One clarification if you're not familiar with New Zealand banking. The article states:
> Last week, Bank of New Zealand warned that “things could well and truly turn to custard” as the global economy is plunged into recession.
I read that and thought "Holy hell, central bankers in the US are usually extremely measured in their comments, they would never say something like 'things could well and truly turn to custard'". I misunderstood, thinking that "Bank of New Zealand" is their central bank. It's just another big bank, not "The Reserve Bank of New Zealand", which is their actual central bank.
And here is the funny bit, it's Australian owned.
If it's anything like the rest of the market which is dominated by Australian banks, it'll pay some old kiwiana type music when you are on hold and say 'Kia Ora' or similar at regular intervals. Kiwi as.
Similarly, the Commonwealth Bank of Australia sounds like a government bank, and in fact even began as one, but is actually privitised. They also happen to be the sole owners for New Zealand's ASB - So that one is also Australian!
Well my call to waka kotahi cost me 90 euros last week. 30 minute wait time and 6 minute convo. Turns out calls outside EU while roaming is priced at a whopping 2.5 eur a minute.
"Central bankers are extremely measured in their comments" is usually true, but it's a funny thing to say about New Zealand, because the reason the US and other countries have a 2% inflation target is almost literally because a New Zealand central banker made it up off the top of his head on TV once.
Many central banks are named "Bank of <Country Name>", like Bank of England (for historical reasons not Bank of UK), Bank of Germany, Bank of France (Banque de France) or Bank of Spain (Banco de España). If we had a private "Bank of The United States", then yes, that would be confusing, but no official institutions are named "BlahBlah of America".
Also, the fact that the official central bank is so close at "The Reserve Bank of New Zealand" makes it more confusing for those unfamiliar.
Also regarding the putative "Bank of Germany" – in German "Deutsche Bank" (literally "German Bank") sounds more natural than "Bank von Deutschland" (if you literally translate "Bank of Germany"), and there actually is a "Deutsche Bank", but it is a private entity (and always has been).
Oddly enough, the originating bank that formed what is now known as Bank of America was founded under the name Bank of Italy. So it can get even more confusing.
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.
Come now, that's legal fiction designed to maintain the independence of the Fed. Congress created the Federal Reserve System and could remove it or twist it to whatever shape it sees fit tomorrow if it wants.
There's a good argument to be made that the Fed ran easy-money policies for too long in 2021 in order to secure Chair Powell's reappointment in early 2022; this gives you a clue as to who they are in fact beholden to, despite their nominal independence.
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.
That is an extremely curious reading of the comment you are responding to, given that it appeared they were just arguing that if people want to change the Fed, and it doesn't happen, then that would show Congress doesn't represent the people of the US.
> 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.
The distinction is significant though, there mechanisms to limit the fed's power if it's necessary, even if those levers and dials are not being currently used.
The Fed is independent because things generally go terribly when it's not independent. The people who control fiscal policy don't do a good job of monetary policy.
If this causes worse problems (which it may but hasn't yet) things will simply be changed again.
That's a rather sensationalist headline. Written by an Australian looking at graphs, rather than having a feel for what's going on.
I'm sure he's a capable economist, but based on what I see, New Zealand is not "plunging". There's definitely a slow down - but I think most businesses are expecting a relatively soft landing.
I'm not commenting if they're wrong in this case in particular, but Macrobusiness's business model is sensational/doomer headlines funnelling into their private newsletter.
They may look prescient if you read the last years publications, but they well and truly live up to the joke "Economists have predicted nine of the last five recessions."
Similarly my anecdata is how hard it is to find a car park in the allegedly in decline Wellington CBD and then how difficult it is to find a restaurant that isn't overflowing with happy diners and consequently incapable of accommodating us.
Macrobusiness is the Zero Hedge of Australia. They are permabears, often with a reasonable financial case for the claims they're making, but they definitely start from the premise that the sky is falling, then look for data that corroborates that perspective.
Middle-class still can't buy because of stricter lending rules and increasing interest rates.
Middle-class who FOMO'd in the last 2 years will see their interest rates double and even triple when they refinance in the next months. With inflation and cost of living rises recently, that bump up in their mortgage payments is really going to hurt.
Meanwhile, those with the cash can just scoop up houses (if/when they want to).
Silver lining is younger and future generations might not be completely and utterly f'd.
For some not so much. Talking with my landlord the other week, they said that they regretted not selling the house last year when they moved. It's lost 15k every week this year on average (according to homes.co.nz estimates). That's almost 30%.
For people like me, it's a good thing. Interest rates are higher, sure, but a smaller deposit is needed and for most people I know that have been looking to buy it's the raising of the deposit that has been the biggest hurdle.
