• TobyPascoe

The boss of banks is dreaming

I appreciate the work the Reserve Bank of New Zealand does in running stress test scenarios on the banks in this country however what is the purpose of releasing the results publicly I wonder?

A week after the latest set of market results, published by the Real Estate Institute of New Zealand, that showed a property market surging ahead with little impact from Covid-19, the RBNZ states that in the case of certain levels of unemployment, the property market value could drop 30-50%.

On reading this I quietly said to myself “in which world are these guys even assessing that equation”.

From March 25th, the day New Zealand went into a full Level 4 lockdown, the majority of economists and commentators, bar a few, were spending their public time stating how our market value would fall 10, 15 and even 20% within months.

Well we are now six months on from those predictions and what do we actually see in reality?

  • A market that in August produced record median house prices in eight out of sixteen regions.

  • Net migration inflow of 76,000 people since 2019. 

  • Available inventory (quantity of properties on the market) has fallen for the 14th month in a row, stretching supply. 

  • Real Estate agents stating auction rooms full of first home buyers and investors, pushing demand. 

  • Banks stretched processing mortgage applications. 

The same group of experts that doomed our property to misery, have slowly backed away back into their bubbles, claiming nobody could have foreseen the impact of low interest rates, loosening of LVR restrictions and returning Kiwi’s at the border. Really? They sounded fairly confident of their predictions at the time didn’t they?

But just when I thought the armageddon was over, the boss of banks - RBNZ, comes out and says the value of our homes could halve!

My question to you Mr and Mrs New Zealander is - if you paid $800,000 for your home yesterday with a mortgage of $640,000 (80%) and I came and offered you $400,000 simply because you had lost your job, would you take it?

I’m going to go out on a limb and say that you would try several other methods first such as:

  • Requesting an interest only period from the bank which you would almost certainly be provided.

  • Request a mortgage holiday.

  • Cut down home expenditure.

  • Request family support or government assistance such as a job-seekers benefit.

  • Find a flat mate or three.

The bank doesn’t want to repossess your home, it doesn’t make financial or commercial sense in any world for them. There is a common mis-conception that if you default on your mortgage payment, even just for one week, then in comes the bank manager with his eviction sticker, however the banks have a responsibility laid out in the ‘Code of Banking Practice’ to support their customers and treat them responsibility. Putting a home on a mortgagee sale for half the purchase price value and two thirds of the lending amount is not responsible.

The government, no matter which party, also dreads the market collapsing or values decreasing by considerable amounts, simply for the fact that it could create a nightmare scenario of indebted citizens with zero or negative equity in their homes leading to a failure of banking systems. If investors flee from the market, the risk posed is an increased shortage of housing for New Zealander’s who have to rent and don’t own their own home. Rents go up, homelessness and welfare stress increases. The government needs private Mum and Dad investors. Sure they would probably like to see a more controlled annual value rise of 3-5%, but certainly not -5, -10 or -20%, let alone a halving. 

What controls the market value is not economists or organisations stating values will drop 50%, it is owners selling their homes for half what they are currently valued out. It is owners signing a dotted line allowing their home to be sold for a certain value. So if Kiwi’s don’t flick their properties on for these massive declines, then the market simply won’t change.

The impact that these statements have, from the likes of the RBNZ, on everyday Kiwi’s who have taken the leap into home ownership can be devastating. In a time where we need New Zealander’s to invest in their own country by spending money, building homes or renovating their homes and therefore pushing money through the economic system, comments of worst case scenarios can create fear and pull us all back into our ‘bubbles’.

The time for ‘bubbles’ is over.

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