Gutted, I knew I should have waited before locking in the big chunk of my fixed mortgage. But hindsight is always 20:20. If it goes much lower it might be worth redocumenting it and just eating the fees.
Ben Wilson it won’t do you any good. Your contract will require you to pay the difference between the new low rate and your current fixed rate, through to the end of the fixed rate term. You took the risk and you lost. The bank took the risk and it won.
How come the OCR always drops after I fix another loan, does the RBNZ just wait for me to fix my loans. I wouldn’t mind so much it the rate stayed down for a couple of years but whats the bet it will go up again when I come to fix another loan.
The more I learn about Central Governments and Official Cash Rates, the more I am convinced that no-one really understands the complexities of the real world, and that traditional monetary policy is akin in many ways to the whole fallacy that an economy can be “planned”.
At least NZ is one of the “least worst” in terms of central bank monkeying with the money supply; however, there is too much focus on this area or that area of the economy on the part of the various players involved and far too little “big picture” analysis of where things are heading. Take note of who predicted the latest financial meltdown – unfortunately it wasn’t ANYONE who was actually in any position of influence on actual policy making.
I can’t see that the official cash rate is the appropriate tool to rely on when you have a major problem with distortions in investment incentives as a result of fiscal policy, and when you have such massive foreign exchange investment flows that are affected by a whole host of things outside your control.
The ticking timebomb for NZ, is all the tens of billions of Japanese investment money propping up our banks lending positions, which are themselves heavily exposed to any loss of equity in mortgages, while our house prices just happen to be at the top of a serious “bubble” and coming down. OK, we might not have had a Fannie Mae and a Freddie Mac, but lets not kid ourselves that much of the mortgage lending that has gone on is not just our own version of “subprime”.
The economic lesson that I believe has to be drawn from this latest round of trauma, is that it is one thing to have bubbles and crashes in share markets and financial derivatives, but you do NOT, you do NOT, you do NOT, EVER, be so STUPID as to let it happen to your housing market.
This is because when share markets crash, everyone shrugs or chuckles, so what, it is only affecting people who had money to invest, they now have a bit less left, so what. But housing affects almost everybody, and especially people who not only do not have investments, but who are heavily in debt with their mortgages. And the total sums involved in this are HUGE, many times bigger than the sharemarket, and tens of times bigger than the government itself. We are seriously deluded if we think that the big, solid, comforting government hovering way up there above little me, is going to be able to do anything when housing starts to unwind. The total sums involved are just astronomical.
The government’s total annual revenue is around 65 billion. The total housing stock in NZ is “worth” 600 billion, and it has “bubbled” to this point over the last few years. On longterm trends it should be around 400 billion. If it starts to unwind back to this level, who seriously thinks that any “bailouts” using taxpayer money, are going to have a cooeee of doing anything?
The US government is seriously deluded. Yet no politician apart from a few marginalised ones, have the guts to simply level with the public with the aid of a few simple graphs, and continue the exercise in futility of throwing 1 trillion dollars of money they don’t have, at a problem that is heading for more than 20 trillion dollars in size, when their total annual budget is 3 trillion dollars, and their borrowing is 7 trillion just gone up to 8 trillion.
PhilBest, definitely the government can’t ‘bail out’ the entire property market, but they can bail any particularly important parts of it, like major banks collapsing (which would be disastrous for a huge number of people who really couldn’t afford it). I would feel a whole lot less bitter about such bailouts if they involved the government taking a major stake in the banks that were being bailed out, so the cure is not free at all, but comes with a massive loss of control. Not that I think owning banks is the business of the government – ideally when the recession starts to thaw and those assets grow beyond what the government bailed them out for, they should sell up.
Well I can’t say I am too sad about this – I am locking in my mortgage for the first time in a month and a half Should I lock in for 1 year or higher at this rate? Or break it up in to parts and lock some at 1 year and the rest at maybe 2, 3, or 5?
Whilst there will be bad housing loans I do not think our banks have been as lax with low/no doc loans as the US but some 100% lending may prove a problem. Provided the Banks don’t panic into repossessions too soon and borrowers can meet the interest – which is why the world bank/IMF are encouraging central banks to get interest rates down to 1%- the only major issue is the carry trade you refer too where currently re investment is running at 10% and whilst the RB can print enough money to keep our banks liquid the question is what effect the sale of $40/50 billion will have on our currency which will depend on the level of risk aversion and timing so it would be interetsing to have an idea of maturity dates/values.
