[constablechuck]

Sunday August 5, 03:42 PM
Mortgage stress mushrooms
New research by economist Brian Easton shows half a million New Zealanders are now living in mortgage stress, spending more than 40c in every after-tax dollar their households earn on the mortgage.

"There has been a sharp rise in households under financial pressure because of their burgeoning mortgage bills," Dr Easton told the Sunday Star-Times.

Overall, 175,000 households, or 11.2 percent of all households, are in mortgage stress, in figures to June 2007.

The figures, compiled for the newspaper, represent a large swath of the mortgage-belt, as only about 30 percent of all households have a mortgage.

In 2004 just 3.7 percent of all households were in the mortgage stress zone.

Dr Easton said while for some households heavy mortgage repayments were a deliberate part of their life financial plan, for others it was a huge strain and left little in their budget for anything else.

Last week the international credit ratings agency, Fitch Ratings, ranked New Zealand as the world's riskiest housing market, with our prices among the world's most over valued.

In a survey of 16 developed nations, Fitch also ranked New Zealand households second only to Denmark for their debt vulnerability. With its high interest rates, New Zealand also had the worst interest to income ratios in the survey

[StevieD]

Yup, got it about right there, and it just confirms the financial advice we had from a friend who is in the business yesterday.... let the buyer beware because they are all expecting it to come falling down over the next 6 months.

[bob_the_engineer]

Hi SteveD, hope all’s going well :nice1

I’d like to add something to this post.

Whoever made that statement for the international credit ratings agency, is in a word a muppet! Or I suppose taking a view only from the perspective of financing houses, rather than the actual price.

They really said “with our prices among the world's most over valued “ take 130, 000 quid and see what it will buy you in the UK, then compare that with what you can buy in NZ.

The interest rate is farcically high here, not the cost of houses, and that’s all down to the number one Muppet, sat in the big chair in the reserve bank. Oooo don’t get me started on him!

Bob

PS SteveD drop me a line, I’d love to hear how you and your family are getting on.

[Lupin]

TBH, compared to the UK I don't think NZ house prices are crazy, crazy high. Sure there are pockets of unaffordability but there's plenty of affordable housing here too.

[incredible hulse]

I think the report was more to do with house prices in relation to local salaries which I think makes NZ higher than UK (Think Oz was the highest ?). Must say I pity the young kiwis having to buy a house as much as young brits - must be near on impossible with the current house market and low wages

[bob_the_engineer]

I think the report was more to do with house prices in relation to local salaries which I think makes NZ higher than UK (Think Oz was the highest ?). Must say I pity the young kiwis having to buy a house as much as young brits - must be near on impossible with the current house market and low wages

I pity the young kiwis too, but quite honestly I pity the young UK’ers even more.

I’d pity the UK people even more if they had to try and meet the interest rates that the kiwis have to try and meet, and since this is about house prices lets drop the interest rate for now. Just adding if you set UK interest rates at the rate they are right now in NZ, the housing market would have crashed yesterday in the UK!

Lets put this into perspective, I know I can buy a reasonable three bed bungalow, in a reasonable area of Wellington, a detached house with an 800+ sq meter garden for 130,000 quid. (trust me here I’m on the market to buy!)

I defy anyone to find me the same in London, lord knows I have friends who have paid more than that for the upper floor of a terrace house in London, and a hell of a lot more for a tiny 3 bed ex-state flat (neighbours above, below and to either side!)

The interest rates are so high in NZ that it makes housing unaffordable, not the cost of the house. And lets face fact’s if the Muppet in the reserve bank wasn’t shoving the rate up, the kiwi wouldn’t be high and the companies and farmers would be exporting at a huge profit, putting them in a position to pay their workers more! (lets not even go to business loan rates)

The interest rate goes up and everyone who works (home loan or not) is on the receiving end. The only people who gain are those who invest from outside NZ.

IMHO the reserve bank is robing the hard working kiwi and handing the cash straight out of the country.

