New Zealand plunges into recessionary spiral
macrobusiness.com.au
macrobusiness.com.au
> Last week, Bank of New Zealand warned that “things could well and truly turn to custard” as the global economy is plunged into recession.
I read that and thought "Holy hell, central bankers in the US are usually extremely measured in their comments, they would never say something like 'things could well and truly turn to custard'". I misunderstood, thinking that "Bank of New Zealand" is their central bank. It's just another big bank, not "The Reserve Bank of New Zealand", which is their actual central bank.
And here is the funny bit, it's Australian owned. If it's anything like the rest of the market which is dominated by Australian banks, it'll pay some old kiwiana type music when you are on hold and say 'Kia Ora' or similar at regular intervals. Kiwi as.
I'm not familiar with how the Reserve Bank of New Zealand operates, but if it's anything like our federal reserve, the country belongs to the bank, and not the other way around.
You're just saying the same thing with different words. If the Fed or the congress doesn't represent the people it doesn't make any difference to the elite class, who indeed own these two entities.
As such, I'm deleting the original text, since I can't delete this comment any more.
My apologies.
Come now, that's legal fiction designed to maintain the independence of the Fed. Congress created the Federal Reserve System and could remove it or twist it to whatever shape it sees fit tomorrow if it wants.
There's a good argument to be made that the Fed ran easy-money policies for too long in 2021 in order to secure Chair Powell's reappointment in early 2022; this gives you a clue as to who they are in fact beholden to, despite their nominal independence.
If this causes worse problems (which it may but hasn't yet) things will simply be changed again.
Most countries have a retail bank that uses the name of the country or region, even if they aren't the central bank.
The German central bank is The Deutsche Bundesbank,which literally means "German Federal Bank" not "Bank of Germany".
Source: https://en.wikipedia.org/wiki/European_Central_Bank#Capital_...
Also, the fact that the official central bank is so close at "The Reserve Bank of New Zealand" makes it more confusing for those unfamiliar.
The only one I can think of is Voice of America. Definitely none of the major departments or agencies.
This works okayish but, you know, could be better. (Some more explanation at https://someunpleasant.substack.com/p/the-prime-directive.)
I'm sure he's a capable economist, but based on what I see, New Zealand is not "plunging". There's definitely a slow down - but I think most businesses are expecting a relatively soft landing.
I guess time will tell.
Good?
Middle-class still can't buy because of stricter lending rules and increasing interest rates.
Middle-class who FOMO'd in the last 2 years will see their interest rates double and even triple when they refinance in the next months. With inflation and cost of living rises recently, that bump up in their mortgage payments is really going to hurt.
Meanwhile, those with the cash can just scoop up houses (if/when they want to).
Silver lining is younger and future generations might not be completely and utterly f'd.
For some not so much. Talking with my landlord the other week, they said that they regretted not selling the house last year when they moved. It's lost 15k every week this year on average (according to homes.co.nz estimates). That's almost 30%.
For people like me, it's a good thing. Interest rates are higher, sure, but a smaller deposit is needed and for most people I know that have been looking to buy it's the raising of the deposit that has been the biggest hurdle.
Those with negative equity are likely to pay down debt faster rather than consuming (hang on to the car for another year, or not repaint, for example), so there is some effect on aggregate demand over time.
They may look prescient if you read the last years publications, but they well and truly live up to the joke "Economists have predicted nine of the last five recessions."
This post is wrong, we're not in a recessionary spiral. Households (and banks!) are overall doing fine. Unemployment is at record lows, wages are rising faster than inflation, non-performing (ie in default) mortgages are at 0.2% of all mortgages (lower than GFC), mortgages are stress-tested to higher levels than we're seeing. Banks are extremely healthy (making money hand over fist).
Consumer confidence is low, but it's low in defiance of reality.
For more see here: https://thekaka.substack.com/p/incomes-are-rising-faster-tha...
In the US, that'd definitely lead to a housing crisis worse than 2008. Is there something different about how houses are purchased in NZ?
If you try to get a 30 year fixed loan outside of the US mortgage market, it's hard to find with rates as low.
