The Risks of the House Price Boom [infographic]

Gareth MorganEconomics15 Comments

Banks and the Reserve Bank have for a long time viewed mortgage debt as ‘safer’ than other types of debt. That means that banks have been able lend more and at lower interest rates than they can for other types of debt.

The sheer size of mortgage lending has now rendered that assumption of mortgage debt being ‘safer’ as false. Loose lending restriction in the past have contributed to the boom in house prices and growth in debt that now puts our economy at risk. New Zealand is now dependent on foreign lending, and if foreign lenders decide that New Zealand is looking like a riskier place to put their money then they may not want to lend to us, or if they do they will demand higher interest rates. This could make it difficult for people to repay their mortgages.

risks of house price boom infographic

The Risks of the House Price Boom [infographic] was last modified: August 17th, 2016 by Gareth Morgan
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Gareth Morgan

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Gareth Morgan is a New Zealand economist and commentator on public policy who in previous lives has been in business as an economic consultant, funds manager, and professional company director. He is also a motorcycle adventurer and philanthropist. Gareth and his wife Joanne have a charitable foundation, the Morgan Foundation, which has three main stands of philanthropic endeavour – public interest research, conservation and social investment.

15 Comments on “The Risks of the House Price Boom [infographic]”

  1. Banks facilitate it all by granting mortgages (ie. money out of nothing). They should have to carry the can and lose money out of nothing. I really cannot see the point of mortgages. Prices should reflect what people can save themselves, wouldn’t that be a better world! Take a zero off the price of every property (i.e., divide by 10), cancel mortgage debt and outlaw it. Hey presto. Problem solved.

    1. Yep that’s called Socialism and that worked a treat in a whole range of places! Venezuela is the latest to try that one.

      1. Venezuela is a typical one-horse economy, the oil revenue was all gathered up by the few (must admit to knowing bugger all about Venezuela). The same happens in the Gulf States whereby just enough is allowed to trickle down to stop revolt but not enough to really diversify (ownership). Doesn’t help having the US trying to undermine Venezuela of course. It’s not socialism, it’s real capital(ism) I’m talking about.. Capitalism works fine until the only capital is regarded as the house you live in. We are talking about housing, not socialism and not capitalism. If we all had to pay for water, would it become capitalism if we all stored rain water and banks started to lend us hundreds of thousands of dollars for ever more expensive water tanks? Housing is a basic human need.

      2. How is a bank lending money that it doesn’t have responsible capitalism. It is a situation that history will surely look back upon as a bizarre economic aberration

  2. The fact that even labour refuses to welcome any solution that leads to house price decreases shows that this ‘problem’ is far to convenient for ‘voters’. Hard to believe that Don Brash, someone I rarely agree with on other matters, is one of the only people saying that house prices need to drop considerably. If I was in government I would set a goal of decreasing house prices by 5% a year for the next 10 years. Or make it a target range like inflation, aim for hours price decreases between 3-7%. The government is allowed to use any of its tools to achieve it. Too bad the young haven’t had enough time to understand what is happening to them and understand why they should vote.

  3. Finally a reasonable sort of post that attempts to address the issues without pandering to your social warriors, social democrats, lefts and Herne Bay socialists.
    Clearly, in my view, the issue needs a comprehensive plan but I think the RB has been asleep at the wheel, while I believe in free(er) markets the banks have been allowed to create credit without exacting over sight or rules. I think an article on comphrehensive reform of the RB and banking system is in are few ideas:
    1. The banks cannot borrow offshore
    2. The banks must issue Bonds locally if they want to lend to the property market
    3. The banks must maintain gold reserves at the RB, not to be used as their lending base
    4. The banks must maintain higher reserves with the RB
    5. The banks must invest in more IT so they can closely monitor their lending patterns, ie who they are lending to, in what income categories and what locations
    6. The RB should actively monitor this reporting and direct or maintain lending ratios , ie, 10% of the portfolio to Dairy farmers. 50% of all lending must be to Business
    7. Tightening up lending ratios as currently happening, ie deposit amounts.
    8. Punative fees or interest charges in failing to adhere to the rules.

    While this sounds like Socialism the last 30 years of laissez faire bank lending has been an error. hen in Australia 3 weeks ago each of the 4 big banks were estimated to be $5b short of the their reserve requirements, $20b total ..sobering thought

    1. The Reserve bank has to operate within their guidelines which are not frequently changed, but ultimately global conditions are doing more damage than they can control.

      Even Japan or the EU can’t control the global economy which influences their currencies, and thus their economic performance. Their efforts then drive investors here, leading to local impacts. We are (sadly) a small and insignificant cogs that can be driven by external factors so easily.

