Financial Armageddon!!

[Chris W]

Also an interesting comment from a reader on interest.co.nz

It is interesting how the banks have "enabled" a buyers affordability to increase from the levels in 1990's. Firstly the banks previously used 25% of income as debt servicing, which was increased to 33%. They previously only applied 25% of income to debt servicing to the main income, now they apply it to both incomes. Then the banks increased the term of the average mortgage from 20 years to 30 years which results in higher loan amounts at same monthly repayment levels.

Refer - https://www.rbnz.govt.nz/-/media/ReserveBank/Files/Publications/Discussi...

Then finally they also allowed borrowers to go from P&I mortgages to interest only loans (especially for many property investors) - up to 40% of new loans in some months in 2015 were interest only. The two other drivers for larger loan sizes are higher household income due to wage inflation, and lower mortgage interest rates from 14.8% in 1990's to 4.5% level currently.

As an illustration, if you adjust mortgage loan sizes for only wage inflation and interest rates, then mortgage loan sizes today would be 4.7x that of the 1990's. After you adjust for the increase in debt service as a percentage of income from 25% to 33%, extension of mortgage term from 20 years to 30 years, then mortgage loan sizes are 7.7x that of levels in the 1990. Then if you adjust for allowing interest only loans from P&I loans, then the mortgage loan size is 10.6x than of 1990 levels.

So as a result of banks changing the terms and making debt servicing payments more affordable for borrowers (i.e. increasing the debt servicing as percentage of income, extending loan maturity terms and from P&I to interest only), bank mortgage loan sizes are 65% to 125% larger of what they would be, had all these terms remained unchanged.

[Don't believe the Hype]

And next we will see inter generational mortgages, where you buy the family home and your children take over payments.

[Perry]

Their Lips Are Moving

I don't have to pay the debt incurred by the household down the road.

I do have to pay the debt incurred by the NZ gummint.

I object to a government saddling me with indebtedness and then telling me (and everyone else) what great financial managers they are / were.

Neither you nor I could run our business that way and get away with it.

The gNats asked people to reduce their debt spending at one stage. In their first term, wasn't it? The retail domestic economy stagnated and the W'gton woodenheads quickly changed their tune.

What a bunch of twits.

[Chris W]

I do have to pay the debt incurred by the NZ gummint.

I object to a government saddling me with indebtedness

Perry,

Not sure that I understand you fully. Can you explain a bit more on how the government is saddling you with indebtedness?

[Learning]

Can you explain a bit more on how the government is saddling you with indebtedness?

That $62 Billion in extra debt has to be paid back eventually and until it is it costs millions of tax payer dollars in interest. That's coming out of Perry's, mine, your's and every other NZ tax payers pocket and will be for years to come.

Labour raise taxes, taking from you today to pay for tomorrow. National took from you tomorrow to claim that today was great. In the end it doesn't matter who's in government. It's always us who end up paying.

[WINZ]

I don't have to pay the debt incurred by the household down the road.

I do have to pay the debt incurred by the NZ gummint.

I object to a government saddling me with indebtedness and then telling me (and everyone else) what great financial managers they are / were.

Neither you nor I could run our business that way and get away with it.

The gNats asked people to reduce their debt spending at one stage. In their first term, wasn't it? The retail domestic economy stagnated and the W'gton woodenheads quickly changed their tune.

What a bunch of twits.

1. Technically speaking neither you nor, me nor the government has to repay government debt as this doesn't have to be repaid, it can be rolled/extended until it reduces as % of GDP through GDP Growth.

2. High levels of government debt is far less of an issue than high levels of household/private debt as governments have both the ability and balance sheet to borrow cheaply and defer their repayments ad infinitum.

3. High levels of household debt will have a far greater impact on you personally in the medium/long-term as this eventually lead to bubbles/crashes in the housing markets (see Ireland/Spain post-GFC, Australia/Canada/UK/HK in the present term, and now Sweden which is showing significant cracks in its housing market despite non-existent interest rates). These deleveraging cycles affect both valuations (stocks, bonds real estate) and the underlying economic outlook (employment, inflation, tax receipts etc).

4. In terms of policy outlook it seems labour is less concerned about government debt levels (and more concerned about individuals equality), whilst national was less concerned about private debt levels (and more concerned with "growth" by any means)

[JBM]

Monster Credit Crash coming 2018 ??

Treasury Executive Minutes. Source: Treasury, The First Home Owner’s Boost

Already at the time of the GFC, Australian households were at 190% debt to net disposable income, 50% more indebted than American households, but then things really went crazy.

The government decided to further fuel the fire by “streamlining” the administrative requirements for the Foreign Investment Review Board so that temporary residents could purchase real estate in Australia without having to report or gain approval.

It may be a stretch, but one could possibly argue that this move was cunningly calculated, as what could possibly be wrong in selling overpriced Australian houses to the Chinese?

I am not sure who is getting the last laugh here, because as we subsequently found out, many of those Chinese borrowed the money to buy these houses from Australian banks, using fake statements of foreign income. Indeed, according to the AFR, this was not sophisticated documentation - Australian banks were being tricked with photoshopped bank statements that can be bought online for as little as $20.