CMHC may not buy fixed rate loans in the same way.
Freddie Mac and Fannie Mae or whatever they are/were take those mortgages and basically convert them into government bonds that are then sold out.
Otherwise getting 2% for 30 years would be nearly impossible (and it IS impossible in many countries).
It isn't competitive (9.75% vs 6.2% on a 5 year), but it's there.
Much more info (with numbers and charts) in Bernard Hickey's post from a few days ago.
https://thekaka.substack.com/p/incomes-are-rising-faster-tha...
The US government subsidizes long term fixed-rate mortgages as a matter of policy. This is not true in most other countries, including, apparently, New Zealand.
I have two fixed-rate mortgages with really low rates. They won't come up for renewal until 4 years from now. Then I'll have to choose whether to do another 5 years with the current rate, or convert over to an adjustable rate.
A mortgage that ends after 5 years and needs to be renewed would be considered a balloon mortgage, and they are rare in the US. They are "non-qualified" mortgages which means the government sponsored entities won't buy them, so there is a limited secondary market and they have much higher rates.
I don't think I would sleep great at night knowing that every 5 years I would need to either get a new mortgage loan or lose my house.
[0] https://www.ceicdata.com/en/indicator/canada/household-debt
You can lock in a rate for up to 5 years (with the majority choosing 1 or 2 years), but after that “fixed” period completes, you now renew your interest rate at whatever the current market is. Most mortgages are signed up for a term of decades (mine is 30 years, and I signed up at age 50), so although you might use “fixed” rates for a few years each, you end up with a stepwise approximation to the floating rate. My mortgage allows me to pay 20% more principal each month, which shortens to term to 20 years.
You can renegotiate terms, and you can cancel a fixed 5 year rate early, but the bank charges a fee, and the fee depends on how valuable the current terms are to the bank (they cover any downside risk to them). If you change mortgage terms, and it turns out the bank is “in the money”, they don’t pay you (they just pocket the profit).
So is it the case that in NZ, if you refinance your mortgage, you typically get charged a significant fee?
Let's say that you buy an $800,000 place at 3% interest with a 20% down-payment ($640,000 borrowed). Your payments are $2,698/mo. Fast-forward a couple years and you're now at 7.3% and your payments are up to $4,388/mo. That's a 63% increase in your housing budget. That's an extra $20,280/year in housing costs.
Yes, rent can increase crazy amounts which makes budgeting hard as well and we've seen rent go up 20% from pre-pandemic levels in many markets (though that seems to be rapidly falling as the market changes). However, you're not committed to that rent. Yes, it might be bad to downsize to something smaller that you're renting or to a less desirable location, but it's theoretically possible. In this case, you now have to pay 63% more money without a possibility of alleviating that burden.
As rates go up, the amount you can sell a property for likely goes down (since it's now a more expensive property). In the US, at least you can continue living there at your low interest rate and fixed monthly payment. In NZ, your $800,000 place is now worth $700,000 and your payments have gone up 63% and you can't really sell it because you owe more than it's worth and you also can't afford the payments...?
I feel like I might be missing something, but your answer might just be "yea, that's how it is here."
In 2008 my mother had her equity completely wiped out due to the exact situation you describe. Underwater mortgage, unable to afford the interest, forced to sell at a loss, zero net worth at the end after paying off all her debt.
On the other hand, we didn't suffer the 2008 banking crisis and overall the economy was basically fine with only a minor recession, mostly due to worldwide conditions.
Buyers are subject to strict lending criteria to determine whether they can afford $current_rates + $future_increases. This means a lot of people are locked out of owning housing.
The system is benefiting the already wealthy and leaving others, particularly young people, out in the cold.
That is correct, but I think your cause and effect analysis is wrong.
We have 5 million people bidding against each other on 2 million households.
People bid as much as they can on their home, so if lending becomes looser, home prices shift up. The long term affordability doesn't change much. There can be other dynamic effects in the short term, I am talking about long term stability.
People bid to the limit of their affordability, so houses remain at the limit of affordability, regardless of the actual prices.
The structural problem is that home prices are a zero-sum game where we collectively bid to the point we can individually only just afford the interest payments. And we also screw the country because we are bidding on how much money we can give to Australian banks.
