Our Great De-Leveraging

Written By: - Date published: 5:05 pm, June 4th, 2023 - 13 comments
Categories: Debt, debt / deficit, economy, housing - Tags:

This is how you get off heroin.

Debt is the most destructive and addictive form of economic behaviour we have in New Zealand. For everyone who lives in a house whether landlord or straight homeowner you feel the bank slipping that good leveraged needle of joy from fear back into eyes-rolled-back blissful security.

For the majority of New Zealanders mortgage debt is a promise to yourself and your family that, decades into your future, somehow, you’re going to get out of this hellhole and live free. Whatever free means. Your land, your apartment, your property. But there is simply no way you can get to that pure free joyous plane unless you take the debt and let it tap your blood.

This post won’t talk too much about specific policies. It’s going to focus on the pain of mortgage debt addiction.

Through 2021 our job incomes were secured by the government, so New Zealand went into a most almighty mortgage debt binge. We chose to secure our future with the only reliable asset class we had: property ownership through mortgages.

Despite the COVID-19 epidemic, house prices here surged through 2020 and 2021: about 20% in 2020 and another 15% in 2021.

Apparently we spent over $14 billion on coastal property alone in one year.

Those who could reach for a leveraged rental went for the lower end of the price range, out to the poorer periphery for multi-homeowners in Gisborne (where they were 83% of sales), Taharoa in Waikato (82% of sales), Tokomaru Bay (78% of sales), Okura Buch in Auckland (74%) and Te Kaha (73%). I’ve got a cousin who bought two little rentals in Westport. Westport!

The Reserve Bank had its base rate around 2% and your bank could tie the rubber tube around your forearm and insert the needle at around 3.5% and man it would kick you back for a while, and let you dream big and eyeball wide.

At the same time the government underwrote our mortgages if we got into any trouble, with a mortgage payment deferral scheme that at peak had about 80,000 mortgages on deferral: about 7% of all of New Zealand’s mortgages. That’s the government putting a pillow under your head while you glide through the high.

The question is only, for every addict, how long can you hold the high. FInally, here comes the answer.

As early as March 2022 Statistics New Zealand reported that household debt had gone up 29%.

And now as the banks central and Australasia start to limit the heroin supply they will give you, from half a kilo to an ounce a week, the trends are getting worrying.

Centrix Credit Bureau says the number of missed mortgage payments grew for the seventh consecutive month in February 2023. Overall, 1.29% of mortgages (18,900) were in arrears, up almost a quarter year-on-year. Centrix say this could be attributed to people rolling off fixed home loans and being unable to service higher interest rates.

Unsecured personal loans are up 7.8% in February this year and Buy Now Pay Later arrears are near an all time high. Consumer arrears are the highest they have been since 2019.

So many institutions have warned us that we are in a dangerous level of mortgage debt dependency and one day we’re going to feel a world of pain. Oh but the pain is so close to pleasure and we pay more and we use more.

We are only at about 6-8.5% for bank mortgage rates but yes this is going to go to over 9%. That heroin fix just gets more and more expensive to buy every time.

If you want to see the scale of pain that deleveraging out of real estate debt looks like, turn your eyes to China. Like New Zealand they have been warned for a decade that a real estate debt boom will leave scars all the way up your arm.

Instead of being a growth driver, the whole real estate deal was a massive downer cycle.

China is now in a world of deleveraging pain.

And China is telling us that deleveraging out of real estate mortgage addiction is very, very, very very hard to do. Once you do crack, you never go back.

By March this year New Zealand’s median sale price was down 13.9% on a year previously. In Wellington it was down 20.6% and Auckland’s was down 15.2%. Pain.

We’re going to hear many, many more very painful stories like we did in 2009 of people just walking out and telling the banks where to shove it. Or couples breaking up under the strain. Of choosing to eat out of a can rather than give up on their one shot at getting up and getting out.

Most analysts bet average sale value prices will come down to about 2019 levels. And of course after Cyclone Gabrielle all that coastal rental property in Gisborne, southern Bay of Plenty, and peripheral Auckland ain’t going to sell for a very, very long time. It ain’t karma it’s pure fate and that’s a dirty mattress to sweat on.

