Dileepa Fonseka: The 'no win' housing slump

Tuesday, 28 June 2022

Glen McLeod, director of Edge Mortgages, explains why we should all be watching how banks are stress testing home loan borrowers.

Dileepa Fonseka is a Stuff business journalist.

OPINION: How badly do you want to buy a house? Badly enough to resort to buying chocolate fish in bulk just so you can show the bank just how frugal you are?

Reining back smashed avocado consumption is yesterday’s tactic. A bumper avocado crop in Australia last year means the price of avocados has taken a bit of a hit, instead it’s the price of everything else that is the problem.

The chocolate-fish method is a cost-saving technique used by one aspiring homebuyer I spoke to this week.

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Buying an individual chocolate fish as an afternoon treat costs you more than if you simply buy a large packet of chocolate fish, wrap each one in glad-wrap and take one to work each day.

The tactic probably saves you something in the vicinity of less than $300 a year, but costs you more in terms of valuable chocolate fish-wrapping moments of your life that you will never get back.

But in these lending-restricted times, the hope is the tactic looks better to a bank manager than spending $2 a day on a chocolate bar.

It is surprising that within days of hearing this story I hear another of a homeowner with the opposite problem.

Economist Leith van Onselen argues there’s a ‘miserable’ period ahead for New Zealand’s economy.

If interest rates remain at this level, this homeowner will be paying thousands of dollars more per year than they were earlier paying in rent.

Not so bad if interest rates and property prices get back to “normal” – which for him is actually a period of abnormally low interest rates and ever-increasing property prices – but he wonders if it will really be worth his while if they don’t.

The irony is that the current economic conditions are tough on both property owners repaying their mortgages and those looking to get into the market.

Which is not how some people see it, one person told me they thought the economy was entering a “golden age”: high wages, no migration, cheap houses, lots of construction and zombie businesses being washed out of the economy which should have been cleaned out long ago.

Leith van Onselen, an economist who writes about New Zealand’s housing market on Australian economics website Macrobusiness, argues the opposite:

Higher interest rates lead to the construction industry cutting back too

“New Zealand is facing a miserable period ahead,” he says. “New Zealand’s housing market was the most over-valued in the English-speaking world and now faces a serious price crash on the back of Reserve Bank tightening.”

Van Onselen points to buyers who bought into jumbo-sized mortgages at rock-bottom rates over the pandemic.

When their low fixed rates expire from the end of this year many will face a huge lift in mortgage repayments at the same time as their homes plummet in value.

“That's a miserable combination and helps explain why New Zealand consumer sentiment is at record lows,” Van Onselen says.

Which means good times for aspiring homebuyers currently subsisting on glad-wrapped chocolate fish, right?

Not so much, if interest rate rises outpace wage gains mortgage repayments can actually get more unaffordable even while prices decline.

Christina Leung says increased mortgage rates could mean decreased housing affordability.

Higher interest rates also affect future housing supply since all parts of the construction value chain are so reliant on debt.

Developers are reliant on debt to finance construction, builders and subcontractors developers work first and invoice afterwards, consumers need banks to lend money to them so that they can buy properties from equally debt-swamped developers.

NZ Institute of Economic Research principal economist Christina Leung says there are several ways to look at housing affordability.

While many people look at house price to income as a measure of housing affordability – which could improve as workers negotiate pay rises and house prices come down – there is another which could get worse.

This is the ratio of mortgage payments to income, which could worsen as mortgage payments rise alongside steadily increasing interest rates.

“The increase in mortgage rates will potentially mean a deterioration in housing affordability, given the sharp rise in house prices we’ve already seen requiring larger mortgages to be taken out.”

Leung says the key is to hope wage rises keep ahead of interest rate rises and inflation.

She says there is a chance this could happen thanks to low unemployment.

But just how realistic is it to expect wage rises to keep pace with interest rate rises even with the labour market as tight as it is?

Van Onselen acknowledges New Zealand’s labour market is “currently the best in generations”, then attaches a “but” to that sentence:

“Given the economy is so tied to the housing market and household consumption, it will likely be thrown into recession and unemployment will lift back up.

“This will kill the prospects of wage growth too.”

The prospects of this housing market downturn morphing into a “golden age” for anyone are fast-diminishing.