Home prices follow the same distribution as income (I think), until you reach a minimum wall of a few hundred thousand, below which nothing is available.
The problem of house prices is an effect of bidding, and I believe prices have almost nothing to do with land availability or the costs of building houses.
We could build more houses, but wealthier people will just buy two or more. I would like to own a second home in town for my occasional use.
What to do? I don't know. Keep increasing minimum wage so that 50% of people are in the lowest income bracket? Extra taxes on investment properties or empty vacation homes? Suggestions?
Are our city council rates already a significant way towards a Georgist taxation system? I looked at a wealthy suburb in Christchurch, and they were paying 5x as much as I do on rates ($15k per annum for the house I looked at).
Living in Christchurch, we had heaps of as-is houses that couldn't get a mortgage, and their prices reflect the cash price, which was wayyyyyy lower than the same home would be with a mortgage. I bought a perfectly good 3 bedroom home for land-valuation + $5000. At least half the price, because a mortgage was unavailable (and market was slow, so amplification factor on price too).
Make housing less attractive as an investment vehicle. In my opinion the best way to do this is with the tax system (which, in NZ, currently favours property investment to a large extent).
Two proposals that are often discussed are a capital gains tax (CGT) and a land value tax (LVT). Personally I would prefer a LVT. A CGT would be an improvement on the current situation, but it would be a big impediment to freely moving to take up a new job or for family reasons. An LVT has the opposite problem of being a potential impediment to staying put if the value of your land increases relative to other areas. For an older person who is no longer working this could force them to find a new home but could be dealt with by deferring payments until sale or settlement of an estate.
1. in NZ we need more investment in businesses, and less in real estate. I think introducing CGT would decrease business initiation and growth.
2. Most businesses fail i.e. your expected returns are often negative. The power law returns mean your expected return is highly dependent on winning big (VC model that one massive winner makes up for 10 losers), but CGT discourages winning big, and it discourages early investment in businesses.
Other possible measures:-
Stamp duty, as in the UK. Also disincentivises exchange.
Unimproved land value tax (Georgism). (Would need to apply to alienable land only, or there would be significant impact on rural iwi, and possibly a threshold of say $100k/ha unimproved land value since farmers whinge so loudly.) Fewest problems in tax policy terms.
Revise zoning. Change residential to mixed use (light traffic commercial, up to 25 employees, say), allow up to four storey and multiple-household buildings, prohibit "amenity" and "character" objections to consents (apart from noise and smell) and building size/usage/land use covenants near (<10 km radius) the centres of cities, and probably some other measures. Densification policies. Streamlined planning and consenting of developments.
I agree that we need to build capital for business investment. Tax policy (and middle class culture, as embodied in zoning rules and district plans) is heavily tilted against that. Been that way my whole life.
It's nuts. Talking about Australia though.
Its also how it is in the UK and most other countries. There is a benefit that the central bank can control the economy much better. When the fed raises rates most people dont directly notice, where with floating rates the majority of households have less money every month straight away.
I suspect a rates go up, ARMs (adjustable rate mortgage) become more common, in the hopes that rates come down and the homeowner see that upside.
Floating rate makes sense, if inflation rises, rates rise and usually so the pay rises so you can afford to pay more. In the US I have fixed at ~2% for 15 years which is good for me but seems silly over such a long term.
My American father-in-law who is a retired realestate / financial industry professional seemed to have trouble getting his head around that when I told him. Not only that long term fixed rates were not available but also when you're in a short term (5 year) fixed rate, you can't easier refinance if the general rates go down. That seemed normal to me at the time because it's a gamble for both parties. If I sign a contract to pay X% for the next five years then it doesn't seem like I should be able to change my mind part way through any more than the bank can renege on the deal. That said, I never suffered significantly so that's easy for me to say.
Likewise for deposits. It seems a lot easier to break a CD early (forfeiting some interest) in the US than it is to break a term deposit (like a CD) in NZ.
And then the 1929 market crash wiped out the banks so they called in all their assets (loans).