A friend of mine went to school with the chap in the big chair at the reserve bank, his opinion is he was an arrogant idiot then and clearly he still is now.

Bob

[Chiba]

A decent apartment in Tokyo will cost you half a million quid. Our interest rates are effectively zero. We have 2 generation mortgages. I genuinely have no clue as to how the global economy works, and as a bank/securities employee I've made an effort to find out! Not a clue. :confused:

[isv]

Hi SteveD, hope all’s going well :nice1

I’d like to add something to this post.

Whoever made that statement for the international credit ratings agency, is in a word a muppet! Or I suppose taking a view only from the perspective of financing houses, rather than the actual price.

They really said “with our prices among the world's most over valued “ take 130, 000 quid and see what it will buy you in the UK, then compare that with what you can buy in NZ.

The interest rate is farcically high here, not the cost of houses, and that’s all down to the number one Muppet, sat in the big chair in the reserve bank. Oooo don’t get me started on him!

Bob

PS SteveD drop me a line, I’d love to hear how you and your family are getting on.

Bob,

From a purely historical perspective NZ interest rates are not high at all. Unfortunately people have very short memories and we have gone through a period of extremely low rates of interest which means that any movement upwards causes great discomfort.

What you fail to realise is that the actual price paid is irrelevant - it all comes down to affordability - just how much of your salary is lost to covering the mortgage required to purchase your property. The problem is not high interest rates in NZ (and again, they're not that high!) but simply the fact that salaries are far lower than many other western economies - and even though you might think NZ is 'cheap' when you compare house prices to local salaries you then realise that NZ is extremely unaffordable.

The fact that £130K wont buy you much in the UK is irrelevant- a typical UK salary will give you far more disposal income than in NZ and hence will cover a higher purchase price. With the proceeds of a UK property sale in your pocket an expat can be forgiven for thinking NZ is cheap... but the fact is many migrants don't get to take such huge amounts with them and the grim reality for many is that their standard of living falls dramatically once in NZ as they struggle to purchase a house and maintain their standard of living whilst earning an NZ salary.

One of NZ's many problems is that the recent low interest rates have inflated the economy and caused many people to go on a buying binge... sucking in imports and driving the property market to unaffordable levels. Kiwis really only have themselves to blame - if they hadn't got carried away in recent years then there would have been no need to inflate rates to their current levels in an attempt to bring things back in to balance.

Alan.

[incredible hulse]

I pity the young kiwis too, but quite honestly I pity the young UK’ers even more.

Lets put this into perspective, I know I can buy a reasonable three bed bungalow, in a reasonable area of Wellington, a detached house with an 800+ sq meter garden for 130,000 quid. (trust me here I’m on the market to buy!)

Bob But that's about 350k NZD; with an average wage of say 32k (june 2006 figures were 610 p/wk) thats almost 11 times earnings; Granted 245k doesn't buy you much in the UK these days but you can get similar to that around Brum for less than that (Haven't compared to London as Welly isn't comparable)

[Rabbit]

In determining fair value, perhaps we should consider...

a) Land mass, e.g. NZ is 4.5 million people and about the size of the UK with 60 Million people, population density is very low.

b) disposable income and mortgage costs and associated gearing

c) Absolute income and the overhead of providing for old age.

d) Build quality and the enduring nature of the asset, e.g. likely to appreciate or depreciate over time.

e) Building regulations and property conformity - as building standards rise e.g. double glazing, heating, insulation, less efficient properties will hold a lower value.

f) Property prices in NZ relative to the US appear very high.

g) At the end of the day, in any country it will be about supply, demand and differentiation.

Based on land mass, build quality, income and the costs of borrowing capital, I would say yes, property prices in NZ are indeed over inflated at current exchange rates.

If the dollar does indeed drop by 27%, and property prices fall or remain stagnant then for a new immigrant then it is a reasonable deal, bringing into play allot of other trade-offs.

Regardless, the economy is seriously un-balanced in many ways and property prices are a big part of the equation.