No, there is no policy cure for this. Some want to force even faster withdrawal with higher taxes on property or even on untenanted property, as proposed in Queensland.

Best of luck to the local council or party that tries that as a policy here.

Other parties simply want to tax property wealth, with no thought to where else that money should go. Heroic policy without consequence is a pretty common problem on the left.

We don’t yet know if mortgage defaults and forced bank sales will follow suit yet. But they usually do. Suicide. Marriage breakups. Kids with no social mobility. Permanent social damage. But in a timespan about as fast as the 1988 sharemarket crash.

There will be no shift from real estate to other asset classes (such as they are here), because most are now just trying to hang on to what they have and ride it out for as long as they can. Also, mortgage heroin is what our banks deal, so that is the stuff we use.

Mortgages are New Zealand’s very high grade heroin and we are being forced to come down off a most spectacular high into a rage-inducing forced withdrawal.

We’re only just starting the shakes.

13 comments on “Our Great De-Leveraging ”

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  1. Phillip ure 1
    4 June 2023 at 7:12 pm

    Interesting analogy..a bit of a groin stretch tho'..

    I would consider addictions to eating animal flesh..as closer to heroin..in that urge to daily consume…and physical/mental withdrawals (of a sort)..

    Housing/mortgages don't fill that criteria…

    And I would question the do crack and you don't come back claim.(n.b..'p' is not crack..crack is further processed cocaine that is smoked..and it is very very addictive/obsessive..but surprisingly easy to kick..

    I got a crack habit while living in a foreign city..and when I decided to kick it..I flew to jamaica..and hung out with the rastafarians…smoking a ton of weed to get me over the hump of withdrawals..and it was much easier than I suspected…

    In fact the ease I found in kicking both powdered cocaine and crack has left me with little sympathy for those addicted to 'p'..who claim to be unable to kick it..

    Fast drugs are much easier to kick than the opiates (heroin etc)…with heroin at about 8 out of ten in difficulty..and crack/cocaine/'p' about 3 out of ten…

    Where your heroin analogy does work is in the strength of the addiction nz has to this staple of life..housing..as a wealth creator…

    And the difficulties in kicking both..the nz withdrawals are gonna be ugly…(I think we are in the early cold-sweats stage now..day three is the worst..)

    But..y'know..!…there are other ways of living…

    And as a society we need to facilitate them…

    And of course like long term use of heroin…a mort-gage (in french) is a death-pledge..

    As a society we have to kick that habit..it can only end in tears…

  2. Stuart Munro 2
    4 June 2023 at 7:48 pm

    By March this year New Zealand’s median sale price was down 13.9% on a year previously. In Wellington it was down 20.6% and Auckland’s was down 15.2%. Pain.

    Corporations feel no pain. Ditto speculators.

    NZ median house prices blew out in 2022 to an average of 471 k – more than three times the 144k of 2000, and more than 20% higher 2020. The median home owner buys infrequently, every 5-10 years at most. Corrections of less than recent inflation only affect speculators, and a tiny fraction of over-leveraged recent purchasers.

    Sustain these mostly unrealized losses for years and, yes, there may be some pain. But not on the scale of the harm done by the unenlightened policy of inflating real estate out of the reach of ordinary New Zealanders. For many, sustained falls are the only hope of getting the slumlords' boots off their necks.

    • mpledger 2.1
      4 June 2023 at 9:15 pm

      House prices are only falling because interest rates are going up. People are still shelling out the same amount of money, just more of it is going to the bank in interest.

      What people need is for interest rates to go down and for house prices to go down. The problem is that we have had a huge surge in immigration – possibly pent-up demand or maybe a longer time trend. Housing is going to be in short supply again. It may take a little while in Auckland as the pop declined over the covid era but everywhere else had covid era growth and now immigration.

      Immigrants can't buy so rental properties are going to be highly desirable for speculators which wipes out all the young ones looking for first homes.

      None of this is good.

      • SPC 2.1.1
        4 June 2023 at 9:48 pm

        Two scenarios

        National win and restore the ability to charge mortgage cost against rent income for existing property. Investors will hold what they have and buy more of such housing (instead of buying new supply only – which encourages development) and so house prices will rise. Which is why National would reduce the bright line test down to 2 years – so people can make an untaxed CG.

