Secular Stagnation And Housing Craziness

I’ll briefly discuss the idea that balance sheet recessions take a long time to recover from. Debt fuelled asset bubbles don’t always wind down in an orderly fashion. There are bumps along the road. In the New Zealand experience of the GFC, we entered a recession earlier than the rest of the world and now, find ourselves in the monetary tightening phase as some countries like Australia are starting to slow down.

I think that the balances sheet restructuring hasn’t gone far enough. There is still too much private sector debt in New Zealand and no one has adjusted their portfolio allocation behaviour. New Zealand obviously has way too much allocated to property as an asset class and the inability of many people to think clearly about this issue is a major risk, in fact I’d say it is a bigger risk than even officials have indicated in some works.

Whilst I’d agree that servicing ability is what matters for mortgages – I disagree with the idea that highly leveraged housing loans aren’t a key driver of higher house prices. Most first home buying couples are broke and some even need their parents to help with the deposit. That makes them high risk because with labour market insecurity, the fact that many relationships don’t last and external shock risks like another global trade slump, lending money to these people is really silly stuff.

If the loan term has to be extended to 30 years in order for a mortgage to be “affordable”, that’s nothing different to what sub-prime experts Countrywide and Washington Mutual did in the US. They’d come up with fancy interest rate reset or balloon repayment structures to make the monthly payment affordable. When interest rates rose, the music stopped for millions of US households locked into these sorts of contractual agreements some were even fraudulently induced into.

If you look at the contribution employment growth in Canterbury is making to employment growth nationally, then you can’t help but realise that we’re in another asset price fuelled mirage. The balance sheet restructuring necessary to ensure that capital shallow firms can get the financing they need simply hasn’t happened. The only “businesses” that have received funding are farms on the back of high commodity prices.

I don’t think this is going to be fun in the medium term. Constantly deferring the day of reckoning makes the inevitable reversal worse than it has to be. It’s even more worrying when you realise that NIMBY homeowners have enormous political power – the housing sector in New Zealand is basically “too big to fail” as evidenced by National’s announcement last week of more fuel on the fire for first home buyers.

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