Life is a gamble.
Sometimes you win.
Sometimes you lose.
Faced with an unencumbered home in East Tamaki or a highly mortgaged home in Kohimarama, the punter gambled on the property prices rising, and went the Kohimarama way. Just as I gambled on the favourite in the Melbourne Cup. I lost heavily and do not deserve any taxpayer funding. The Kohimarama punter has also lost heavily and deserves as much help as I do. That is, diddly squat.
PhilBest seems to think that everybody’s mortgage borrowing is in excess of 75% of the value (2007 value) of their property. Surely, a large number would have been making principal reductions. Those who have not made principal reductions are as deserving of taxpayer help as the mother who uttered those eternal words;
“My daughter’s got lice in her hair and I want to know what the GUMMINT is going to do about it.”
Well, Phil and Ben, I am actually starting to wonder whether owning banks is a task for government. In principle that is obviously not the case, but in a complex and highly regulated society and economy you can actually argue that the provision of money and particularly the provision of a system of secured payments and financial obligations is not simply a matter of infrastructure, just as roads and arguably things as electricity and communication infrastructure.
If you define infrastructure as the means to transport capacity (in any shape size or form) than the provision of that capacity itself (be it capital, electricity, information content, goods and services etc etc) is something for a largely unregulated (i.e. commercial/capitalist) system, while the provision of the actual infrastructure can be a task for government, or for government controlled entities.
One can apply this argument also to issues like the ACC, healthcare etc. The way by which excesses can be controlled (eg bloated organizations) does not need to be by the often difficult ‘competition’ paradigm, but can just as well be by providing openness and 100% clear and detailed information (e.g. by trading say 30% of the organizations that provide infrastructure on the stock exchange, and setting performance targets).
Back to banking, in that scenario a government could own/control a central bank and banking system that would provide payment infrastructure (from eftpos to electronic banking) and some government financial instruments (bonds and perhaps some mortgages). Commercial banks could provide whatever financial services/product through that infrastructure, without having to bother about maintaining huge systems to process transactions. They could thereby provide products like financing, merchant banking, credit cards, brokerage etc by simply defining these products on top of the existing infrastructure. An added advantage of an advanced system in this manner would be the abolishment of cash for anything larger than small denominations, thereby effectively terminating much crime, gangs, sneaky financial suppoert of political parties etc.
The Reserve Bank Governor’s job may become redundant soon, thanks to groundbreaking work being done at the University of Chicago to calculate likely inflation and appropriate interest rate responses. Using historical interest rate movement data in New Zealand, taking into account a range of international and domestic economic and political circumstances. This is a complex formula determines that the optimum cash rate to ensure inflation remains within its target range, and calculates the average interest rate as a factor of the period in office of the relevant governing party in order to achieve that inflation target.
Economists now refer to the period when interest rates need to exceed 5% to dampen inflation as the “Cullen Line”.
dimmocrazy, the problem with the government assuming MORE control or total control over “banking”, is that the problems endemic to political interference and introduction of inefficiency in the economy, would when involved in banking as well, kill the economy.
Freethinker, have you seen Bernard Hickey and Gareth Morgan on CloseUp?
“…..There’s an old adage that if you borrow too much then you have a problem – but if too many of us borrow too much, then our lender is the one with the problem. This indeed is the case in the mortgage market in the US and also in the UK (where house sales are now the lowest since records began – talk about the fan about to be hit). This correction to lenders’ sensitivity to risk is also being felt through the finance company and even banking sector in New Zealand.
In large part this is a natural correction to a market overshoot and should be allowed to play its way through – with borrowers and lenders having to suffer the consequences of their decisions. But of course, with so many people and businesses affected, the policymakers are concerned to minimise the damage to the whole economy. This indeed is the case in the US where the taxpayer has picked up the tab and nationalised Freddie Mac and Fannie Mae, the large mortgage players originally set up by the government to compete with each other (how Roger-pseudo -nomics is that?), in order to ensure the US mortgage market – in particular its 30 year fixed rate segment – doesn’t totally collapse. The cost of this week’s rescue has been to double publicly held US government debt! The US Treasury Secretary has admitted that Freddie and Fannie have introduced a systemic risk to the US mortgage market and the medium term objective will be to shut them down…..