        Labour wins, and the arrival of full impact of loss of mortgage interest payment cost against rent income for existing property rented out forces them to sell and buy new builds for rent instead. These sales and the increase in new build supply holds down property values.

        PS Less migrants and higher wages means lower house prices and closer connection to incomes. But the neo-liberal regime would call that inflation that the RB Act was designed to prevent. Guess why house values and mortgage interest levels are not part of our inflation statistics – despite the fact that buying a property is the largest cost against income anyone will have.

  3. SPC 3
    4 June 2023 at 8:09 pm

    Short version.

    Cry for the person who has a mortgage, including investors who speculated for profit using borrowed money, since 2019. For me, not for the "investors". People did this in stock markets pre 1987 and 1999 and 2008. Others burnt on bit coin. Don't speculate using borrowed money. Save the sympathy for those who lost their savings in finance companies (2007-8) etc or who bought leaky homes.

    Fact is, even back in 2019 property values had reached a level where it was beyond the reach of our incomes.

    And more people are struggling with homelessness or unaffordable rents, than are struggling with mortgage payments.

    Those who sold property in 2020-2021 made largely untaxed CG/wealth gains. And ended up owning property without any debt whatsoever (positioning for the total loss of mortgage deductability – they just needed suckers to join the investor pyramid pool at the bottom rung to position themselves as the elite on top). Note that Luxon has no mortgage debt against his properties.

    The struggles of some are no reason not have a wealth tax as the Greens correctly propose.

    Fortunately most first home homeowners bought before the end of 2019 and will have more value than debt. And the time of high mortgage rates will pass and provided they retain employment they should be OK. The government can help them by providing income support to non working partners to reduce the number of mortgagee sales. This policy would also help the sole parent should they form a relationship with someone working – which would lead to more efficient use of housing.

    As would a tax on vacant housing and unused land as applies in Oz.

    House prices flatlined 1976-1981 because of high interest rates. Wages rose with inflation and thus against house values, thus anyone living at home in those years was able to save and buy a house within 5 years of leaving high school (having the equity to do so). Hopefully this might happen again, assisted by access to jobs/apprenticeships.

    I hope house prices in 2024 are no higher than they were in 2019. Thus a decline in real terms and bringing them back to incomes. So more people can own.

    • SPC 3.1
      4 June 2023 at 8:30 pm

      Perhaps clearer as

      Short version. Cry for the person who has a mortgage, including investors who speculated for profit using borrowed money, since 2019.

      For me, not for the investors. People did this in stock markets pre 1987 and 1999 and 2008. Others burnt on bit coin. Don't speculate using borrowed money. Save the sympathy for those who lost their savings in finance companies (2007-8) etc or who bought leaky homes.

      etc

    • joe90 3.2
      4 June 2023 at 8:44 pm

      Shorter still; the music always stops. Always.

  4. Craig H 4
    4 June 2023 at 10:54 pm

    Must be due a debt jubilee.

    • Phillip ure 4.1
      5 June 2023 at 9:14 am

      It clearly needs some such sword..to cut thru the gordian knot…

    • Mike Smith 4.2
      7 June 2023 at 12:29 pm

      I agree Craig. You will probably be aware of the extensive writing on debt forgiveness of my favourite economist Michael Hudson the author of "…and forgive them their debts" which corrects the wording of the Lord's prayer, and The Destiny of Civilisation, also Ann Pettifor, the author of The coming first world debt crisis. Both were involved in the Jubilee 2000 debt forgiveness program for countries in the global South. Michael can be followed at his eponymous website https://michael-hudson.com/ and Ann Pettifor at Prime Economics https://www.primeeconomics.org/

    • SPC 4.3
      7 June 2023 at 12:40 pm

      At some point the nation state is going to have to make a choice to between being a subject of global market capital neo-liberalism (the 1% ers regime) or enabling continuance of a semblance of democratic governance.

      And that means not being constrained by debt.

      Government finance free of debt, separate from tax revenues.