Housing Debt Hits Record Levels As Speculative Contagion Spreads

Geoff SimmonsEconomics6 Comments

Auckland’s speculative housing bubble might be cooling in the wake of the Reserve Bank’s new loan to value ratios, but there is little to suggest that our days of housing speculation are over. The pause in Auckland may only be temporary, and the bubble is showing all the hallmarks of spreading across the rest of the country’s main centres. Meanwhile even bank economists are sounding warning bells about rising debt levels.

The only reason this state of affairs is affordable is because interest rates are at an all time low. We are literally betting the house that they stay that way. In fact we may be betting our entire economy on it.

Auckland no longer top of the heap

Auckland is no longer top of the heap when it comes to rising house prices, but first home-buyers shouldn’t get their hopes up.

The change is partly due to a flattening off in the market there, which might be due to the recent Reserve Bank changes in loan to value ratios. However, last time the rules changed, the hiatus in the rise of the Auckland market was temporary.

The real reason Auckland has been usurped is because the speculative bubble has spread elsewhere. We’ve recently commented on the issues facing Queenstown, which have contributed to a table topping 31% rise there. Tauranga, Hamilton and Wellington all have price rises above Auckland; a clear sign of contagion; the speculative bubble is spreading to other regions.

Meanwhile our debt ticks up

Few commentators drew the link between this fact and the other news that our debt has hit record levels. Our private debt tracks our housing bubbles; there was a blip in the 2000s and another one is happening now.

Even more concerning are the comments from budgeting services experts who say that those on low incomes are borrowing just to stay afloat. Housing is now the major driver of rising inequality.

As a country we now owe a year and 7 months worth of our entire national income. This is high compared with other countries, putting us in the top quarter most indebted nations. If we take out the money we owe to each other and just look at our debt held with other countries, New Zealand is one of the highest.

We’ve talked before about how the rise in debt is putting our economy at risk. Currently it is affordable because interest rates are at a record low, but we can’t necessarily expect them to stay there forever. We will have to pay back this money sometime, somehow.

Election year will bring pressure for change

Everyone knows that price rises at the current rate are simply not sustainable, but they show no sign of abating soon. If house prices continue to rise in election year the pressure will inevitably build for action, the only question will be whether the politicians respond with good ideas or duds.

The most likely response will be pressure on the Reserve Bank to bring in income to debt ratios. These restrict the amount someone can borrow as a multiple of their income, and are used overseas. Such restrictions would likely take the majority of investors out of the market. However, in the current market it will be difficult to implement such a policy without shutting out first home buyers or crashing the market entirely. Politicians won’t want either of these outcomes.

We’ve previously critiqued both National’s HomeStart scheme and the Greens’ proposed capital gains tax as being ineffective solutions to the problem. We really need to close the tax loopholes on housing with a Comprehensive Capital Income Tax, but few politicians look up to that challenge.

Housing Debt Hits Record Levels As Speculative Contagion Spreads was last modified: October 6th, 2016 by Geoff Simmons
About the Author
Geoff Simmons

Geoff Simmons

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Geoff Simmons is an economist working for the Morgan Foundation. Geoff has an Honours degree from Auckland University and over ten years experience working for NZ Treasury and as a manager in the UK civil service. Geoff has co-authored three books alongside Gareth.

  • Graeme

    Either the Government acts to rein in the market or the full market fall will be experienced when the next GFC hits. Which looking at the world economy could be at any time. And China won’t be there to protect NZ and Aus with a huge infrastructure spend up. It will be brutal.

    • Dan

      Indeed, two words: Deutsche Bank.

    • ross b

      it will be brutal and global.

  • mark

    The government talks about economic growth and a rockstar economy but doesnt bother to mention the growth of debt both public and private. We are borrowing so much and only getting minimal growth when pop. growth is taken out. The National government is riding a debt boom with 1% growth with the Christchurch rebuild adding 2% to GDP. You could say were running at -1% growth with massive growth in our national debt levels and all when we have historic low interest rates.

    What happens when house prices peak or worse fall and then you add increasing interest rates. We could be looking at a severe recession.

    I wonder how many people have borrowed money calculated on just affording their loans with interest rates at 4.25%. What happens if they were to return to 8-9%? Even if we dont see the defaults like the US and large financial institutions collapse it will constrain the economy going forward.

    The housing market is overvalued. House prices cant simply keep rising past the point where people cant afford them especially in Auckland.

    So when house prices stop rising our debt fuelled growth will stop or reverse. Its like every boom bust cycle. As before this is what our economy looks like in the boom what will it look like in the bust!!!!

    • ross b

      Agree its a debt boom … The real problem is that the world is now collectively trapped. Without further debt being added, commodities will sink further in price – ask any dairy farmers if they can handle a further halving of milk price, or Oil companies if they can tolerate a long period of $20 barrel prices … We are in a really ugly cul de sac.

  • Peter

    I’m i right in saying that transparency is a part of the problem, I can balance my books because i see where the money is going. Markets like housing are not transparent, surly a good starting point wold be legislation around visibility. Or get to the point and restrict owner ship of land and homes to discourge the gentrification of this once great county.