A tipping point both for the currency and property as an investment?

So potentially a big risk to make this sort of investment at the moment.

Rabbit.

[bob_the_engineer]

Bob,

From a purely historical perspective NZ interest rates are not high at all. Unfortunately people have very short memories and we have gone through a period of extremely low rates of interest which means that any movement upwards causes great discomfort.

What you fail to realise is that the actual price paid is irrelevant - it all comes down to affordability - just how much of your salary is lost to covering the mortgage required to purchase your property. The problem is not high interest rates in NZ (and again, they're not that high!) but simply the fact that salaries are far lower than many other western economies - and even though you might think NZ is 'cheap' when you compare house prices to local salaries you then realise that NZ is extremely unaffordable.

The fact that £130K wont buy you much in the UK is irrelevant- a typical UK salary will give you far more disposal income than in NZ and hence will cover a higher purchase price. With the proceeds of a UK property sale in your pocket an expat can be forgiven for thinking NZ is cheap... but the fact is many migrants don't get to take such huge amounts with them and the grim reality for many is that their standard of living falls dramatically once in NZ as they struggle to purchase a house and maintain their standard of living whilst earning an NZ salary.

One of NZ's many problems is that the recent low interest rates have inflated the economy and caused many people to go on a buying binge... sucking in imports and driving the property market to unaffordable levels. Kiwis really only have themselves to blame - if they hadn't got carried away in recent years then there would have been no need to inflate rates to their current levels in an attempt to bring things back in to balance.

Alan.


Alan,

Loan period 25 years *12 months that’s 300 months or 300 repayments

Lets borrow 350k at 9% that’s $2937.19 a month
Total Repayment $881157

Lets borrow 350k at 4% that’s $1847.43 a month
Total Repayment $554229

The interest rate hike is costing you a house, you lost $326,928 because of a 5% difference in home loan rate.
Explain how that isn’t effecting the affordability of buying a house when your paying an extra $1000 a month!

4,000,000 people, 2.5 per house that’s 1,600,000 households. Say 30% are mortgaged that’s about half a million home loans. $163,464,000 is the EXTRA profit someone made from the increased rate in NZ

That’s one hundred and sixty three million four hundred and sixty four hundred thousand dollars.
Now for the question who gets this money?

I know historically rates were high here (and for a reasons that no longer exists!) and thankfully people don’t think like that,,,,,,,,,,,,,,,,, because something is historically true, then we should keep doing it! Are you kidding ! That doesn’t wash, particularly not in NZ.

Maybe if we all though this was a good way to think NZ wouldn’t have given women the vote eh,!

Lets look at the interest rates of the most powerful countries in the world, and remember the OCR is a direct reflection of the exchange rate, a vital factor of any manufacturing or producing country.

Oh well enough is enough I guess I’ll cut to the chase (no offence meant), IMHO if you think that growing wealth isn’t reflected by growing inflation then you’re an idiot. There is a big difference between inflation caused by growing wealth and a collapsing economy!

If you think that the kiwis have nobody but themselves to blame (a comment that to be honest annoyed me) for the hike in interest rates, sucking in imports as you said, OMG are you serious! We are talking about a little country here that controls global exports, with a little political muscle this place could be the next Japan of the 80’s. The kiwis have nobody to blame but themselves for the wealth they’re creating! additionally NZ has chosen to follow a path of quality over quantity, and Helen reflects that in the huge sums the government invests in research here. If you want the best, you buy it from NZ, you just don’t know it.

Here are a few questions for you , but just one answer:

Who powers the giant semiconductor factories in China?
Who supplies the emergency comms system to the UN?
Who provides remote access to broadband in the UK?
Global Internet traffic logging, who provides the fastest equipment?

That’s some technology, here is one for the farmers!

Who has the largest share of the global diary market?
Where did the lamb that you ate last Sunday come from?
When you ordered a filleo fish, be it in Birmingham, or New York, where exactly do you think the fish came from?

