Responsible Lending? I wonder….

[Logen Ninefingers]

Interesting to see the following quote in the below article:
“Where was the bank's stress test when we took the mortgage out? Is this not irresponsible lending by the bank, akin to the United States sub-prime mortgage lending fiasco?”

The size of these mortgages is just staggering. IMO, lending someone $850,000 to buy residential property is an act of folly.

—————

https://i.stuff.co.nz/business/property/132483897/mortgage-rate-pain-we-will-probably-have-to-sell-the-house

Mortgage rate pain: 'We will probably have to sell the house'
Miriam Bell
05:00, Jul 06 2023

‘Mortgage rates have skyrocketed over the last two years, and that change will cause pain for many people refixing this year.

After Covid hit in 2020, rates fell to record lows of around 2%, but two years on they have climbed to around 7%.

For households coming off low two year rate deals this year, and moving to current higher rates, that means their repayments will cost thousands more.

It will be a huge financial shock to many, so when Stuff reported on the "mortgage bomb" on Tuesday, we asked for reader experiences.

One reader said he and his partner bought their West Auckland home in April 2021 with a fixed rate of 2.65%. They have a $700,000 mortgage on a 20-year term, and were paying $3761 a month.

But they were due to refix, and the best fixed rate currently available was 7.25%, he said. It meant their repayments would leap to $5533 a month.

“That is an increase of $1772 per month, or an extra $21,264 per year. So we will need to find nearly an extra $30,000 worth of income in order to service the increased interest cost.”

They could not extend the term of their mortgage as he was in his early 50s, and the sole income earner for the family.
“So, we will probably have to sell the house as we can't afford this,” he said.

“Where was the bank's stress test when we took the mortgage out? Is this not irresponsible lending by the bank, akin to the United States sub-prime mortgage lending fiasco?”

Another Auckland reader bought a KiwiBuild house in 2019 for $650,000, and refixed their mortgage nearly two years ago for 2.79%.

That fixed-term rate would come to an end in September, and he expected the repayments on their $460,000 mortgage debt would jump significantly when they refixed again.

“What I want to know is why it is not possible to fix mortgages for longer periods of time in New Zealand,” he said
“In the United States, I believe borrowers can fix their mortgage for the life of the loan, why don’t we have that opportunity here?”

The existing situation seemed to favour the banks rather than the public, and hearing about their record profits was a savage burn on top of the rise in costs of living, which were making it harder to get by, he said.

One reader said she and her family had moved to Australia to get better paying jobs, so they could manage their mortgage repayments.

The family put their life savings into buying a house in 2021. They had an $850,000 mortgage, and were on a rate of 3.89%.

When they had to refix to 6.69%, they decided to rent their house out, and cross the ditch, she said.

“The rent is not sufficient to pay for the mortgage, and we have considered selling our house, but due to the drop in the market our house’s value has decreased by $200,000.”

They were struggling to pay rent, child care costs and manage living expenses in Australia, and were hoping for some sort of change, she said.

Another reader originally bought his Auckland house in 2012, but bought his ex-wife out when they separated in 2021.

At the time rent cost about as much as the mortgage, which he got on a 2.59% rate.

But he was about to experience the pain of a massive increase in rates, after he refixed for a special six-month rate of 6.84% this week, he said.

“This increases my mortgage by $811 a fortnight, and I find myself in a predicament. I've already cancelled all my subscriptions, the only other thing I can skimp on is insurance.”

His house’s value had decreased so much, there was no way he could sell, he said.

“I'm on a very well-paid job, roughly $140,000. I shouldn't be having to struggle like this. I get nothing from the government, but pay $40,000 in tax, and rates will hit me next.”

He was now signing up to do Uber driving on the weeks that he did not have his children, he said.

A reader with a $680,000 mortgage and 26 years left on the term was on a 2.5% rate until October, but said his family would find it very tough after they refixed.

“If we jump to say 7% then we'll be paying an extra $400 per week. Our weekly budget currently has nothing spare, before the rise.