And so now the US Government steps in and says "banks you can't do that" and the banks said "then screw lending" and the government said "we'll buy and resell the loans with our guarantee" and the banks said, "oh really hmmm".
You can get ARMs for real estate in the US, and they may become more attractive as rates rise; the rates were so low it wasn't really worth it to even consider, but they exist - here are some: https://www.bankofamerica.com/mortgage/adjustable-rate-mortg...
The average American holds their loan for something like 7-10 years before either moving/selling or refinancing, so an ARM can be a worthy consideration. But you must plan around what it could do "worst case".
Indeed, it's pretty !@#$ing awful that that's the condition.
The importance of the traditional resource industries feels like an out of date meme leveraged for political reasons. It's not the future for Canada.
https://thenarwhal.ca/for-decades-b-c-failed-to-address-sele...
With that background we can see that they will always want to be able to run headlines like this, whether they’re right or wrong. So I wouldn’t worry about things based solely on headlines from organizations like this, any more than I’d put all my trust in economic forecasts from “The Marx Community Paper” :D
I’m similarly wary of banks own forecasts given their track record of being opposed to any economic policy that doesn’t increase their own profit margin.
Honestly I would kill for the big important government measures for inflation, etc to only account for say the 80-90yh percentile of tax residents.
The decades of continuing dropping interest rates mean a good chunk of the population don't even understand the mortgages they took on.
Now imagine buying a home for $1.5M in GTA, then having your mortgages payment increase by 50-75% and the value of your home drop by 30%+.
Winter is coming.
https://data.sca.isr.umich.edu/get-chart.php?y=2022&m=9&n=35...
New Zealand, Canada, and Australia will all be catastrophic lessons in the future.
So when you see -25 sentiment in housing by Kiwis, it's much more severe than -35 in the US, because over 50% of the Kiwi economy is based on housing and associated services: https://figure.nz/chart/WRpSmBftC60lEu2q
Canada and Australia are similar stories.
Canada is probably the worst in that it intentionally is using immigrants to try to prop its rental market and suppress wages. This works well if you are intent on starting a golden era for slumlords, but it's also going to absolutely demolish quality of life and send food/energy costs screaming.
It's very likely we're at the apex of a golden era of incompetence in these three countries in particular, but the West broadly.
Since most immigration goes to the major Canadian cities of Toronto, Vancouver and Montreal, there is a serious impact on housing and services. For reference, it's as if the US government committed to bringing in over 5 million immigrants per year and putting them in the 5 biggest metro areas, without any increase in housing development, education or health care.
This is also probably why the health care system is collapsing, why educational quality is decreasing and why housing prices have sky-rocketed to some of the most unaffordable in the entire world.
[0] https://abcnews.go.com/International/wireStory/canada-500000...
The only data in this is at the end, and it is not particularly interesting. NZ homeowners will be affected by rising interest rates.
“Keep buying those mortgage backed loans”, for example
“Keep those interest rates near zero”
What do they have at stake?
I'm certainly no expert in all of this, how does that stack up with other countries data?
The thing that makes them not painful in bad times is that often the payments stay fixed, and the extra interest is tacked onto the end (meaning that you are gaining more to pay). (you can get a mortgage where the payments do immediately change as the rate changes)
That being said it is possible to hit the "trigger rate" where your fixed monthly payments are no longer even covering interest alone, and then the bank will give you a call to make your payments go up.
Most banks will give 5 years fixed at maximum and the interest rates were always higher than variable.
Most people signing for the variable rates didn't expect this sort of massive increase within a year, given its been fairly low for a decade.
The people that get hurt the most with increasing interest rates are new home buyers with high-ratio loans, with their amortization already at the maximum. There are definitely some people who get caught in that squeeze and are forced to downsize or right out of the market by those conditions.
It's very common to always go with a floating variable mortgage and for the past 3 decades it's been the clear winner to locking in a rate for 3-5 years.
It also explains why last year the average sale price of a Canadian house was double that of the US. Let that sink in, in a country with higher taxes, lower wages and variable mortgages...the price is double.
It should be the other way around. You'd expect the US to be the same or maybe a small premium to Canadian home prices.