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.