“My partner and I are on reasonable incomes of about $150,000 pre-tax combined. But we have four kids, and with the cost of everything going up, we are barely holding on.”

They did not know how they were going to be able to come up with that much more money every week, he said.

“One option is to go interest-only, but given our age, extending our mortgage term for another year or two will mean we may be forced to work beyond 65.”

One Christchurch reader said her family had several mortgages under different scenarios, and would feel the increase in rates.

The family home was split into three mortgages, so only one third was coming up off 2.95% in November to whatever was the rate then, she said.

But the rate on a property they own and “rent” to her parents to make housing more affordable for them on the pension had gone from 2.35% to 6.39%.

“They pay half the mortgage, and we pay the other half. So not only is this a hit on our outgoings when trying to help family out, but also on their pension payments.

“We also have a rental which has gone from 2.49% to 6.35%. Even with a rent increase for a new tenant we now have a shortfall to cover.”

Add in childcare, and the increase in petrol, groceries, and so on, and it was not a great combination, she said.

“But there is no crystal ball, and we haven’t locked in for longer than two years. We do think rates will come back down. We just have to wear the pain for now and work out other ways to save costs.

“On my partner's first house the rate was closer to 8%, so for him it’s not as bad as it could be.”

Meanwhile, 3% of 1091 survey respondents thought they might have to sell a property in the next year because of higher interest rates, according to the new Horizon Research Banking Monitor.

That figure was equivalent to 43,000 people with a mortgage.

The research also found that 23% of, or 303,000, mortgage holders were very concerned they might not be able to afford their repayments if their mortgage was refixed at the current floating rate, or a higher fixed rate.’

[Aaron]

“Where was the bank's stress test when we took the mortgage out? Is this not irresponsible lending by the bank, akin to the United States sub-prime mortgage lending fiasco?”

The size of these mortgages is just staggering. IMO, lending someone $850,000 to buy residential property is an act of folly.

I think the banks were stress testing at around 8%. You will know if it was folly if the loans go bad. Bad for the people borrowing maybe, but the banks must be happy.

Shame a bunch of cry babies do not want to take responsibility for their actions and are blaming the banks for giving them the money. I imagine a couple of years ago when they wanted to jump on the house buying band wagon and were probably complaining that they weren't being given enough money by the banks.

Maybe if they tough it out for a few of years they will see the benefits of inflation and suppressed interest rates on their debt and house prices.

The RBNZ sets the price of capital (interest rates) and can create capital (printing money) out of thin air.

Adrian's Funding For Lending and near 0% interest rates were designed to prevent a 10% fall in house prices at the time of the pandemic. You have to admit they were pretty successful.

Maybe instead of the RBNZ guaranteeing house prices and cost of living increases (inflation) of 2-3%pa they should have a target of 0%. 0% inflation sounds like price stability to me.

Maybe the MPC should be sacked if inflation remains too high for too long as they have failed to do the job they were appointed for. If they are not capable of managing inflation perhaps appointing people with a spine and a set of cajones would be a better option. People pleasers don't help anyone in the long run.

[kiora]

Inflation is always and everywhere a monetary phenomenon.

~ Milton Friedman

[Jay]

The banks increased their Stress test rate as the rates were rising from memory.
If they had a stress test rate of say 8% when rates were 2-3% the same people would also be crying foul.
No body really knew when and how high rates could/would go.

[Logen Ninefingers]

The banks increased their Stress test rate as the rates were rising from memory.
If they had a stress test rate of say 8% when rates were 2-3% the same people would also be crying foul.
No body really knew when and how high rates could/would go.

So who stuffed up then in your opinion?

[Aaron]

So who stuffed up then in your opinion?

No one stuffed up. Other than maybe Adrian Orr and central bank monetary policy.

Can we agree the RBNZ low interest rates and easy money as well as excessive immigration were largely responsible for excessive speculation in housing. Kiwis borrowing more and more to buy houses off each other. It happened in Ireland in the GFC, seemed stupid then and might appear stupid now unless the RBNZ drops rates and pushes house prices up again in which case they are geniuses, it is a gamble on central bank policy either way.

