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Comment by hedora | Hacker News Reader

Figure 9 looks dire: 95% of mortgage (by total value, not count) are going to have their rates adjusted in the next three years; 56% in the next year.

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?

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In New Zealand, all mortgages are approximately at a floating interest rate.

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).

Silly question, but how do you budget given floating interest rates?

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."

Yes. This is how you get wrecked in the housing market. This is because buying a house is taking a risk. The question is just who is taking it.

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.

Your scenario desribes how it works in Australia (similar system to NZ). Almost all mortgages are variable rate, you can lock in a fixed rate for a few years but otherwise you're at the mercy of interest rates.

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.

> 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).

> What to do?

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.

I am a strong opponent to CGT for businesses. I suspect it would be hard to introduce CGT just for real estate. Reasons for hating on CGT:

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.

I don't think it would be hard to apply a CGT to real estate only, as all transactions are centrally recorded, but it would disincentivise exchange (which presumably occurs when the buyer sees a more valuable use for the land), unless it is charged on unrealised gains, which is a can of worms.

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.

I’d like to add - forbid leveraged investors from buying existing stock.

You've had multiple replies, but I think that one key piece of information missing from all of them is the fact that you could move between floating and fixed. In your example you might see rates going up and you'd decide to change from the floating rate to a fixed rate for a term of 1-5 years. A few years later you might go back to floating. You might also have your mortgage split up into 2 or 3 tranches with 1 floating and 1or2 fixed at different rates. You can move from floating to fixed at any time, but you can only from fixed to floating at the end of the fixed term (or earlier by paying the bank a break fee)

> "yea, that's how it is here."

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.

Yeah, that's how it is here. Part of the thinking is that everyone is in the same boat and the government couldn't possibly let everyone go to ruin.

It's nuts. Talking about Australia though.

That's wild. In the US, a fixed-rate 30 year is pretty common, particularly when rates were <4% - lock in that low rate for the duration. We currently have a 20 year. No prepayment penalty, no renegotiation. The only reason my monthly payment changes is changes to taxes/insurance (paid with mortgage, put into escrow to ensure those are kept current). I effectively have a housing cost that goes down over time due to inflation and salary increases.

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.

You can generally refinance though even with a fixed rate. (There is more overhead though than just going with whatever the current adjustable rate is though.)

Yeah, borrowers can refinance in the US. We have a few times as rates dropped. Now that they’re going up, we’re locked in at a great rate and don’t have to worry.

Here in the US we have ARMs (adjustable rate mortgages) - usually they are rated by (fixed period/stepping rate) - the most common being a 5/1 ARM = 5y fixed + adjustable rate reset every year.

So is it the case that in NZ, if you refinance your mortgage, you typically get charged a significant fee?

I can’t speak exactly for NZ but I assume it’s similar to Australia; it is normal to get charged a discharge fee from the bank your leaving and there maybe an establishment fee at the bank your refinancing with, along with another small cost to change the official register of state government. This could all amount to a couple of thousand dollars every time you refinance.

We do have ARMs in the US, but fixed mortgages are a lot more popular - presumably because they allow someone to know how much it's going to cost.

I've read comments on Hacker News that adjustable rate mortgages are the rule rather than the exception in many countries (outside of the U.S.). Here's a comment saying that Canada ONLY does ARMs https://news.ycombinator.com/item?id=15185052 and another comment saying that they're very common in some European countries: https://news.ycombinator.com/item?id=30339845. I'm guessing this is how it is in New Zealand.

Canada does both adjustable-rate and fixed-rate mortgages. Just that we tend to do it for shorter periods. Typically 5 or 10 years.

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.

In the US a mortgage with a rate that resets after 5 years would be considered an adjustable rate mortgage, although the rate would typically reset yearly after the initial 5 years (a 5/1 ARM).

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.

