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New Zealand plunges into recessionary spiral

macrobusiness.com.au

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Re: New Zealand plunges into recessionary spiral

#41

Post by bombcar »

voisin wrote: post #34
jemmyw wrote: post #24

Earlier quoted context omitted.

Mortgages in NZ are typically fixed for between 1 and 5 years, with most fixing around 3 years. So 95% of mortgages will always be rate adjusted in the next 3 years.

Same as Canada. I assumed it was market forces but no, it is regulated this way! Seems like a bizarre plan to make your populace less resilient to rate fluctuations.

The US weirdness of 30 year fixed-rate loans that the customer can call at anytime and the bank can never call except for non-performance is substantially subsidized by the US Government.

Freddie Mac and Fannie Mae or whatever they are/were take those mortgages and basically convert them into government bonds that are then sold out.

Otherwise getting 2% for 30 years would be nearly impossible (and it IS impossible in many countries).

Re: New Zealand plunges into recessionary spiral

#42

Post by ztetranz »

abeppu wrote: post #19

As an American I was struck by the graph of mortgages by fixed term length. I guess I've always heard that US home buyers are constantly benefiting from policies propping up 30 year fixed mortgages, and I knew that other places this wasn't the norm. But it's surprising to me that a majority of mortgage debt in NZ is fixed for less than 1 year. Even in years that don't see rapid interest rate changes, this must make i…

That's true. As a kiwi in the US, I was surprised by how many mortgages here are fixed term for a long time. When I last bought a house in NZ about 30 years ago floating rate (potentially changing every month) was the norm and "lock in your rate for five years" was advertised as an option you could take.

My American father-in-law who is a retired realestate / financial industry professional seemed to have trouble getting his head around that when I told him. Not only that long term fixed rates were not available but also when you're in a short term (5 year) fixed rate, you can't easier refinance if the general rates go down. That seemed normal to me at the time because it's a gamble for both parties. If I sign a contract to pay X% for the next five years then it doesn't seem like I should be able to change my mind part way through any more than the bank can renege on the deal. That said, I never suffered significantly so that's easy for me to say.

Likewise for deposits. It seems a lot easier to break a CD early (forfeiting some interest) in the US than it is to break a term deposit (like a CD) in NZ.

Re: New Zealand plunges into recessionary spiral

#43

Post by robocat »

hedora wrote: post #18

Figure 9 looks dire: 95% of mortgage (by total value, not count) are going to have their rates adjusted in the next three years; 56% in the next year. In the US, that'd definitely lead to a housing crisis worse than 2008. Is there something different about how houses are purchased in NZ?

In New Zealand, all mortgages are approximately at a floating interest rate.

You can lock in a rate for up to 5 years (with the majority choosing 1 or 2 years), but after that “fixed” period completes, you now renew your interest rate at whatever the current market is. Most mortgages are signed up for a term of decades (mine is 30 years, and I signed up at age 50), so although you might use “fixed” rates for a few years each, you end up with a stepwise approximation to the floating rate. My mortgage allows me to pay 20% more principal each month, which shortens to term to 20 years.

You can renegotiate terms, and you can cancel a fixed 5 year rate early, but the bank charges a fee, and the fee depends on how valuable the current terms are to the bank (they cover any downside risk to them). If you change mortgage terms, and it turns out the bank is “in the money”, they don’t pay you (they just pocket the profit).

Re: New Zealand plunges into recessionary spiral

#44

Post by [deleted] »

hedora wrote: post #18

Figure 9 looks dire: 95% of mortgage (by total value, not count) are going to have their rates adjusted in the next three years; 56% in the next year. In the US, that'd definitely lead to a housing crisis worse than 2008. Is there something different about how houses are purchased in NZ?

[deleted]

Re: New Zealand plunges into recessionary spiral

#45

Post by allannienhuis »

ghaff wrote: post #21
zinckiwi wrote: post #13

Earlier quoted context omitted.

In my experience the concept of a 30-year fixed mortgage is uniquely (or close to it) American. Certainly in NZ anything beyond a two-year fix is rare.

Which, as an American, seems wild. How many people are prepared to have their mortgage go up 2x to 3x just a few years--which doesn't even require an increase to especially outrageous rates from historically low interest rates?

I suspect many homeowners with a bit of equity would adjust their ammortization period to keep their payments affordable, and then re-adjust it again if rates drop a few years later. When it's time to renew your mortgage you usually have quite a bit of flexibilty.

The people that get hurt the most with increasing interest rates are new home buyers with high-ratio loans, with their amortization already at the maximum. There are definitely some people who get caught in that squeeze and are forced to downsize or right out of the market by those conditions.

Re: New Zealand plunges into recessionary spiral

#46

Post by bombcar »

voisin wrote: post #36
twelvechairs wrote: post #23

Earlier quoted context omitted.