People saw prices going up 10-20% a year so wanted to jump on the band wagon as people do in speculative mania. Sadly for the first home buyers they were not trying to make money but secure a future for themselves and their families as they saw home ownership being pushed beyond the reach of an average salary earner. They took a chance and it has not paid off YET.

They made their choices and took the risk that property might not increase every year at 10-20% and that interest rates might not remain at historically low rates forever.

People should stop whining and take responsibility for their actions. That said I have not taken my own advice and have been angry at Adrian for years because I did not load up with excessive amounts of debt and accept unreasonably low yields. Mostly because I thought the RBNZ would act responsibly. I was angry because I would have been a lot richer for doing so.

If anything the media should be looking at inflation targeting and find the study that proved it was a good idea in the first place, because I can't.

We should also question if printing money (capital) makes us richer or poorer and if suppressing the price of capital (interest rates) results in better decision making when allocating capital.

Do you reward investors or speculators??? Or perhaps provide stability so that people can make decisions without having to factor in inflation.

This is the Share Trader website so I suspect the answer is speculators.

[Jay]

No one stuffed up. Other than maybe Adrian Orr and central bank monetary policy.

Can we agree the RBNZ low interest rates and easy money as well as excessive immigration were largely responsible for excessive speculation in housing. Kiwis borrowing more and more to buy houses off each other. It happened in Ireland in the GFC, seemed stupid then and might appear stupid now unless the RBNZ drops rates and pushes house prices up again in which case they are geniuses, it is a gamble on central bank policy either way.

People saw prices going up 10-20% a year so wanted to jump on the band wagon as people do in speculative mania. Sadly for the first home buyers they were not trying to make money but secure a future for themselves and their families as they saw home ownership being pushed beyond the reach of an average salary earner. They took a chance and it has not paid off YET.

They made their choices and took the risk that property might not increase every year at 10-20% and that interest rates might not remain at historically low rates forever.

People should stop whining and take responsibility for their actions. That said I have not taken my own advice and have been angry at Adrian for years because I did not load up with excessive amounts of debt and accept unreasonably low yields. Mostly because I thought the RBNZ would act responsibly. I was angry because I would have been a lot richer for doing so.

If anything the media should be looking at inflation targeting and find the study that proved it was a good idea in the first place, because I can't.

We should also question if printing money (capital) makes us richer or poorer and if suppressing the price of capital (interest rates) results in better decision making when allocating capital.

Do you reward investors or speculators??? Or perhaps provide stability so that people can make decisions without having to factor in inflation.

This is the Share Trader website so I suspect the answer is speculators.

What he said!

[Logen Ninefingers]

Nobody stuffed up, but the results of the below survey make alarming reading.
But the bank stress tests were all in order, the amounts being loaned were all in order, and there was no ‘subprime’ lending of any sort going on. Honest.

If you put ‘bad credit and low deposit home loans new zealand’ into Google, you should see how many websites show up. I can only presume these entities exist because nobody is using them.

https://www.newstalkzb.co.nz/on-air/heather-du-plessis-allan-drive/audio/graeme-colman-horizon-research-principal-researcher-on-43-000-people-revealing-they-will-have-to-sell-their-property-due-to-rising-interest-rates/

Horizon Research data reveals 43,000 mortgage holders fear they'll have to sell their property

Publish Date Thu, 6 Jul 2023, 6:19PM

‘11 percent of mortgage holders responding to a survey have said they'll likely need to sell in the next 12 months.

That's according to an opt-in Horizon Research survey on the impact of higher interest rates.

About 70 percent are worried repayments could be unaffordable.’

[Logen Ninefingers]

No one stuffed up. Other than maybe Adrian Orr and central bank monetary policy.