Lets get back to history eh,,,

Where was the first powered flight, the Wright brothers, yea right, that’s like saying the Scots didn’t invent the telephone or television (sorry for the shocker to all those folk in the USA, we know Bell was really cheated LOL).

Rutherford’s name seems to fade from history, not as the farther of nuclear physics, but as the guy from Nelson NZ!

The thing I love and hate about NZ is its genius, mixed with its modesty,,,,,,,,,,,,,, its so bloody Scottish! :D

Bob.

[mclarity]

Bob,
the actual price paid is irrelevant - it all comes down to affordability -

I totally agree with this point. Whilst living in NZ last year we thought about buying a house and our FINANCIAL REALITY was as follows:

Based on the probable purchase price of a similar house to that which we were renting (neat, 3 bedrooms, small garden, garage, Lower Hutt Wellington)

Purchase price: $350,000
Deposit at around 15% $50,000 –
Required mortgage $300,000

Monthly mortgage cost $2100,00
(Interest rate 7,5%, 30 year mortgage)

This meant that our monthly housing cost (excluding rates & taxes) would have been just over 50% of my net income. My salary was $75000,00 per annum which meant just over $4000,00 net per month. No 13th cheque, no employer pension contribution, minimal employer medical aid contribution.

[constablechuck]

The U.S. Mortgage crisis goes global.

SAN FRANCISCO — When Linda Martin refinanced the mortgages on three different houses nearly three years ago, she thought the lower monthly payments would help her save more money for retirement.

Instead, the Lakewood, Colo. skin-care specialist is sinking in financial quicksand amid a widening mortgage morass that’s pulling down home prices and threatening to drag the U.S. economy into a recession. “I’m hanging on by a thread, not knowing whether I am going to be living in a car in six months,” said Martin, who declined to reveal her age.

Martin is among the hundreds of thousands of borrowers saddled with “option” adjustable rate mortgages, risky loans that dangled bargain- basement introductory payments and also let borrowers defer a portion of interest payments until later years.

Millions of other borrowers are wrestling with another type of adjustable rate mortgage, or ARM, called “interest-only.” These loans allowed borrowers to pay just enough each month to cover the interest owed on the loan, leaving the balance of the outstanding debt unchanged.

While most of the mortgage market worries so far have focused on the huge losses flowing from the subprime home loans made to people with bad credit, the option and interest-only ARMs held by more creditworthy borrowers loom as another calamity in the making.

If the worst fears about these loans materialize, the economic damage would likely extend well beyond the United States because much of the debt has been packaged into securities sold to pension funds, banks and other investors around the world who were hungry for high yields. The fallout could also further depress housing prices, leaving U.S. consumers feeling poorer and less likely to buy the merchandise imported from overseas.

So far, less than 4 percent of the option and interest-only ARMs are delinquent, well below the 14 percent rate for the subprime market, where about $1.5 trillion in home loans are still outstanding, according to the most recent data from the research firm First American LoanPerformance.

But there is still reason to be alarmed because the trouble with option and interest-only ARMs still appears to be in its early stages. Many industry observers suspect the biggest problems will emerge during the next 16 months as shoddily underwritten ARMs made near the real estate market’s peak in 2005 and 2006 climb to higher interest rates.

“Those loans are begging to blow up. This is a true financial crisis,” said Christopher Thornberg, a principal with Beacon Economics, a consulting firm that has followed real estate market’s ups and downs.

Lenders made an estimated $581 billion in option ARM loans during 2005 and 2006 while doling out nearly $1.4 trillion in interest-only ARMs, according to LoanPerformance. A recent study estimated about $325 billion of these loans will default, leading to more than 1 million homeowners relinquishing their property to lenders. By comparison, about $212 billion in subprime loans were delinquent through May.

The initially low monthly payments on these exotic ARMs enabled more people to buy homes and enticed other borrowers to refinance their existing mortgages to free up cash for other purposes.