Those with negative equity are likely to pay down debt faster rather than consuming (hang on to the car for another year, or not repaint, for example), so there is some effect on aggregate demand over time.
ITT: Lots of people from overseas wondering how New Zealand's mortgage and housing market works.
This post is wrong, we're not in a recessionary spiral. Households (and banks!) are overall doing fine. Unemployment is at record lows, wages are rising faster than inflation, non-performing (ie in default) mortgages are at 0.2% of all mortgages (lower than GFC), mortgages are stress-tested to higher levels than we're seeing. Banks are extremely healthy (making money hand over fist).
Consumer confidence is low, but it's low in defiance of reality.
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).
Silly question, but how do you budget given floating interest rates?
Let's say that you buy an $800,000 place at 3% interest with a 20% down-payment ($640,000 borrowed). Your payments are $2,698/mo. Fast-forward a couple years and you're now at 7.3% and your payments are up to $4,388/mo. That's a 63% increase in your housing budget. That's an extra $20,280/year in housing costs.
Yes, rent can increase crazy amounts which makes budgeting hard as well and we've seen rent go up 20% from pre-pandemic levels in many markets (though that seems to be rapidly falling as the market changes). However, you're not committed to that rent. Yes, it might be bad to downsize to something smaller that you're renting or to a less desirable location, but it's theoretically possible. In this case, you now have to pay 63% more money without a possibility of alleviating that burden.
As rates go up, the amount you can sell a property for likely goes down (since it's now a more expensive property). In the US, at least you can continue living there at your low interest rate and fixed monthly payment. In NZ, your $800,000 place is now worth $700,000 and your payments have gone up 63% and you can't really sell it because you owe more than it's worth and you also can't afford the payments...?
I feel like I might be missing something, but your answer might just be "yea, that's how it is here."
Yes. This is how you get wrecked in the housing market. This is because buying a house is taking a risk. The question is just who is taking it.
In 2008 my mother had her equity completely wiped out due to the exact situation you describe. Underwater mortgage, unable to afford the interest, forced to sell at a loss, zero net worth at the end after paying off all her debt.
On the other hand, we didn't suffer the 2008 banking crisis and overall the economy was basically fine with only a minor recession, mostly due to worldwide conditions.
Your scenario desribes how it works in Australia (similar system to NZ). Almost all mortgages are variable rate, you can lock in a fixed rate for a few years but otherwise you're at the mercy of interest rates.
Buyers are subject to strict lending criteria to determine whether they can afford $current_rates + $future_increases. This means a lot of people are locked out of owning housing.
The system is benefiting the already wealthy and leaving others, particularly young people, out in the cold.
> The system is benefiting the already wealthy and leaving others, particularly young people, out in the cold.
That is correct, but I think your cause and effect analysis is wrong.
We have 5 million people bidding against each other on 2 million households.
People bid as much as they can on their home, so if lending becomes looser, home prices shift up. The long term affordability doesn't change much. There can be other dynamic effects in the short term, I am talking about long term stability.
People bid to the limit of their affordability, so houses remain at the limit of affordability, regardless of the actual prices.
The structural problem is that home prices are a zero-sum game where we collectively bid to the point we can individually only just afford the interest payments. And we also screw the country because we are bidding on how much money we can give to Australian banks.
Home prices follow the same distribution as income (I think), until you reach a minimum wall of a few hundred thousand, below which nothing is available.
The problem of house prices is an effect of bidding, and I believe prices have almost nothing to do with land availability or the costs of building houses.
We could build more houses, but wealthier people will just buy two or more. I would like to own a second home in town for my occasional use.
What to do? I don't know. Keep increasing minimum wage so that 50% of people are in the lowest income bracket? Extra taxes on investment properties or empty vacation homes? Suggestions?
Are our city council rates already a significant way towards a Georgist taxation system? I looked at a wealthy suburb in Christchurch, and they were paying 5x as much as I do on rates ($15k per annum for the house I looked at).
Living in Christchurch, we had heaps of as-is houses that couldn't get a mortgage, and their prices reflect the cash price, which was wayyyyyy lower than the same home would be with a mortgage. I bought a perfectly good 3 bedroom home for land-valuation + $5000. At least half the price, because a mortgage was unavailable (and market was slow, so amplification factor on price too).
Make housing less attractive as an investment vehicle. In my opinion the best way to do this is with the tax system (which, in NZ, currently favours property investment to a large extent).