US has 30 year mortgages backed by government. New Zealand and Australia do not so the overwhelming number are either floating/variable or fixed for 1-5 years.

How are they backed by government differently than say in Canada where CMHC backs most mortgages?

https://www.freddiemac.com/about and friends buy mortgages that meet certain requirements (called "conforming" loans) and package and sell them to investors. Since they will buy 30 year fixed loans, banks are willing to sell them, and investors are willing to buy the subsequent bonds created out of them because they're (likely) almost as reliable as 30 year treasuries from the US government itself.

If you try to get a 30 year fixed loan outside of the US mortgage market, it's hard to find with rates as low.

CMHC may not buy fixed rate loans in the same way.

Re: New Zealand plunges into recessionary spiral

#47

Post by ghaff »

Tiktaalik wrote: post #39
ghaff wrote: post #21

Earlier quoted context omitted.

Which, as an American, seems wild. How many people are prepared to have their mortgage go up 2x to 3x just a few years--which doesn't even require an increase to especially outrageous rates from historically low interest rates?

Variable rates are bad in those rare years where rates spike upwards, but the data shows that in general, variable rate mortgages are more affordable than fixed rate mortgages (which are a premium), which is why they're pretty popular. The thing that makes them not painful in bad times is that often the payments stay fixed, and the extra interest is tacked onto the end (meaning that you are gaining more to pay). (you…

(In the US), the thing with fixed rate mortgages is that they're predictable which has a lot of value too even if you could do better with ARM if things align. And if rates go down--not that that was likely over the past at least 10 or so years, you could always refinance to a lower rate. I did have a home equity line of credit for a while--which was variable--but fortunately during a pretty low interest rate period.

Re: New Zealand plunges into recessionary spiral

#48

Post by coliveira »

matteotom wrote: post #38
yonaguska wrote: post #22

Earlier quoted context omitted.

Let's be clear, the federal reserve does not belong to the USA, and is not beholden to any direct representation to the people of the United States. I'm not familiar with how the Reserve Bank of New Zealand operates, but if it's anything like our federal reserve, the country belongs to the bank, and not the other way around.

The Fed is designed to be independent from the whims of any individual politician, but it still exists due to an act of congress, and could be changed at any time by congress passing a law and the president signing it. And if that can't/doesn't happen, it's because _congress_ doesn't represent the people of the United States.

> if that can't/doesn't happen, it's because _congress_ doesn't represent the people of the United States.

You're just saying the same thing with different words. If the Fed or the congress doesn't represent the people it doesn't make any difference to the elite class, who indeed own these two entities.

Re: New Zealand plunges into recessionary spiral

#49

Post by Negitivefrags »

voisin wrote: post #34
jemmyw wrote: post #24

Earlier quoted context omitted.

Mortgages in NZ are typically fixed for between 1 and 5 years, with most fixing around 3 years. So 95% of mortgages will always be rate adjusted in the next 3 years.

Same as Canada. I assumed it was market forces but no, it is regulated this way! Seems like a bizarre plan to make your populace less resilient to rate fluctuations.

It makes the banking system more resilient to rate fluctuations..

Re: New Zealand plunges into recessionary spiral

#50

Post by bombcar »

ztetranz wrote: post #42
abeppu wrote: post #19

As an American I was struck by the graph of mortgages by fixed term length. I guess I've always heard that US home buyers are constantly benefiting from policies propping up 30 year fixed mortgages, and I knew that other places this wasn't the norm. But it's surprising to me that a majority of mortgage debt in NZ is fixed for less than 1 year. Even in years that don't see rapid interest rate changes, this must make i…

That's true. As a kiwi in the US, I was surprised by how many mortgages here are fixed term for a long time. When I last bought a house in NZ about 30 years ago floating rate (potentially changing every month) was the norm and "lock in your rate for five years" was advertised as an option you could take. My American father-in-law who is a retired realestate / financial industry professional seemed to have trouble get…

The US market is greatly formed by the Great Depression - before that both sides could "call" the mortgage at anytime, basically (you could pay it off anytime you wanted, and the bank could call you and say "pay us cash tomorrow"). But nobody ever really DID either of those except from normal business (moving, missing payments, foreclosure, etc).

And then the 1929 market crash wiped out the banks so they called in all their assets (loans).

And so now the US Government steps in and says "banks you can't do that" and the banks said "then screw lending" and the government said "we'll buy and resell the loans with our guarantee" and the banks said, "oh really hmmm".

You can get ARMs for real estate in the US, and they may become more attractive as rates rise; the rates were so low it wasn't really worth it to even consider, but they exist - here are some: https://www.bankofamerica.com/mortgage/adjustable-rate-mortg...

The average American holds their loan for something like 7-10 years before either moving/selling or refinancing, so an ARM can be a worthy consideration. But you must plan around what it could do "worst case".

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