Now, the exotic ARMs are tormenting overextended homeowners, reckless lenders and shortsighted investors as the teaser rates rise, dramatically driving up monthly loan payments against a backdrop of declining property values.

The mortgages were particularly popular in high-priced real estate markets like California or areas like Nevada, Arizona and Florida, where speculators were buying homes as investments instead of places to live.

Option-ARMs accounted for nearly 22 percent of the mortgages made in California during 2006, according to LoanPerformance. Other hot spots included: Nevada (15 percent), Hawaii (13.3 percent), Florida (12.2 percent), Washington (10.9 percent) and Arizona (10.6 percent).

If many of those loans go bad, major option-ARM lenders will likely be forced to erase some of the profits that they have already booked from the exotic mortgages.

Investors already appear to be seeking shelter from the possible financial storm ahead.

[MarkS]

Lets borrow 350k at 9% that’s $2937.19 a month
Total Repayment $881157

Lets borrow 350k at 4% that’s $1847.43 a month
Total Repayment $554229

The interest rate hike is costing you a house, you lost $326,928 because of a 5% difference in home loan rate.
Explain how that isn’t effecting the affordability of buying a house when your paying an extra $1000 a month!

4,000,000 people, 2.5 per house that’s 1,600,000 households. Say 30% are mortgaged that’s about half a million home loans. $163,464,000 is the EXTRA profit someone made from the increased rate in NZ

That’s one hundred and sixty three million four hundred and sixty four hundred thousand dollars.
Now for the question who gets this money?
.

Bob,

Just to address this point of your argument. The point you're making above is very one-sided - you need to consider the other side of the coin.

The overwhelming answer to the question of "who gets this money" is the people with savings accounts. Banks will generally make the same amount of profit (more or less) if base rates are 3% or 10%. Whatever base rates are, mortgage rates will generally be a bit higher, and savings rates generally a bit lower.

So, when you compare mortgage rates at 4% and 9%, you also need to take into account that savings rates will be something like 2% or 7% respectively. This makes a massive difference to your argument!

It's actually the case that household non-property assets and household liabilities
are fairly evenly matched. Take a look at this report from the RBNZ (http://www.rbnz.govt.nz/finstab/fsreport/3011386.pdf). Table 2.2 on page 9 shows that household equities and other financial assets are a total of $190bn, whereas total household liabilities are $160bn. Note that the assets side there doesn't include housing value (which is another $585bn!). So that means that even if everyone's houses reduced in value to zero tomorrow, leaving behind their mortgages to be paid off, NZ households as a whole would still have $30 billion in the bank!

(Other interesting stuff in that table is that household non-housing assets have barely increased in 15 years, while housing assets have more than doubled. Not very healthy for the economy)

So there is definitely an argument to be made that high interest rates penalise debtors and reward savers - but that's pretty obvious really. Taking that a step further, and it seems that high interest rates, broadly speaking, penalise the young (who have mortgages and other debts) and reward those who are older (paid off their mortgages and have savings). So, if you're looking to blame someone for profiting from higher interest rates, then don't blame a foreign owned bank, as they'll make very similar profits no matter what base rates are. You're better off blaming your gran!

[MarkS]

(Just realised I should clarify something in the above. The numbers in the table I referred to are actually expressing a percentage of household disposable income. However, the text refers to 160% being "over $150 billion", so I've treated the numbers as if they were just in billions. It's the relationship between them that's the important point, anyway)

[tiefchord]

Who provides remote access to broadband in the UK?


Who knows, but that's such an amibiguous "merit" that I don't find it worth anything really.


Global Internet traffic logging, who provides the fastest equipment?


If it's NZ, it's a currently present aberration - the US has always led the world in network equipment and will likely continue to do so.


Lets get back to history eh,,,

Where was the first powered flight, the Wright brothers, yea right, that’s like saying the Scots didn’t invent the telephone or television (sorry for the shocker to all those folk in the USA, we know Bell was really cheated LOL).

Rutherford’s name seems to fade from history, not as the farther of nuclear physics, but as the guy from Nelson NZ!

