Govt or Reserve Bank: Who Will Help Borrowers Out of Bubble Bath?
Housing
The Finance Minister say he’ll urgently activate Covid shutdown support. But for those locked down in a brutal housing market, today’s Reserve Bank decision on interest rates is a lose-lose.
ANALYSIS: Those paying top dollar to get their first home may think it allows them to enjoy the bubbles like the generation before; instead they are more vulnerable than ever.
If the Reserve Bank doesn’t raise the official cash rate from its all-time low of 0.25 percent, prices for the scarce supply of houses will continue to soar. But if the Bank hikes interest rates, it becomes dangerously hard for them to service massive debts.
That combines with this week’s Covid lockdown slowing the economy, and puts them at greater risk than anyone. For those understandably worried about paying the bills, Ministers Carmel Sepuloni and Grant Robertson have activated business and welfare support measures.
Robertson said he had spoken to Reserve Bank Governor Adrian Orr ahead of last night’s announcement, who had confirmed the Reserve Bank would go ahead with its official cash rate decision on Wednesday. “It’s not my place to give the Governor guidance on those matters,” the minister said.
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A full week of national level four lockdown could cost the country’s economy $1.5 billion, Robertson said, or $920m as most of the country moves to level three. An increased $600/wk wage subsidy scheme is being activated and businesses would have access to some of the $5 billion set side for just this scenario.
Robertson promised to ensure agencies got the money out the door quickly to protect jobs and keep firms’ operating. Details of the wage subsidy scheme are going up on MSD/Work and Income websites; Inland Revenue has info live on the Resurgence Support Payment to help support businesses or organisations with one-off costs due to the Covid-19 alert level increase.
It comes as a new report by the Financial Services Council shows just how exposed New Zealanders are to a downturn.
The report highlights the challenges for Generation Rent but also says the cost of stepping across the threshold into home ownership may be too high, leaving borrowers more vulnerable than anywhere else in the world. Ryan Bessemer, the chief executive of Trustees Executors who sponsored the research report, says the difficulty in getting on the home owning ladder is arguably one of the most challenging social and economic issues we have seen for some time.
“In addition to access, the increasing risk profile for Kiwis who have accumulated substantial debt at historically low interest rates is also a concern.”
He said property in New Zealand was already expensive by world standards prior to the pandemic, but with median growth of more than 30 percent in the past 12 months, and a further 15 percent anticipated by the end of 2022, access to first time property buyers could not be further away.
“History tells us that a substantial correction is in no one’s interest and would have flow on implications to our economic recovery. There are no easy answers of course, however I believe there will be several options canvassed to slow growth, including taxes (think stamp duty), tightening of lending guidelines, and perhaps the release of more land to address housing stock shortages.”
– Ryan Bessemer, Trustees Executors
Bessemer cited this year’s Bloomberg Economics Bubble Ranking Index: “Unsurprisingly, New Zealand ranks 1st in the bubble index.”
Bloomberg indexed New Zealand’s price-to-income ratio at 166, and the price-to-rent ratio at 211.
“History tells us that a substantial correction is in no one’s interest and would have flow on implications to our economic recovery,” Bessemer said. “There are no easy answers of course, however I believe there will be several options canvassed to slow growth, including taxes (think stamp duty), tightening of lending guidelines, and perhaps the release of more land to address housing stock shortages.”
New Zealand is at higher risk of its bubble popping than any other country, the Bloomberg Index says. Its real price growth was 13.2 percent year-on-year, and its annual credit growth was 6.0 percent.
Bloomberg economist Niraj Shah said in his report that the extraordinary stimulus from governments and central banks, that had helped get the global economy back on its feet, was also stoking a new problem of real estate bubbles. “Gauges of risk are flashing warnings at an intensity not seen since the run-up to the 2008 financial crisis,” he said.
“It doesn’t take a long memory to recall times when runaway house prices triggered a crisis. The risk is greater when there’s a synchronised boom – as is the case in the current cycle.”
– Niraj Shah, Bloomberg
Risks were most elevated in New Zealand, Canada and Sweden, with the US and UK not too far behind. “In an ultra-low interest rate environment, and with lending standards higher, it’s hard to see a trigger for crash. When borrowing costs do start to rise, the resilience of the housing boom will face a test,” he said.
“The house price-to-rent and the price-to-income ratios provide benchmarks of sustainability – prices can’t move out of line with incomes or rents forever. On these measures, Canada and New Zealand look most stressed.
“As in the U.S. ahead of the sub-prime crisis, excess growth in credit to households can be a sign of trouble ahead…. While this includes other consumer debt, a large proportion tends to be mortgages.”
He noted that New Zealand had reduced mortgage loan-to-value ratios, and removed “tax incentives” for property investors. “Still, it doesn’t take a long memory to recall times when runaway house prices triggered a crisis. The risk is greater when there’s a synchronised boom – as is the case in the current cycle.”
ANZ chief economist Sharon Zollner argued that in terms of interest rate and exchange rate volatility, the lesson of the 1990s and 2000s cycles was that “a stitch in time saves nine” – that kicking off a hiking cycle too late can lead to a perception that dramatic action is going to be required to rein things in.
“Of course, with household debt so high and relatively lightly fixed, we don’t doubt the Reserve Bank can get traction on household cashflow quite quickly with rate hikes, but that doesn’t mean hiking too late is riskless.”
But she acknowledged the Reserve Bank had until relatively recently has been more focused on avoiding the policy errors of 2010 and 2014, when premature hikes had to be reversed.
“There’s not enough information yet for the Reserve Bank to change its forecasts, but it certainly highlights the uncertainty of the world we live in!”
– Sharon Zollner, ANZ
This time, both core inflation and the unemployment rate more clearly pointed towards rates hikes being appropriate than when the Bank moved too soon in those years, in anticipation of a tight labour market and inflation.
Others economists like Westpac’s Michael Gordon and Sense Partners’ Shamubeel Eaqub have argued the Reserve Bank should pull back from any interest rates hike. But Zollner urged the Monetary Policy Committee, at its meeting this morning, to stick to its guns.
She says: “There’s not enough information yet for the Reserve Bank to change its forecasts, but it certainly highlights the uncertainty of the world we live in!”