Two proposals that are often discussed are a capital gains tax (CGT) and a land value tax (LVT). Personally I would prefer a LVT. A CGT would be an improvement on the current situation, but it would be a big impediment to freely moving to take up a new job or for family reasons. An LVT has the opposite problem of being a potential impediment to staying put if the value of your land increases relative to other areas. For an older person who is no longer working this could force them to find a new home but could be dealt with by deferring payments until sale or settlement of an estate.
I am a strong opponent to CGT for businesses. I suspect it would be hard to introduce CGT just for real estate. Reasons for hating on CGT:
1. in NZ we need more investment in businesses, and less in real estate. I think introducing CGT would decrease business initiation and growth.
2. Most businesses fail i.e. your expected returns are often negative. The power law returns mean your expected return is highly dependent on winning big (VC model that one massive winner makes up for 10 losers), but CGT discourages winning big, and it discourages early investment in businesses.
I don't think it would be hard to apply a CGT to real estate only, as all transactions are centrally recorded, but it would disincentivise exchange (which presumably occurs when the buyer sees a more valuable use for the land), unless it is charged on unrealised gains, which is a can of worms.
Other possible measures:-
Stamp duty, as in the UK. Also disincentivises exchange.
Unimproved land value tax (Georgism). (Would need to apply to alienable land only, or there would be significant impact on rural iwi, and possibly a threshold of say $100k/ha unimproved land value since farmers whinge so loudly.) Fewest problems in tax policy terms.
Revise zoning. Change residential to mixed use (light traffic commercial, up to 25 employees, say), allow up to four storey and multiple-household buildings, prohibit "amenity" and "character" objections to consents (apart from noise and smell) and building size/usage/land use covenants near (<10 km radius) the centres of cities, and probably some other measures. Densification policies. Streamlined planning and consenting of developments.
I agree that we need to build capital for business investment. Tax policy (and middle class culture, as embodied in zoning rules and district plans) is heavily tilted against that. Been that way my whole life.
You've had multiple replies, but I think that one key piece of information missing from all of them is the fact that you could move between floating and fixed. In your example you might see rates going up and you'd decide to change from the floating rate to a fixed rate for a term of 1-5 years. A few years later you might go back to floating. You might also have your mortgage split up into 2 or 3 tranches with 1 floating and 1or2 fixed at different rates.
You can move from floating to fixed at any time, but you can only from fixed to floating at the end of the fixed term (or earlier by paying the bank a break fee)
Its also how it is in the UK and most other countries. There is a benefit that the central bank can control the economy much better. When the fed raises rates most people dont directly notice, where with floating rates the majority of households have less money every month straight away.
That's wild. In the US, a fixed-rate 30 year is pretty common, particularly when rates were <4% - lock in that low rate for the duration. We currently have a 20 year. No prepayment penalty, no renegotiation. The only reason my monthly payment changes is changes to taxes/insurance (paid with mortgage, put into escrow to ensure those are kept current). I effectively have a housing cost that goes down over time due to inflation and salary increases.
I suspect a rates go up, ARMs (adjustable rate mortgage) become more common, in the hopes that rates come down and the homeowner see that upside.
You can generally refinance though even with a fixed rate. (There is more overhead though than just going with whatever the current adjustable rate is though.)
Yeah, borrowers can refinance in the US. We have a few times as rates dropped. Now that they’re going up, we’re locked in at a great rate and don’t have to worry.
Here in the US we have ARMs (adjustable rate mortgages) - usually they are rated by (fixed period/stepping rate) - the most common being a 5/1 ARM = 5y fixed + adjustable rate reset every year.
So is it the case that in NZ, if you refinance your mortgage, you typically get charged a significant fee?
I can’t speak exactly for NZ but I assume it’s similar to Australia; it is normal to get charged a discharge fee from the bank your leaving and there maybe an establishment fee at the bank your refinancing with, along with another small cost to change the official register of state government. This could all amount to a couple of thousand dollars every time you refinance.
I've read comments on Hacker News that adjustable rate mortgages are the rule rather than the exception in many countries (outside of the U.S.). Here's a comment saying that Canada ONLY does ARMs https://news.ycombinator.com/item?id=15185052 and another comment saying that they're very common in some European countries: https://news.ycombinator.com/item?id=30339845. I'm guessing this is how it is in New Zealand.
Canada does both adjustable-rate and fixed-rate mortgages. Just that we tend to do it for shorter periods. Typically 5 or 10 years.
I have two fixed-rate mortgages with really low rates. They won't come up for renewal until 4 years from now. Then I'll have to choose whether to do another 5 years with the current rate, or convert over to an adjustable rate.
In the US a mortgage with a rate that resets after 5 years would be considered an adjustable rate mortgage, although the rate would typically reset yearly after the initial 5 years (a 5/1 ARM).