UBS estimates that $500 billion worth of “not completely factually accurate” mortgages now sit on major bank balance sheets. How much of that will go sour is anyone’s guess.

https://www.linkedin.com/pulse/australias-economy-house-cards-matt-barrie

[Perry]

1. Technically speaking neither you nor, me nor the government has to repay government debt as this doesn't have to be repaid, it can be rolled/extended until it reduces as % of GDP through GDP Growth.

My concern was focussed on the false assertion that the gNats were better financial managers.

It was all smoke and mirrors. They just kept borrowing the keep the windows dressed and looking good.

But it was/is all hyperbole and hollow rhetoric.

[Davo36]

My concern was focussed on the false assertion that the gNats were better financial managers.

It was all smoke and mirrors. They just kept borrowing the keep the windows dressed and looking good.

But it was/is all hyperbole and hollow rhetoric.

Ssshhhhhh.

Go back to sleep, try not to think so much.

Everything is OK, everything is OK...

[Bluekiwi]

i disagree Bluekiwi --consider this ---"a king that is kind to his people will rule forever"
the last king "National" was unkind to its people and they did not prevail --long live the new King

If Winston truly cared for the people he would plant 100 Million FRUIT tree's per year for the populace.

Instead of back handing his forestry sector backers.

Their is only one person more corrupt than Winny and that is Shane Jones

[Bluekiwi]

My concern was focussed on the false assertion that the gNats were better financial managers.

It was all smoke and mirrors. They just kept borrowing the keep the windows dressed and looking good.

But it was/is all hyperbole and hollow rhetoric.

No you are wrong, they always are and they were.
Just watch Robertson squirming now, I have heard that he needs to "Borrow" another 3 Billion, and yes Perry, that is in addition to the extra tax's they are doing.

So Tax and Burn, Borrow and Burn.

Did you really think all those promises could be paid for with a little bit of tax tinkering.
Its a double act Taxinda Stardust and Borrow Robo

[Perry]

I can't see what we're disagreeing over.

Taxcindarella is imbued with a tax-and-spend philosophy.

Blenglish and co are of a borrow-and-spend philosophy.

Neither penchant precludes the other.

gNational introduced several stealth taxes. David mentioned them a while back: filing fees, fire service levy increases, etc.

Labour will doubtless borrow and squirm, as you observe.

The associated pretence (of any of them) is a bit galling - that's all.

Yes, I know it's normal for politicians to lie, but it's very annoying, nonetheless.

Especially when one sees the terminally-gullible fall for it, every time.

[Chris W]

The source of concern shouldn't be government debt levels. The source of concern should be household debt levels (note below in the chart is household debt to national income which is GDP). The level of household indebtedness increases their vulnerability to an unexpected economic slowdown, or unexpected rise in interest rates.

Correction. Above chart is household debt to nominal disposable income (couldn't find a definition on RBNZ website of nominal disposable income but here is a definition - https://www.investopedia.com/terms/d...ableincome.asp).

Here is household debt to GDP chart - https://www.ceicdata.com/en/indicato...of-nominal-gdp

Also an article on how this compares to other nations - http://www.nzherald.co.nz/business/n...ectid=11651662


Here is an article which shows how high household debt can become a government debt issue, the case of Ireland in 2008 - https://www.newsroom.co.nz/2017/05/0...ountry-at-risk
With the RBNZ OBR, this may not happen, but if you have a run on deposits who knows what the government will do to restore confidence in the banking system. After all they gave guarantees to depositors of certain finance companies in 2008 from memory.

[Chris W]

If you have cash deposits in a big 4 bank - then this is worrying - especially for businesses who have large amounts of cash for working capital purposes and treasury purposes at banks, as well as individuals with their hard earned savings. These banks use their own internal models to determine their risk based capital requirements. If the banks have insufficient capital or have under estimated the risk of their assets, then depositors could be at risk and may need to take haircuts. Wonder if the other banks have issues with their own internal models.

https://www.interest.co.nz/business/90905/very-disappointed-rbnz-increases-westpac-nzs-capital-requirements-after-material

a series of errors in Westpac's capital modelling dating back as far as eight years meant the bank breached its conditions of bank registration.
Westpac, along with New Zealand's other Australian owned banks, is allowed to develop its own models to quantify required capital for credit risk and then get these approved by the Reserve Bank. All other NZ banks have the Reserve Bank prescribe their credit risk measurements. However, the Reserve Bank says Westpac used a number of models that had not been approved by the Reserve Bank, and "materially failed" to meet requirements around model governance, processes and documentation.

“This is very disappointing. Operating as an internal models bank is a privilege that requires high standards and comes with considerable responsibilities. Westpac has not met our expectations in this regard,” Reserve Bank Deputy Governor and Head of Financial Stability Geoff Bascand says.
The Reserve Bank required Westpac to commission an independent report into its compliance with internal models regulatory requirements. The report found Westpac currently operates 17 out of 35 unapproved capital models, has used 21 out of 32 additional unapproved capital models since it was accredited as an internal models bank in 2008, and failed to put in place the systems and controls an internal models bank is required to have under its conditions of registration.

[Perry]

Good reason to use a Credit Union - if possible. For now, at least.