Can we agree the RBNZ low interest rates and easy money as well as excessive immigration were largely responsible for excessive speculation in housing. Kiwis borrowing more and more to buy houses off each other. It happened in Ireland in the GFC, seemed stupid then and might appear stupid now unless the RBNZ drops rates and pushes house prices up again in which case they are geniuses, it is a gamble on central bank policy either way.

People saw prices going up 10-20% a year so wanted to jump on the band wagon as people do in speculative mania. Sadly for the first home buyers they were not trying to make money but secure a future for themselves and their families as they saw home ownership being pushed beyond the reach of an average salary earner. They took a chance and it has not paid off YET.

They made their choices and took the risk that property might not increase every year at 10-20% and that interest rates might not remain at historically low rates forever.

People should stop whining and take responsibility for their actions. That said I have not taken my own advice and have been angry at Adrian for years because I did not load up with excessive amounts of debt and accept unreasonably low yields. Mostly because I thought the RBNZ would act responsibly. I was angry because I would have been a lot richer for doing so.

If anything the media should be looking at inflation targeting and find the study that proved it was a good idea in the first place, because I can't.

We should also question if printing money (capital) makes us richer or poorer and if suppressing the price of capital (interest rates) results in better decision making when allocating capital.

Do you reward investors or speculators??? Or perhaps provide stability so that people can make decisions without having to factor in inflation.

This is the Share Trader website so I suspect the answer is speculators.


‘People saw prices going up 10-20% a year so wanted to jump on the band wagon as people do in speculative mania.’

————

It was all enabled by retail banks acting like crack dealers, because unless you’ve got mad piles of cash sitting around then you can’t ‘jump in’ ordinarily. At least not to the extent we saw where people were prepared to pay any old price. But as you say, every Tom, Dick, and Harriet was jumping in.

“If you can keep your head when all about you
Are losing theirs…” and all that.

Personally I’m glad I don’t buy into these mass speculative mania events like some headless chook.

[Aaron]

Personally I’m glad I don’t buy into these mass speculative mania events like some headless chook.

We should probably feel sorry for the people forced to sell especially if they are losing their equity, but if my memory serves me well you were angry at the RBNZ and banks for pushing house prices to ridiculous levels. Forced selling will bring house prices back to levels that might be considered normal.

[Logen Ninefingers]

The Reserve Bank has fired all its bullets and has now lost control of local retail interest rates.

———

‘The New Zealand dollar fell and wholesale interest rates spiked higher after US jobs numbers sent shockwaves through the world’s financial markets.‘

[justakiwi]

It seems to me that a lot of younger first home buyers these days, are not prepared to do what my generation did. We bought a house we could afford. It needed work done. We did it ourselves (most of it anyway). We didn't expect to have a designer kitchen, two bathrooms, a carpeted garage, a spa pool or a BBQ area. We started at the bottom, paid our mortgage off as quickly as we could, and it was "home." We stayed in our first house until my ex's work situation changed and we had to re-locate. At that point we bought a "better" house, which was younger and needed little done to it. We raised two more kids in that house.

Yes, I understand and appreciate that this was many years ago, when interest rates were low, but so were wages compared to now. I also get that house prices are vastly different (ridiculous!) now - but that aside, home buyers need to take responsibility for their decision making. Do your maths and work out what your proposed mortgage will cost you if the worst case scenario arises, interest wise. If it is obvious that you would be screwed if it happened, don't bloody buy that house!

It's not rocket science.

[Logen Ninefingers]

A reminder of the disastrous ‘speculative frenzy’ we lived through -

https://www.bloomberg.com/news/features/2021-04-06/new-zealand-is-among-world-s-most-expensive-property-markets-compared-to-income

It's Beautiful and Virtually Covid-Free. Just Don't Try to Buy a House There

Prices are surging for even the most dilapidated homes in New Zealand, one of the world’s most unaffordable property markets.

