point, a National led coalition looks likely enough to me following the September election. But this is only May and the election is four months away, so nobody can tell - not even the luminaries who visit here.
The real problem for Labour is that it lacks people with ability and competence (and it lacks viable leadership as well).
Further, I find Labour's knee-jerk, simplistic responses to National's policy initiatives to be tiresome. You know what Labour's going to say before they say it - and it's always so trite and unconvincing. Can't they hire a decent policy wonk who can give them some words??
On the other hand, Bill English is a clever/talented bloke. He's experienced, level-headed (without too many frills) and makes well-considered decisions. Plus, he's well-supported with competent Ministers. (Labour just can't match National's level of skill/capability.)
The Auckland housing market will likely be quiet until the election - and perhaps for longer. But any dip in prices will be temporary. Look how quickly property prices recovered after the GFC......
NZers will remain as passionate as ever about property ownership in the medium/long term. Property ownership is a deeply entrenched part of the NZ psyche - and the underlying culture's not about to change despite interest rate fluctuations, inflation, immigration, GDP, employment/unemployment and all the other (short term) stuff.
With property, one needs to think long term. The short term can be too much of a distraction. Serious property investors maintain a long term focus in their decision-making.
My own view is that increasing global uncertainty (Trump, Brexit, acts of aggression, environmental concerns etc) augurs particularly well for property investment in NZ. The evidence abroad shows that NZ now ranks very high on foreigners' wish-lists - many overseas investors would covet their own slice of NZ. This is the "big picture".
Naturally, there are people who feel humiliated by the current level of property prices and yearn to see a major slow-down in the market. But, the reality is that property's not going to be "cheap" again..... Nonetheless, it's never too late to build a portfolio.
I would not like ANY MP managing my personal finances, that is not there role.
there number one task is to work for the people and to ensure the people have a healthy enjoyable country to live in.
The past two governments in my mind have failed that task, and have spent more time trying to hold onto power than address issues
The government has been concerned “for some time” about the risks rising interest rates would have for mortgage holders already near debt-servicing limits, Prime Minister Bill English says.
Hmmmmm...
New Zealand central bank Governor Graeme Wheeler needs to get inflation back to target and some observers think he has “plenty of room” to cut interest rates, Finance Minister Bill English said. [my emphasis]
“He’s been out of the zone for years now, below the midpoint for quite a long time,” English said in an interview late Thursday, referring to Wheeler’s 2 percent inflation goal. “He’s meant to be following the Policy Targets Agreement, that’s the bit I look at, and one day somebody will start asking the minister of finance questions about whether he’s actually following the agreement or not.” Read more
SCF, Solid Energy and Landcorp also raise the spectre of National Government incompetence.
Tothepoint
The reason house prices recovered so quickly after the GFC is because of all the cheap debt sloshing about in the system. During every period of easy cash in recorded history (going back to the Roman's even) asset prices have bubbled. This is so obvious a point, it almost hurts me to type it. House prices have bubbled world wide. The fact that NZ house prices are more inflated than other nations is not at all reassuring.
NZ's economy was not as effected by the GFC as other OECD nations, also for obvious reasons, but NZ banks have still soaked up the cheap overseas lending and passed looser debt behaviour onto the NZ house buyer.
Long term investors with a well considered property portfolio might not keel over if the housing bubble bursts, but they are not the demographic anyone is concerned about!!!! What about all the younger households, possibly with young kids who stretched themselves to the limit to buy a home after years and years of saving? What happens if they go into negative equity or can't afford the mortgage on their homes? What about the people who got swept up in the irrational exuberance and bought houses at over-inflated prices to fund their retirement? Or who leveraged their family home to buy additional properties? Or what about huge amounts of money that will disappear from the consumer economy when it is diverted to cover mortgage rate hikes? Do you not think that might have wider economic and social ramifications?
What happens for all those people?
I reckon they should go and knock on John Key's door in St Stephen's Ave and give him a piece of their mind. He was the one who campaigned on the need to address the housing crisis only to spend the next nine years denying any crisis existed.
Of course there is going to be ramifications towards the investor classes who have over-leveraged! Of course their demise is also going to hit every single New Zealander in one way or another, be it via businesses going bust thanks to all those investors that can't afford to buy goods and services from New Zealand businesses right through to those very same businesses laying off those same staff membes that can no longer pay their mortgage debts! We all have skin in this game. The best position to be in right now, is little to zero debt and only small parcels of savings distributed throughout several different banks, just in case one or two banks start to fail over the next few months.
Yeah Right Tothepoint
The big lie for National is over.
Bartfoot & Thompson worst April since 2008 60 agents left company in April thats very telling.
This coming from someone thats been blue all my life and all my family is also.
Like lots of other blue voters I know sick of the lies and BS.
>"The evidence abroad shows that NZ now ranks very high on foreigners' wish-lists - many overseas investors would covet their own slice of NZ. This is the "big picture"."
This more than anything should demonstrate to young Kiwis that the only solutions will need to be political.
There need to be limits on foreign ownership, otherwise it'll continue to be a case of those with the genius of being born at the right time celebrating their investment smarts in having bought low, and looking to attract as many foreign buyers as possible to buy NZ out from under young Kiwis.
Limits on foreign ownership will be needed.
NZers will remain as passionate as ever about property ownership in the medium/long term. Property ownership is a deeply entrenched part of the NZ psyche
Are you sure about this? I would suggest that property as an investment in NZ at least is relatively new and only began 20 years ago as a major pathway to "riches". Before that houses were homes and people were happy to have the one home. Now the family home is predominately purchased as an "investment" first and foremost
Passionate about property ownership or brainwashed? How many even "own" their own home?