A mortgage that ends after 5 years and needs to be renewed would be considered a balloon mortgage, and they are rare in the US. They are "non-qualified" mortgages which means the government sponsored entities won't buy them, so there is a limited secondary market and they have much higher rates.
I don't think I would sleep great at night knowing that every 5 years I would need to either get a new mortgage loan or lose my house.
It seems to be common due to the oligopoly of Canadian banks (there are 5 big banks for all of Canada and the concept of a small bank just doesn't exist, due to regulatory hurdles). It's a way to push the risk onto the consumer and guarantees that homeowners are first to suffer in a downturn - conversely Canadian banks are very "safe" from economic pressures, at least compared to their American counterparts. It's already a big problem because Canadian household debt has reached 2.1 trillion dollars [0], with a GDP of 1.9 trillion dollars [1] (all in USD).
Note these figures don't include government debt, which is also significant. Altogether, Canada may face a liquidity crisis on servicing the debt, if rates continue to rise.
Canada doesn't have the concept of fixed-rate mortgages like in the US though, which is where the rate is fixed for the entire life of the mortgage. What you are describing is an adjustable-rate mortgage with an initial 5 year fixed-rate term, which in the US would be called a 5/1 ARM.
The banks are required to stress test those loans with somewhat stringent requirements. When the loans were granted they take the current retail interest and add around 3% and ensure that the loan recipient could still afford it. Last year there were stories in the NZ media around how banks were not writing loans because people were spending too much on Uber Eats etc. They were going over finances with a fine-toothed comb (there was a bit of backlash in the media, but turns out it was a good thing). NZ banks have quite a high capital reserve buffer requirement which was increased by the Reserve Bank of New Zealand a few years ago – with a lot of pushback from the banks at the time.
This is correct, and also wages are rising faster than inflation. Very very few households with mortgages are actually at risk of defaulting (so low the number is essentially zero), and both banks and households can sustain higher interest rates than we're seeing.
Much more info (with numbers and charts) in Bernard Hickey's post from a few days ago.
I know from family in NZ that the stress test banks apply is very similar to stress test we apply in Australia. As of the latest rate rise, rates are now above what banks were required to stress test for at the lowest rate loaned in 2021. I imagine New Zealand is reaching that number as well. For 90% of households this won’t matter as they purchased pre 2020/2021 so they were means test for higher rates but for households who took loans on during Covid they could theoretically really struggle when their fixed rates are up.
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).
Woah, that’s strange. I just bought a house and the mortgage guy I was dealing with said anything more than 7 years is prohibited in Canada unless you go to an unregulated B-lender.
Clearly I stand corrected!
This is certainly bad, but if it will lead to a crisis like 2008 in the USA, depends on a number of factors. First, there was a lot of leverage and fraud in the US case. Then, there was lack of financial support for families that had no option other than default on their mortgages. The US government didn't anticipate the issues caused by ARMs and only dealt with the problem when it was already clear the total collapse of the mortgage industry.
Did they even really do anything with ARMs? I thought they were just flushed out with all the foreclosures that happened after '08. And then they just fell out of favor.
> Is there something different about how houses are purchased in NZ?
The US government subsidizes long term fixed-rate mortgages as a matter of policy. This is not true in most other countries, including, apparently, New Zealand.
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.
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.
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 it very hard to plan.
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.
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".
The long term fixed term mortgage in the US rely on Govt regulation and the securitization of debt. In most countries when you get a mortgage its literally a loan from the bank, not sold on to bond holders.
Floating rate makes sense, if inflation rises, rates rise and usually so the pay rises so you can afford to pay more. In the US I have fixed at ~2% for 15 years which is good for me but seems silly over such a long term.
They just posted the job numbers for October and it was +100k, blew through the roof. All this doom and gloom is to push the central banks to calm down and stop raising the rates.
I (Canadian) had to call our mortgage advisor about something unrelated to the rate hikes, but they said people are losing it because their 30 year mortgage now has a 40+ amortization period due to the payments on the mortgage staying the same but the rates going way up. If rates don’t stabilize it is going to be a bloodbath once peoples 5 year terms are up. You can easily see your monthly payments double.
That may be true, but at a significant cost. Skilled labour contributing to GDP is rather more useful than trashing the place and making a quick dollar. Just comparing the dollars masks this.
We're still a resource extraction economy in Canada. If it's not oil & gas, it's timber, mining, water, fish, food. You look at every major export from any province in Canada and it's mostly resources. Ontario is cars, which I'm not sure is any better.