“……Who would ever have thought that New Zealand would have record high terms of trade at the same time it had a record balance of payments deficit and external debt ratio?
This can only continue for as long as the world’s creditors are prepared to fund such largesse and here is the rub. The deficit markets are those where consumers are most profligate and purchase the production from the surplus countries – oil and consumer manufactures being the main cases in point.
The process can continue so long as the creditor/producers are confident that the payment they’re receiving is worth the effort. That payment increasingly takes the form of cash of lesser value (in terms of global spending power, the USD has fallen some 40% over the last 15 years), or stakes in property and businesses within the debtor countries……
“…….That the poor investment record of New Zealand over recent years has not at least in large part, been caused by the diverting of investment monies into a speculative scramble for property assets, is hard to deny. Our productivity record if anything has deteriorated from an already pathetic base, we continue to fail to recover our position on the OECD standard of living league table, our sharemarket continues to shrink and be a shadow of its former self, and our venture capital market is pretty much non-existent. But no worry the property market has been stunning and we are all rich as a result. Yeah right!”
“That the poor investment record of New Zealand over recent years has not at least in large part, been caused by the diverting of investment monies into a speculative scramble for property assets, is hard to deny. Our productivity record if anything has deteriorated from an already pathetic base, we continue to fail to recover our position on the OECD standard of living league table, our sharemarket continues to shrink and be a shadow of its former self, and our venture capital market is pretty much non-existent. But no worry the property market has been stunning and we are all rich as a result. Yeah right!”
THAT sums it up. And where was our genius Min. Of Finance and his colleagues while all this was happening?
Ben Wilson (387) Vote: Add rating 2 Subtract rating1 Says:
December 4th, 2008 at 10:42 am
“PhilBest, definitely the government can’t ‘bail out’ the entire property market, but they can bail any particularly important parts of it, like major banks collapsing…….”
You still miss the point, Ben, and so do those people giving you positive karma for this comment. The sums involved in the BANKS exposures to the property market, are much bigger than the government itself.
Iceland is an extreme example of this; but it has just not begun to sink in to everyone yet, that the situation Iceland is in is a good illustration of the sheer imbalance between the sums of money involved in banking where property and mortgages are concerned. Even if the USA is only a fraction as bad, proportionally speaking, as Iceland, the problem is still too big for the government and the available tax revenues from the economy, to handle.
The USA and NZ too, are actually now completely at the mercy of the foreign investors whose money we have been feverishly borrowing on the strength of gains in the value ON PAPER of our properties; we have SPENT that money on consumption, not invested it in productivity; our productivity rate increase is at an all time LOW.
The Japanese have been working their butts off and saving their money and lending it to New Zealanders who then blow it. In the event that the Japanese want their money back, and we start taking the money back out of the mortgage market to give it back to them, what happens? When the house prices that are the Japanese investors security, start to go south, what will the Japanese investors want to do with their threatened investments?
OK, if this DOESN’T happen “this year”, or “next year”, or the year after, how long will it take before the fundamentals all come back into line, regarding Kiwis earnings and savings and payment of debt, to the extent that we are NOT this exposed? At current rates of growth? 100 years?
If we perform an economic miracle and get ourselves 10% per year economic growth? AH. We might then get ourselves out of this in as short a time as 10 years.
Chances of this happening at current levels of Kiwis economic ignorance, love of soft socialism, mistrust of Roger Douglas, despisal of wealth creation, and the white-ant role played by our media in all this?
# Johnboy (887) Vote: Add rating1 Subtract rating 0 Says:
December 4th, 2008 at 11:55 am
“THAT sums it up. And where was our genius Min. Of Finance and his colleagues while all this was happening?”
“Uh out buying houses? Don’t Helen own 5 or 6?”
YOU SAID IT, Johnboy.
An opposition politician apparently owned a few shares in KiwiRail. In opposition to the Labour gummint, one can guess exactly how much clout he had to actually do anything that would affect the value of those shares; and he apparently sold them at a loss anyway. This was beaten up endlessly as a serious conflict of interest, evidence of the type of corruption one could expect from politicians who were in bed with the business roundtable, yadda, yadda, yadda.