      Remember when National was being criticised for a net migration outflow and now perhaps we are rethinking those comments.
      Responding to your ideas:

      1. This would drive interest rates up massively and cripple the economy – remember that not only home owners borrow – you might not remember the 80’s with 24% mortgage interest rates, you could buy a house cheaply but not afford to pay the interest costs anyway.
      2. They do offer local deposit rates, but Kiwis aren’t big net savers, and nowadays what they are saving is tied up completely in Kiwisaver (or their home). We are taught to pay off the mortgage before other saving from an early age.
      3. Old school idea, but reserve ratios can be increased which slows borrowing, the reserve bank is doing this. Problem is that it affects businesses as well. Also, Gold prices fluctuated between USD2000 & 1200 in the last 3 years or so, that isn’t really price stability in terms of asset base.
      4. See 3
      5. The local trading banks know intimately where their money is going, as they have contracts for their lending, not like the securitised rubbish that caused the sub prime lending issues in the US which were effectively reselling the risk on insurance on junk mortgages.
      6. Banks often specialise, the RB cannot direct them to have such a prescriptive split of their portfolio. How would an Ashburton based bank who knew farming, lend in upper north Island industry effectively, safely. It would also damage competition that keeps our interest rates down as once a bank has met their needs they would not chase new business, and they would go for the nice large safe companies and smaller less wealthy groups would face higher lending costs.
      7. makes sense, but once you have a large portfolio and good capital growth, you are almost immune as the total capital growth over multiple properties supports increasing lending and cuts out others (this does however stop people with smaller portfolios taking outlandish risks)
      8. Loss of banking licence is an option, but a massive step. NZ banks are pretty good staying within the rules that the government and RB set, just the political will is needed to have those restrictions.

      1. Don’t disagree at all with your comments in general. However the RB guidelines I suspect haven’t been changed in 30 years. Yes we are a ship afloat in the sea of globalisation and it makes a mockery of their interest rate pronouncements every quarter, as if they can really set them…I just hope we don’t go negative.
        Yes I remember net outmigration I even did a paper on it in 1978 at Akl Univ did an econometric model, haha. Economics and maths what a load of bullshit.
        Thanks for your comments on my ideas but I notice you offer nothing in return!
        At the end of the day I suspect we can only do things at the margins, until global thinking changes re things like Quantitative Easing and loose credit policies where we have bought forward future consumption for the next 20 years.
        We are stuck but it doesn’t stop us moving in the right direction, the world may follow our model if it worked.
        1. generalist comment of yours that I cant accept, massive and cripple. I had a house then our rate went to 24%, I still had a job, the economy still worked.
        2. Don’t follow this comment at all, to issue credit for house purchases, bonds have to be issued.
        3. Nothing wrong with old school, it worked in the past and will work in the future, simply put the currency must be backed with an asset. Why else are the Chinese buying gold when ever they can, they want to back their currency with Gold.
        4. From what I have heard and read the abnks IT systems are antiquated because of the high costs to change.
        5. Guidelines more than prescriptive, you don’t want the RB doing the banks job, better monitoring and guidance, perhaps their exposure to dairying would not be so great if someone had say hey.
        Anyway you a staus quo man?? 🙂

  4. a bank creates money so you can pay for the labor used to make it –say– your house they say you pay for the labor over 30 years — or you spend 30 years building the house — it is the person that buys the house later and demands a profit that destroys the system as they do not work for their money — this is capitalism and it causes — in its extreme– every past civilization to fai— and we are next— like a car a house should become cheaper from age and more expensive from improvements — the repayments should not have interest only genuine bank services – and related to you income as taxes are — so if you are filthy rich you pay actual cash — and poor you pay a percentage of your income over the years you need

    1. Sorry Kay but it is its back to the books for you, you don’t understand how an economy or bank operates. :). Money or credit is simply a method of exchange for goods and services. In Iraq in their empire, 3000 years before the birth of Christ they used little clay tablets. We now use bank notes, or electronic payment methods. You work, you earn, even 3500 years ago you got a leg of lamb, or some rice and then 3000 years ago clay tablets came out. In Iraq 3,000 years ago they would have faced exactly the same issues we face now. Too much credit, not controlled properly is bad for an ecxonomy.

  5. The unhelpful labels used by a couple of respondents don’t advance anyone’s understanding of anything except their argument’s ahistorical shallowness. Banks and economies are both constructs of societies and understandably have to be controlled by the state without pandering to particular interest groups. I hope that all members of the community would consider themselves morally bound to be ‘warriors’ for social justice.

    1. Sorry but I don’t know what social justice is? Generally its just a polite term used by the intelligentsia to hide the fact they are socialists.

  6. As the ratio of housing price to income is largely not an issue in Germany (as it is not affordable for 80 % of young families, full stop) I have taken some time to find numbers. But here they are. Germany has an affordability index as has Auckland. Nationwide. And Apartments have risen far sharper in Price than Houses in the last 4 years, due to demand. So please, also I think most of your arguments are correct, Germany is NOT a role model for them. See this study (stopping in 2013, but I found no better numbers, the affordability Index is on Page 19) . Also it is absolutely legitimate and reasonable, the house affordability discussion in NZ, Australia and Canada is pure luxury from a German perspective.

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