I dont get this. How will they go higher. They are already at multiples of 10-13 times income.
I earn over average and with double income we have enough money, to survive, but Im loathe to buy property in NZ. My other half is welsh and we are either looking in Wales where the yield is better and prices are better, so we can have something for her, just in case we need to go back, or we may move to Australia as prices are better. Im from Waiuku, Im trying to start up a business so I can work from home, I may also move back to Waiuku, so I dont need to make it through the traffic in Auckland. But even Waiuku prices have gone a little nuts. But we are looking at land to build on. Build something within reason so we can be debt free and get my business going.
Financially we are OK, but the house prices attack our disposable income, we would rather have more income to enjoy life then spend on obscene property in Auckland. It comes down to what I want in life. Either be in debt or enjoy life.
If prices go up, how will people afford the houses if multiples are higher then 13, and then if interest rates go up, this will impact people. Banks are not lending as much so will be hit profit wise, so how will they increase their profits, probably raise interest rates.
How high can prices go if people cant afford it, where does the money come from, NZ is a low wage economy? It just does not make any sense.
Bill English and clever in the same sentence not sure how you do that have you fell for the smoke and mirrors nothing to see here.
Bill English that clever guy that puts down NZers as druggies uses anecdotes to explain why he brings in unskilled labour. If he doesnt like NZers hes in the wrong job.
http://www.stuff.co.nz/national/politics/89876945/bill-english-claims-a…
'Govt has been concerned for some time'...but do nothing, in fact they exacerbate the problem.
This govt just leaves a trail of faeces in its wake both literally and figuratively.
Bill English was playing dumb this morning on RNZ talking about how he doesn't understand Australian governments concerns that NZ is becoming an easy 'back door' into Australia. I think every person living in Auckland knows why they have these concerns but apparently its too complex for Bill.
The mind boggles at the incompetence.
Gingerninja and others: I have plenty of empathy for first home buyers and others who aspire to house ownership. It's damned tough for them these days.
But my point is that the housing market is not going to keel over with a terminal illness, for the reasons I have outlined above. As I have stated, NZ's place on the world-stage is rising. It's a global star - and becoming an increasingly popular country to invest in property. That's the "big picture" - despite all the short term "noise" we hear on a daily basis.
I'm just an observer - and occasional commentator.
Tothepoint, I agree with you. The conflict now is between proponents of open societies and closed societies. To fix things up to the satisfaction of most commenters here would require a closing up of society and an introduction of authoritarian rule. Most people wouldn't be happy with that. I would struggle against that unless it was my sort or authoritarianism but others, like PocketAces, would want their sort.
I am happy to settle for maximum freedom of thought and self promotion in a modern New Zealand society even if that means some people will have to move out of Auckland to buy their own home.
I think society must have some authority. The best ones are where there are few written laws but quite subtle unwritten laws where people don't even realise they are subject to an authority - the authority of tradition and manners. Multi-culturalism has resulted in the introduction of new written laws that weren't even dreamed of in the old days - an unintended consequence of globalisation. Calls for a written constitution like what the TOP party desire are a move in the direction of too much authoritarianism. We should probably only consider implementing something like the American First Amendment which was crafted by men of genius.
Also, while they overlap, bear in mind there is a difference between authoritarian and totalitarian.
Wouldn't necessarily disagree that we might benefit from a constitution, the way recent governments have treated some of our institutions.
Would also suggest some looking at the ideas of Amartya Sen - wherein freedoms constitute both freedom from and freedom to. Sometimes giving unbounded freedom to all and sundry around the globe to exploit Kiwis will result in fewer freedoms to for young Kiwis.
Your philosophising requires some explanation
quote
"I am happy to settle for maximum freedom of thought and self promotion in a modern NZ society even if that means some people will have to move out of Auckland to buy their own home"
Does that mean you are happy to extend those freedoms to foreign all-comers who generally are much much sharper than many of our locals who are being forced out by your reckoning
Should they not be protected from the ravages being being visited upon them by outside pillagers
Personally I say yes, we owe it to them
"In the end, responsibility lies with borrowers who take on mortgage debt with their “eyes open,” knowing the risks," he said.
A valid point, however National were the ones who allowed foreigners from any country to buy up large which forced prices up and meant kiwis had no option but to take on large debt to buy a house.
Why can't the housing market respond quickly enough to demand? In all other areas of the economy there are no shortages from increase demand - I haven't seen the shelves at supermarkets empty. Of course it takes longer for housing to be built but this has been an issue since a better part of a decade now. Regulation and NIMBYs seem to be an issue but it also no political will to do anything about it.
"It is important first that election takes place as national going out is a foregone conclusion."
abnz1: If I was you, I'd avoid making predictions - especially those concerning the outcome of NZ's forthcoming General Election.
They might just come back to bite you on the backside.......
Theres quite a few swing voters out their which I am one. I voted Labour three elections ago and National for the last two. I wish I didnt but I did. A lot of voters sound like they have had enough of National, which I didnt hear last election. So we will see.
I dont want to vote Labour as I dont want them to go on a spending spree, but we do need more spending on infrastructure and schools, plus most of all I dont want them to maintain immigration as it is. I dont have a lot of trust for major parties.
But National has decreased my disposable income, so anything that hits me in the pocket I'm against. Traffic in Auckland is bad and getting worse, property prices are out of reach for my kids, and homeless people are on the increase so I would be stupid to vote for the party that created all this. So Winstone may get my vote, I never thought I would say that, but desperate times.
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