Canada is going to be hit hard. If you go on the Canadian financial subreddits, you'll see plenty of "Can my bank increase my mortgage by $1,500 per month?".
The decades of continuing dropping interest rates mean a good chunk of the population don't even understand the mortgages they took on.
Now imagine buying a home for $1.5M in GTA, then having your mortgages payment increase by 50-75% and the value of your home drop by 30%+.
This is a standard pro business publication that posts sensationalist headlines with regularity, and believes the only way an economy can function is by not having taxes and letting businesses do whatever they want whenever they want.
With that background we can see that they will always want to be able to run headlines like this, whether they’re right or wrong. So I wouldn’t worry about things based solely on headlines from organizations like this, any more than I’d put all my trust in economic forecasts from “The Marx Community Paper” :D
I’m similarly wary of banks own forecasts given their track record of being opposed to any economic policy that doesn’t increase their own profit margin.
Honestly I would kill for the big important government measures for inflation, etc to only account for say the 80-90yh percentile of tax residents.
There are a couple of Western countries that have combined a decade of terrible housing policy, banking policy, immigration policy, and every other government lever you could imagine; in order to generate an absolutely generation-crushing property bubble.
New Zealand, Canada, and Australia will all be catastrophic lessons in the future.
So when you see -25 sentiment in housing by Kiwis, it's much more severe than -35 in the US, because over 50% of the Kiwi economy is based on housing and associated services: https://figure.nz/chart/WRpSmBftC60lEu2q
Canada and Australia are similar stories.
Canada is probably the worst in that it intentionally is using immigrants to try to prop its rental market and suppress wages. This works well if you are intent on starting a golden era for slumlords, but it's also going to absolutely demolish quality of life and send food/energy costs screaming.
It's very likely we're at the apex of a golden era of incompetence in these three countries in particular, but the West broadly.
The Canadian government just doubled down on immigration to attempt to bring in 500,000 new immigrants per year[0]. Note, this does not include other sources of immigration, such as students and other types of international work visas.
Since most immigration goes to the major Canadian cities of Toronto, Vancouver and Montreal, there is a serious impact on housing and services. For reference, it's as if the US government committed to bringing in over 5 million immigrants per year and putting them in the 5 biggest metro areas, without any increase in housing development, education or health care.
This is also probably why the health care system is collapsing, why educational quality is decreasing and why housing prices have sky-rocketed to some of the most unaffordable in the entire world.
FWIW, housing sentiment according to the same survey is at -52, near the lowest level ever recorded, -60 in November 1981, and the same level as July 1981.
It doesn't feel like a recession but something is wrong. Our "go hard, go early" approach to covid meant we avoided a lot of tragedy but the govt printed that money. Now we're having an inflation shock leading to an interest rate shock. The shrinkflation is insidious when the packaging hasn't changed.
The thing is, unemployment is so low, it's like the whole country is running to stand still.
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?
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 can get a mortgage where the payments do immediately change as the rate changes)
That being said it is possible to hit the "trigger rate" where your fixed monthly payments are no longer even covering interest alone, and then the bank will give you a call to make your payments go up.
(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.
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.
Banks are supposed to stress test customers to that kind of rate. Not sure how successful that is. I know we thought about it and moved pretty far out in order to afford the home we wanted without stretching our budget to the limit. Most of our peers stretched themselves to the absolute limit they could afford.
The problem is that interest rates have been on a long, slow downward trend for almost 30 years in Canada. Anyone less than 50 years old hasn't be around in a rapidly increasing interest rate environment.
It's very common to always go with a floating variable mortgage and for the past 3 decades it's been the clear winner to locking in a rate for 3-5 years.
It also explains why last year the average sale price of a Canadian house was double that of the US. Let that sink in, in a country with higher taxes, lower wages and variable mortgages...the price is double.
It should be the other way around. You'd expect the US to be the same or maybe a small premium to Canadian home prices.
As another commenter said, no choice. That's just how it works. Conversely, we're confused why banks in the US are willing to do a 30-year fix in the first place. That's an awfully long time into an unknown future to commit to anything, especially in an industry so conservative and ruthless as banking.
It's somewhere between US fixed-loan buying and month-to-month renting. It can go up but you can plan for that, basically by buying less house than "the maximum".
> Last week, Bank of New Zealand warned that “things could well and truly turn to custard” as the global economy is plunged into recession.
I read that and thought "Holy hell, central bankers in the US are usually extremely measured in their comments, they would never say something like 'things could well and truly turn to custard'". I misunderstood, thinking that "Bank of New Zealand" is their central bank. It's just another big bank, not "The Reserve Bank of New Zealand", which is their actual central bank.