First, get people into debt, then hammer them

Dr Bryce Wilkinson
Insights Newsletter
12 August, 2022

You load 16 tons and what do you get?

You get one day older and deeper in debt.

… I owe my soul to the company store

Those lyrics from a 1946 mining song lamented the plight of tough miners trapped by debt. Some householders today could be feeling similarly about their mortgage debt.

First, the Reserve Bank (RBNZ) encouraged banks to lend and people to borrow. It wanted faster inflation.

The response was terrific. Household new mortgage commitments in 2021 were a staggering $99 billion, 45% higher than the annual average during the previous five years.

Home buyers borrowed too much and paid too much. They feared missing out on rampant capital gains. CoreLogic estimates New Zealand house prices rose 50% between December 2019 and December 2021.

In 2021, 11,000 first-home buyers borrowed more than 80% of the value of their (over-priced) properties.

Now the RBNZ has shifted its policy foot from accelerator to brake. The average mortgage interest floating rate for new customers was 6.23% in July, 1.82 percentage points higher than in July 2021.

That would increase the annual interest cost of a $275,000 mortgage loan by $5,000. (Half of New Zealand households with a mortgage on their primary residence owed over $260,000 on their property in June 2021 according to Statistics New Zealand.)

In addition, Wellington house prices dropped 9.5 % in the first half of this year.  This is according to the Frank Knight Global Residential Cities Index. Auckland’s decline was 6.2%.

A journalist reported that hundreds of Wellington first-home buyers now owe more than what their property is now worth. That is believable.

There are some offsetting considerations.

First, higher interest rates are not inherently a national income loss, lenders benefit.

Second, unexpectedly high wage and price inflation benefits borrowers and hurts lenders ­provided interest rates do not rise faster than inflation.

Third, it is good that borrowing heavily to buy property is no longer seen as a one-way bet.

Fourth, Covid-response was a challenge ­ for almost everyone.

Regardless, the miners’ lament about debt traps resonates still. Whiplashing monetary policies have added a debt dimension to the regulatory morass that has crippled house supply.

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