By Ainsley Thomson
7 April 2021 at 5:00 AM NZST

‘Every week seems to bring new stories of unimaginable prices being paid. In March, a modest three-bedroom bungalow in the desirable Auckland suburb of Greenlane sold at auction for NZ$5.98 million, some NZ$2.6 million above its local council valuation, according to real estate website OneRoof.

Behind the explosion in prices is ultra-loose monetary policy that has sent borrowing costs to historic lows and fueled a rush into higher-yielding investments such as property. Those forces are driving up values globally but New Zealand, which vanquished Covid-19 and is recovering sooner than most, has become a poster child for the boom.

Even dilapidated houses, known as “dungers” in New Zealand, are in hot demand. In January, a tumble-down, three-bedroom house with peeling paint and boarded-up windows sold for NZ$1.81 million in the Auckland suburb of Avondale, revealing the value of the land it sits on to developers.

The median house price is now 6.7 times the average annual household income, according to Infometrics. To get back to an affordable multiple of about three, the economics consultancy estimates there would need to be a 55% drop in house prices or a 123% lift in household incomes.’

[Logen Ninefingers]

https://www.nzherald.co.nz/nz/man-accused-of-forging-qualified-engineers-signatures-to-sign-off-1000-buildings-police-investigation-under-way/WRN7MP3LWZGBXBYIAZVFKF2EYA/

‘Up to 30 Auckland building projects are “potentially compromised” after a Taupō man allegedly forged the signatures of qualified engineers to sign off more than 1000 buildings around New Zealand.

At least 40 councils are now scrambling to check if any properties in their regions are structurally at risk.

A police investigation is also under way but no charges have been laid. The matter has also been referred to the Ministry of Business Innovation and Employment.’

[ynot]

It seems to me that a lot of younger first home buyers these days, are not prepared to do what my generation did. We bought a house we could afford. It needed work done. We did it ourselves (most of it anyway). We didn't expect to have a designer kitchen, two bathrooms, a carpeted garage, a spa pool or a BBQ area. We started at the bottom, paid our mortgage off as quickly as we could, and it was "home." We stayed in our first house until my ex's work situation changed and we had to re-locate. At that point we bought a "better" house, which was younger and needed little done to it. We raised two more kids in that house.

Yes, I understand and appreciate that this was many years ago, when interest rates were low, but so were wages compared to now. I also get that house prices are vastly different (ridiculous!) now - but that aside, home buyers need to take responsibility for their decision making. Do your maths and work out what your proposed mortgage will cost you if the worst case scenario arises, interest wise. If it is obvious that you would be screwed if it happened, don't bloody buy that house!

It's not rocket science.

Exactly. Anyone borrowing $800k for a home and then complaining when the rate increases has only themselves to blame.

[blackcap]

It seems to me that a lot of younger first home buyers these days, are not prepared to do what my generation did. We bought a house we could afford. It needed work done. We did it ourselves (most of it anyway). We didn't expect to have a designer kitchen, two bathrooms, a carpeted garage, a spa pool or a BBQ area. We started at the bottom, paid our mortgage off as quickly as we could, and it was "home." We stayed in our first house until my ex's work situation changed and we had to re-locate. At that point we bought a "better" house, which was younger and needed little done to it. We raised two more kids in that house.

Yes, I understand and appreciate that this was many years ago, when interest rates were low, but so were wages compared to now. I also get that house prices are vastly different (ridiculous!) now - but that aside, home buyers need to take responsibility for their decision making. Do your maths and work out what your proposed mortgage will cost you if the worst case scenario arises, interest wise. If it is obvious that you would be screwed if it happened, don't bloody buy that house!

It's not rocket science.

Totally agree with your sentiments. People not willing to do the hard work but also not willing to start humble. I remember my uncle and aunt lived in a garage for 2 years before they had enough money to build their home.

That said: I remember when I was just out of uni, starting salary was $30k. I then bought my first 3 bed home for $73,500. Mortgage was $50pw.

Now starting salary out of uni is $70k? But that same 3 bedroom home I recently saw priced at $695,000.

That is a world of difference. Starting grad salary about double. Price of home almost 10 fold.

