The Finance Minister is worried about the risk that interest-only home loans pose to the country’s financial stability – and that’s just the half of it
This month is crunch time for home-owners and investors who signed up for the Government’s mortgage deferral scheme in last year’s economic downturn.
In the six months after the first lockdown, more than 61,000 bank customers deferred all repayments on consumer loans totalling around $21 billion. The deferral scheme was extended another six months and gradually, property owners restarted payments – but by the start of the year, the banks were still exposed to $2.4b in mortgages on which the borrowers weren’t paying back the principal or the interest.
At the end of March the scheme ends, and borrowers will face a backlog of principal and interest payments that have been mounting up for 12 months, for some of them.
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In addition, there’s about $74-$80 billion owed on interest-only and revolving credit loans – and most of that is owed by property investors.
It is that mounting liability, and the threat it poses to the country’s financial stability, that is alarming Finance Minister Grant Robertson. He has asked the Reserve Bank to advise him on targeted initiatives to quell speculation or investor demand, such as implementing debt-to-income ratios and putting limits on interest-only mortgages for investors.
Last week’s annual Demographia report into house prices in major cities listed Auckland as one of the five least affordable cities in the world to buy a house; it would take 10 years for the average worker to earn the price of a house in the city.
“The market has moved quickly and rapidly in a way that is not sustainable. We have to confront some tough decisions and we will do that in the coming weeks.”
– Grant Robertson, Minister of Finance
So it was important that any potential restrictions did not disproportionately affect first-home buyers and low-income borrowers, Robertson said. Australia is among countries that have, in the past, applied restrictions on interest-only mortgages due to the risks they post to financial stability.
“This is just one step,” he told a meeting of Auckland business leaders. “We need to tilt the balance in favour of first home buyers and away from speculators. We need to make sure that those who rent are able to do so affordably and with security.
“There is no single silver bullet for addressing the housing crisis. What is required is coordinated and enduring action. The market has moved quickly and rapidly in a way that is not sustainable. We have to confront some tough decisions and we will do that in the coming weeks.”
Robertson said the effects of rising demand for property, particularly by speculators and investors, had blown projections of a house price downturn out of the water. The nationwide median house price rose by 19.3 percent in January, compared with the same period a year earlier. In Auckland it was a slightly slower pace, “still an eye-watering 14.9 percent”.
He and Reserve Bank chair Neil Quigley are to speak at a major Economics Forum at Waikato University this afternoon. It comes at a tense point in the relationship between the Minister and the Bank; Robertson trampled over the Bank’s concerns last week to write the effect on house prices into its decision-making remit.
In an interview with Newsroom, the Bank’s Deputy Governor Geoff Bascand said the Bank might look to set a band for house prices, relative to incomes. It already has a 1-3 percent band for inflation, and an unpublished but acknowledged band for sustainable employment. “That’s what we worry about, if unemployment rises and people can’t sustain their house mortgage payments, then prices could fall quite sharply.”
“You need landlords so you can have rentals – not everybody’s going to own their house. Even in the best of times, we had about 70 percent owning their own house. Now we’re down to about 60 percent homeownership, 40 percent renting. So you need a rental market and you need a home ownership market, and both need to work well.”
– Geoff Bascand, Reserve Bank
The Bank says it’s willing to exceed the 2 percent midpoint of the inflation target, and maximum sustainable employment levels, in order to kick the stuttering economy back into gear. “I think our caution was pretty well exemplified by the latest lockdown,” Bascand said.
“We can’t cry victory yet. It’s really good that we’ve recovered quite well from the last year’s experience and we’ve come out of that with a bit of good acceleration in the Sept-Dec quarter – but what’s happening after that? Households are cautious, card spending is slowing down, the tourism boom over Christmas wasn’t there, and then we got another lockdown.
“What’s going to happen now? We’ll have businesses saying, I’m not going to buy in supplies in case I can’t sell them. Or I’m not going to invest right now until I’ve got more certainty.
“So let’s wait and see how the recovery plays out for a number more months, before you contemplate easing back. We need to keep the wind in the sales.”
“You can think of some good reasons why interest-only loans make sense, like when you’re bridging finance between one property and another. Or somebody’s in distress – that’s why we had the mortgage deferral scheme last year. We were encouraging banks to put people on interest-only payments, and sometimes not even those, for a while!”
– Geoff Bascand, Reserve Bank
Bascand said the Reserve Bank was clear that investors posed a higher risk to financial stability than owner-occupiers. “It you’re an owner-occupier, you don’t walk away from a property, you desperately try to hang on.
“But you do need a rental market, you’re absolutely right. You need landlords so you can have rentals – not everybody’s going to own their house. Even in the best of times, we had about 70 percent owning their own house. Now we’re down to about 60 percent homeownership, 40 percent renting. So you need a rental market and you need a home ownership market, and both need to work well.”
He wouldn’t rule out interest-only loans entirely. “You can think of some good reasons why interest-only loans make sense, like when you’re bridging finance between one property and another. Or somebody’s in distress – that’s why we had the mortgage deferral scheme last year. We were encouraging banks to put people on interest-only payments, and sometimes not even those, for a while!
“On the other hand, long-term not paying any principal would seem a bit odd, a bit weird. So this just needs a bit of thought. And if there’s one theme in the correspondence between the Minister and the Governor, it is we are committing the professionalism of this organisation to look at these issues and put our best analysis into them. That’s what we’re good at, that’s what we’ll do.”
“Customers who can resume loan repayments should do so. Many customers have already restarted payments on deferred loans. That shows they understand the benefits of getting back on track if they can.”
– Roger Beaumont, Bankers’ Association
Bankers’ Association chief executive Roger Beaumont said banks were having conversations with customers who had deferred their loans, to discuss what was best for them as the deferral period ended.
“Customers who can resume loan repayments should do so. Many customers have already restarted payments on deferred loans. That shows they understand the benefits of getting back on track if they can,” Beaumont said.
“Any new or extended loan deferrals will not be automatic. They will be available to customers in genuine need for a period up to 31 March. Affected customers may need less time than that to get back to normal repayments.”
The Government has promised a comprehensive housing package later this month, comprised of both supply-side changes being led by Housing Minister Megan Woods, and demand-side fixes being led by Robertson.
“We already know that building more houses, particularly more affordable houses, is critical,” Robertson said. “As part of that the Government will repeal the Resource Management Act and replace it with new laws. These new laws will improve the natural environment, enable more development within environmental limits, provide an effective role for Māori and improve housing supply and affordability.
“Planning processes will be simplified and costs and times reduced. Other key changes include stronger national direction, and one single combined plan per region. We are going to take the time to get this right. But it is critical work.”