MEANWHILE; Hulun and Mikhael and their cronies 1) own investment properties
and 2) preside over a combination of disastrous fiscal and monetary policy that creates the biggest ever speculative bubble in investment property that NZ has ever seen
and 3) with the aid of their media lap-dogs, ignore, mock, and marginalise anybody who tried to warn what was happening, and any policy suggestions that might have helped avoid the problem.
I honestly believe that some sort of enquiry needs to be held into this, if only to raise public awareness of what has been put over us all by corrupt socialists who must NEVER get their filthy hands on our economic destiny ever again.
Well blow me down with a waft of a Labour Party pledge card. How can it be that the champions of the oppressed masses, nay the best PM and Min of Finance we have ever had have been growing wealthy at the expense of the struggling first home buyers. It just cannot be true.
The Housing Bubble and the Boomer Generation.
Robert Bruegmann is a professor of Art History, Architecture and Urban Planning at the University of Illinois at Chicago. His most recent book, Sprawl: A Compact History, published by the University of Chicago Press in 2005, has generated a great deal of discussion worldwide.
He has now written a truly insightful essay “The Housing Bubble and the Boomer Generation” which points out that most commentaries on the financial crisis focus on symptoms rather than causes. While an increasing number of us focus on the fact that the financial crisis was born out of the housing bubble which in turn was primarilly caused by excessive regulation of land and associated costs of compliance, most people much prefer to blame the financiers.
Bruegman focuses on the changing popular attitudes which gave rise to a culture which, having benefited from affordable housing in their youth then seized the opportunity to benefit from unearned capital gains in their mature years.
Understandably many of his observations apply equally to New Zealand as to the other unaffordable housing markets around the world.
The Selfish Generation (as identified by our own Professor David Thomson, the Massey University social historian in “The Selfish Generation, 1991) naturally disguised its greed with high ideals – civil rights, multi-culturalism, democracy, caring communities and so on.
For example, our own Local Government Act encourages Community Based planning where all plans are legitimised by consultation.
This shift of decision-making about development from private developers and individual property owners to public planning bodies, almost always controlled by homeowners, was hailed by many observers as a triumph of democratic process. The community rather than the developers, so this line of thinking went, would henceforth dictate the growth of the community. The problem with this equation was that it failed to consider who was speaking for the community and whose voices were not heard or to calculate the costs and benefits of these policies.
Indeed, the local inhabitants were allowed to dictate where newcomers should be allowed to live, or indeed whether they should be allowed to arrive at all!
And of course the LGA also legitimised development contributions which also punished the newcomers and favoured the incumbents and guess who attended all the consultation meetings? As Bruegmann observes:
Nor was this all. There was at the same time an increasing movement around the country to push the cost of what had been considered public goods, like new roads, street lights, sidewalks and sewers, even parks and schools, onto the developers who then passed these costs on to the eventual buyers. As a result, existing owners who enjoyed infrastructure paid for by previous generations no longer had to pay for the infrastructure of their children’s and grandchildren’s generation.
I think it really stinks that Bollard should drop the rate to keep all those people with mortgages feeling rich while fellows like me get poorer because the bank will reduce our interest rates. No bloody justice in the world I say.
Thanks Philbest, Owen, have to admit I don’t understand all of it but get the general idea, like most things in life it’s far from being black or white but your posts help to make sense of whats going down.
While I understand that the cash rate is being lowered as a proactive strike against recession, perhaps some additional weight should be given to encouraging savers – eg a tax rate of 10 % rather than the regular 33 or 39 % impost for other “income”.
After all the best protection in the face of a credit crisis and the threats of de-leveraging may well be having more cash on hand.
Without depositor savings banks will go bust. Or is it simply the case that banks cannot continue to borrow short and lend long when the credit markets seize up and so encouraging deposits is less of an issue ?
The “elephant in the room” may be that as the Kiwi cash rate lowers, and to a certain extent the exchange rate with it,
investors have another reason to re-patriate their funds.
They may decide the exchange rate risk is no longer worth it. Hard to see Japanese regarding $NZ as a good bet now.
As countries play “beggar thy neighbour” policies eg NZ offers a deposit guarantee but the likes of Indonesia do not (if we are honest the USA, NZ et all cannot afford this sort of policy without “printing money”) we will again have reason to fear the redemptions of Dashi $NZ investments.
No doubt some will correct me if there are any misconceptions here ..