[justakiwi]

I agree. But people seem reluctant to ever consider relocating to somewhere far less expensive. It does to some extent, depend on what job you have, but in this day and age, many "professional" type jobs can be done remotely. Jobs at the other end of the spectrum can literally be done anywhere. Why would someone working as a caregiver, cleaner, cook, teachers' aide, builder, mechanic etc, choose to live in Auckland and pay ridiculous house prices, when they could very easily find a job in a far less expensive city or town? If you want more bangs for your buck, you seek out a location that will give you that.

Lifestyle is what you make it. You get to enjoy your lifestyle significantly more if you are not stressed out worrying about how to pay your $800,000 mortgage. If you can buy a similar house for $600,000 elsewhere, why would you not do that???



Totally agree with your sentiments. People not willing to do the hard work but also not willing to start humble. I remember my uncle and aunt lived in a garage for 2 years before they had enough money to build their home.

That said: I remember when I was just out of uni, starting salary was $30k. I then bought my first 3 bed home for $73,500. Mortgage was $50pw.

Now starting salary out of uni is $70k? But that same 3 bedroom home I recently saw priced at $695,000.

That is a world of difference. Starting grad salary about double. Price of home almost 10 fold.

[Logen Ninefingers]

Exactly. Anyone borrowing $800k for a home and then complaining when the rate increases has only themselves to blame.

Yeah, but when does a huge mortgage x how ever many of these have been issued become the retail banks & secondary lenders problem?

“If you owe me $10 you’ve got the problem, if you owe me $1,000,000 I’ve got the problem”.

[Logen Ninefingers]

In the 70’s if you were on an average income and wanted to borrow hundreds of thousands of dollars they’d think you were mad, in this day and age banks are practically begging people on average incomes to sign up to an $800,000 mortgage to buy a bog standard residential property. They all have sales targets to meet & just one product to sell: mortgages on residential property.
It’s not just the mind-set of would be property buyers that changed, it’s the mindset of the retail banks.
I doubt ‘mortgage brokers’ existed in a big way in the 70’s, 80’s, and 90’s either. There is this whole apparatus of what I term ‘the property industry’ that exists to tell people that eye-watering prices are actually really affordable & that they have to get in now otherwise they will miss out.
I remember the TV ads with the young lady talking about the large ‘capital growth’ to be had in a certain area, and another ad with the smiling lady saying “yeah, this is a great buy”. You don’t see these ads anymore.
Were there ads like that in the 70’s, 80’s, 90’s? Not that I can remember. Real estate agencies and retail banks made untold billions billions out of the property frenzy, and plowed a portion of their winnings back into advertising that told people that property was the risk-free bet you couldn’t lose.

[ynot]

Yeah, but when does a huge mortgage x how ever many of these have been issued become the retail banks & secondary lenders problem?

“If you owe me $10 you’ve got the problem, if you owe me $1,000,000 I’ve got the problem”.
In NZ not that often I would guess. Not like the US in 2009 when owners unable to pay mortgages gave the keys back to the bank and ran. Not so here.

[Logen Ninefingers]

I still can’t fathom the basic human mindset that things are not going to happen here because they haven’t yet happened here. It is truly astonishing.
Go back 2 years and no-one thought property prices could ever drop in NZ, and everyone readily brought into the ‘property experts’ (spruikers) standard spiel about how from now on property prices would double every 5 years.

[Logen Ninefingers]

Strange times indeed when the head economist of one of our major retail banks acknowledges that the Reserve Bank has finished hiking, says he expects that the US federal funds rate will go past where the OCR is now....but then says that he (and he's in a minority of one) expects the Reserve Bank to be able to cut rates in February with retail banks cutting mortgage rates in October in advance of this first OCR cut.

The fed funds rate can go past the OCR and the NZD won't lose its purchasing power? When pigs fly!

Retail bank economists and property 'experts' have proven to be some of the most non-credible people going around, yet are still keenly sought out by our pliant media.