It seems to be common due to the oligopoly of Canadian banks (there are 5 big banks for all of Canada and the concept of a small bank just doesn't exist, due to regulatory hurdles). It's a way to push the risk onto the consumer and guarantees that homeowners are first to suffer in a downturn - conversely Canadian banks are very "safe" from economic pressures, at least compared to their American counterparts. It's already a big problem because Canadian household debt has reached 2.1 trillion dollars [0], with a GDP of 1.9 trillion dollars [1] (all in USD). Note these figures don't include government debt, which is also significant. Altogether, Canada may face a liquidity crisis on servicing the debt, if rates continue to rise.

[0] https://www.ceicdata.com/en/indicator/canada/household-debt

[1] https://tradingeconomics.com/canada/gdp

Canada doesn't have the concept of fixed-rate mortgages like in the US though, which is where the rate is fixed for the entire life of the mortgage. What you are describing is an adjustable-rate mortgage with an initial 5 year fixed-rate term, which in the US would be called a 5/1 ARM.

The banks are required to stress test those loans with somewhat stringent requirements. When the loans were granted they take the current retail interest and add around 3% and ensure that the loan recipient could still afford it. Last year there were stories in the NZ media around how banks were not writing loans because people were spending too much on Uber Eats etc. They were going over finances with a fine-toothed comb (there was a bit of backlash in the media, but turns out it was a good thing). NZ banks have quite a high capital reserve buffer requirement which was increased by the Reserve Bank of New Zealand a few years ago – with a lot of pushback from the banks at the time.

This is correct, and also wages are rising faster than inflation. Very very few households with mortgages are actually at risk of defaulting (so low the number is essentially zero), and both banks and households can sustain higher interest rates than we're seeing.

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...

I know from family in NZ that the stress test banks apply is very similar to stress test we apply in Australia. As of the latest rate rise, rates are now above what banks were required to stress test for at the lowest rate loaned in 2021. I imagine New Zealand is reaching that number as well. For 90% of households this won’t matter as they purchased pre 2020/2021 so they were means test for higher rates but for households who took loans on during Covid they could theoretically really struggle when their fixed rates are up.

Mortgages in NZ are typically fixed for between 1 and 5 years, with most fixing around 3 years. So 95% of mortgages will always be rate adjusted in the next 3 years.

Same as Canada. I assumed it was market forces but no, it is regulated this way! Seems like a bizarre plan to make your populace less resilient to rate fluctuations.

The US weirdness of 30 year fixed-rate loans that the customer can call at anytime and the bank can never call except for non-performance is substantially subsidized by the US Government.

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).

How do you mean it is regulated this way? RBC lists a 25-year fixed right now - https://www.rbcroyalbank.com/mortgages/mortgage-rates.html#p....

It isn't competitive (9.75% vs 6.2% on a 5 year), but it's there.

Woah, that’s strange. I just bought a house and the mortgage guy I was dealing with said anything more than 7 years is prohibited in Canada unless you go to an unregulated B-lender. Clearly I stand corrected!

I don’t know if they actually sell a 25, or just post a rate for some other reason. But I know I locked in for 10 my first contract.

It makes the banking system more resilient to rate fluctuations..

This is certainly bad, but if it will lead to a crisis like 2008 in the USA, depends on a number of factors. First, there was a lot of leverage and fraud in the US case. Then, there was lack of financial support for families that had no option other than default on their mortgages. The US government didn't anticipate the issues caused by ARMs and only dealt with the problem when it was already clear the total collapse of the mortgage industry.

Did they even really do anything with ARMs? I thought they were just flushed out with all the foreclosures that happened after '08. And then they just fell out of favor.

> Is there something different about how houses are purchased in NZ?

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.

US has 30 year mortgages backed by government. New Zealand and Australia do not so the overwhelming number are either floating/variable or fixed for 1-5 years.

The US and Belgium are the only countries in the world with a government subsidized 30-year fixed rate AFAIK.

How are they backed by government differently than say in Canada where CMHC backs most mortgages?

https://www.freddiemac.com/about and friends buy mortgages that meet certain requirements (called "conforming" loans) and package and sell them to investors. Since they will buy 30 year fixed loans, banks are willing to sell them, and investors are willing to buy the subsequent bonds created out of them because they're (likely) almost as reliable as 30 year treasuries from the US government itself.

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.

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