Final bullet into a dropping property bull?

[Hommel]

So much of the property boom in the last few years has been driven not by increases in wealth or incomes but by debt. Surely, once most people are mortgaged to the eyeballs with 90-110% mortgages then the ability to borrow more is limited. Thus one of the key drivers of the boom, higher and higher debt, is removed. If wages and rents were increasing at the same rate as house prices then that may be sustainable but they are simply not.

[srotherh]

An article published today


Sunday August 5, 03:42 PM
Mortgage stress mushrooms
New research by economist Brian Easton shows half a million New Zealanders are now living in mortgage stress, spending more than 40c in every after-tax dollar their households earn on the mortgage.

"There has been a sharp rise in households under financial pressure because of their burgeoning mortgage bills," Dr Easton told the Sunday Star-Times.

Overall, 175,000 households, or 11.2 percent of all households, are in mortgage stress, in figures to June 2007.

The figures, compiled for the newspaper, represent a large swath of the mortgage-belt, as only about 30 percent of all households have a mortgage.

In 2004 just 3.7 percent of all households were in the mortgage stress zone.

Dr Easton said while for some households heavy mortgage repayments were a deliberate part of their life financial plan, for others it was a huge strain and left little in their budget for anything else.

Last week the international credit ratings agency, Fitch Ratings, ranked New Zealand as the world's riskiest housing market, with our prices among the world's most over valued.

In a survey of 16 developed nations, Fitch also ranked New Zealand households second only to Denmark for their debt vulnerability. With its high interest rates, New Zealand also had the worst interest to income ratios in the survey.


Dont sound that hot

Are we following the americans

[Stranger_Danger]

There are going to be a lot of grumpy people around in the next few years. I'm seeing it already in a number of different ways.

I honestly believe many people have led themselves to believe that getting paid is unrelated to output, that reward is related to risk and that debt is something that actually has to be paid back.

[MrDevine]

From Bloomberg:

U.K.'s Subprime Crisis May Be Worse Than U.S.'s: Matthew Lynn
By Matthew Lynn

Aug. 8 (Bloomberg) -- We are now all familiar with the damage that can be done to financial markets by a subprime lending crisis. Global equity markets have taken a battering recently because of concerns about U.S. home mortgages.

So which country is next?

The U.K. has had a property bubble every bit as crazy as the U.S.'s. Valuations were stretched, and lending criteria loosened. And now arrears are starting to rocket, even while the economy remains healthy.

Not only does the U.K. face its own subprime crisis, it could be far worse than in the U.S.

The latest figures on debts and mortgage arrears in the U.K. certainly make grim reading. Households ``are getting into more trouble when it comes to their mortgages,'' London-based consulting firm Capital Economics Ltd. said in a note to investors. ``With higher interest rates yet to have their full effect, mortgage arrears are likely to rise further, while unsecured bad debt might start to rise again too.''

The signs of trouble ahead can be seen in the number of homes now being repossessed because their owners can't keep up the payments. According to the Council of Mortgage Lenders, lenders foreclosed on 14,000 properties in the first six months of the year, 30 percent more than in the year-earlier period. That reflected ``the impact of an increasing amount of subprime lending within the overall market,'' the council said in a statement on the figures.

Britons in Debt

Arrears aren't in great shape either. An estimated 125,100 households are behind with their mortgage payments, about 1 percent of the total, according to the council. Home owners behind with the payments will have their homes repossessed a few months down the line, unless their finances improve.

The wider picture of indebtedness isn't much more comforting. The British are deeper in the red than any other major economy. According to data from the National Institute of Economic and Social Research in London, the ratio of household debt to personal income is 1.62 in the U.K., compared with 1.42 in the U.S., 1.36 in Japan and 1.09 in Germany.

The U.K. is now facing a subprime crisis on a similar scale to the U.S. As anyone who has taken out a mortgage in Britain will know, banks shovel out money without asking many questions. A review by the U.K.'s Financial Services Authority last month criticized reckless lending in the subprime sector, which has, it said, ``resulted in the approval of potentially unaffordable mortgages.''

No Proof of Income

The British market doesn't fall neatly into ``prime'' and ``subprime'' categories. Most of the mainstream lenders offer so- called self-certified mortgages, which require no proof of income. Plenty of prime borrowers -- meaning people who haven't defaulted on a loan yet -- are likely to take out mortgages that will be hard to make the payments on.

The U.K. subprime crisis may be a lot nastier than the U.S one. Here's why.

First, despite the mounting evidence that people can't afford them, house prices continue to soar. The National Housing Federation predicted this week that British house prices will rise 40 percent in the next five years, taking the average value of a home to 302,400 pounds ($618,000) by 2012.

The average British home already costs 11 times the average local salary, and that figure continues to increase. It is driven mainly by the U.K.'s small geographic size, high levels of immigration, and very low levels of house building. People have to live somewhere -- a home, after all, isn't an optional item for most of us.

The net result is that even as payment problems mount, people will carry on taking out bigger mortgages. What choice do they have?

Rate Differences

Next, U.S. interest rates may have reached their peak and could soon fall. In the U.K., that isn't the case. The Bank of England is likely to raise borrowing costs at least once more to 6 percent. If the housing market and general inflation don't show any sign of responding to that treatment, interest rates could go higher still. That won't help borrowers already hard-pressed to make their payments.

There should be two self-correcting mechanisms for fixing a subprime crisis in the housing market. House prices should gently fall, making properties more affordable, and reducing the size of loans. And interest rates should stabilize or fall, making the payments on those loans easier to maintain.

Neither seems to apply in the U.K.

Instead, interest rates are rising and so are house prices. The result is that thousands of families are left in a vulnerable position -- and so are the banks that have lent them money (not to mention the investors who have bought those loans as they have been sold on).

Just Walk Away

While the property market rises, everyone will be safe. If your house is worth more than your mortgage, you will be desperate to hold on to it. If you get into trouble, you can always sell it, repay the loan, and move somewhere cheaper.

Yet, as the U.S. has discovered, if house prices start to fall, that arithmetic changes. If you are in trouble with your mortgage, you can't pay it off by selling. There is little incentive to keep up the payments. Why not just walk away, and hand the keys and the problems over to the mortgage company?

Britain hasn't reached that point yet. But if it does, the mess could be even worse than in the U.S.

To contact the writer of this column: Matthew Lynn in London at matthewlynn@bloomberg.net .

Last Updated: August 7, 2007 19:17 EDT

[tricha]

Siping lattes will not solve the problem.

Australia is truely the lucky country

Any Kiwi with half a brain will be here

[Halebop]

Siping lattes will not solve the problem.

Australia is truely the lucky country

Any Kiwi with half a brain will be here

You can have the Kiwis with half brains!

This Kiwi with a whole brain stays at home and lets his money do the roaming.

[POSSUM THE CAT]

tricha as you say every Kiwi that emigrates to Australia raises the average IQ of both countries

[tricha]

tricha as you say every Kiwi that emigrates to Australia raises the average IQ of both countries

Hmm , I think Sir Robert Muldoon wrote that one.

[Snapper]

Hmm , I think Sir Robert Muldoon wrote that one.

Muldoon often gets that quote attributed to him. If I recall correctly, Tom Scott wrote that in the Listener a few weeks before Muldoon used it in Parliament. Ironic really, considering all the grief he got from Muldoon (and vice versa).

[tricha]

NZ well on the way for a fall of 10% (in the cities) says Brash

Make it 20% if the NZ dollar goes any lower compared to the OZ.

Kiwi's will be leaving in their droves to earn a decent living and maybe come back one day.

Australia are living on the back of the biggest commodity boom in history.