The thing I love and hate about NZ is its genius, mixed with its modesty,,,,,,,,,,,,,, its so bloody Scottish! :D
Bob.

Sure, NZ is great. Awesome minds and great contributions - but let's not get TOO carried away with the greatness.

[bob_the_engineer]

Bob,

Just to address this point of your argument. The point you're making above is very one-sided - you need to consider the other side of the coin.

The overwhelming answer to the question of "who gets this money" is the people with savings accounts. Banks will generally make the same amount of profit (more or less) if base rates are 3% or 10%. Whatever base rates are, mortgage rates will generally be a bit higher, and savings rates generally a bit lower.

So, when you compare mortgage rates at 4% and 9%, you also need to take into account that savings rates will be something like 2% or 7% respectively. This makes a massive difference to your argument!

It's actually the case that household non-property assets and household liabilities
are fairly evenly matched. Take a look at this report from the RBNZ (http://www.rbnz.govt.nz/finstab/fsreport/3011386.pdf). Table 2.2 on page 9 shows that household equities and other financial assets are a total of $190bn, whereas total household liabilities are $160bn. Note that the assets side there doesn't include housing value (which is another $585bn!). So that means that even if everyone's houses reduced in value to zero tomorrow, leaving behind their mortgages to be paid off, NZ households as a whole would still have $30 billion in the bank!

(Other interesting stuff in that table is that household non-housing assets have barely increased in 15 years, while housing assets have more than doubled. Not very healthy for the economy)

So there is definitely an argument to be made that high interest rates penalise debtors and reward savers - but that's pretty obvious really. Taking that a step further, and it seems that high interest rates, broadly speaking, penalise the young (who have mortgages and other debts) and reward those who are older (paid off their mortgages and have savings). So, if you're looking to blame someone for profiting from higher interest rates, then don't blame a foreign owned bank, as they'll make very similar profits no matter what base rates are. You're better off blaming your gran!

MarkS, and ISV

I have to say I really enjoyed reading your posts, you put forward an excellent argument, and clearly you’re thinkers.

Sometimes I come on here and vent a little, sometimes I go a little over the top, but I do enjoy reading other people’s point of view and yours is interesting.

I also enjoy giving my opinion too, hell I guess it doesn’t amount to much but it’s fun to share,, eh.

IMHO your quite right, savers are rewarded, while debtors are penalised. Sure the OCR is set, and a bank can invest 0.25 below or loan 0.25 above, ultimately setting the rate it pays the savers, or charges the debtors.

However the OCR is a real figure, that is set by the reserve, this IMHO benefits a foreign investor, and I cant get away from that. I think currency value reflects,, well the value of the currency,,, the value of the currency is set against what you can trade it for, and what you can invest if for. That’s all down to the local interest rate, and hurts the exporter.

As far as blaming my gran goes, I can’t do that, you see 10% of not much is only one tenth of very little. She’s not getting rich on the back of the interest rates. Lets face it if the older generation were getting rich off their savings, then there wouldn’t be so many adds on TV for “equity release lifetime loans”.

Bob

[bob_the_engineer]

The U.S. Mortgage crisis goes global.

SAN FRANCISCO — When Linda Martin refinanced the mortgages on three different houses nearly three years ago, she thought the lower monthly payments would help her save more money for retirement.

Instead, the Lakewood, Colo. skin-care specialist is sinking in financial quicksand amid a widening mortgage morass that’s pulling down home prices and threatening to drag the U.S. economy into a recession. “I’m hanging on by a thread, not knowing whether I am going to be living in a car in six months,” said Martin, who declined to reveal her age.

Martin is among the hundreds of thousands of borrowers saddled with “option” adjustable rate mortgages, risky loans that dangled bargain- basement introductory payments and also let borrowers defer a portion of interest payments until later years.

Millions of other borrowers are wrestling with another type of adjustable rate mortgage, or ARM, called “interest-only.” These loans allowed borrowers to pay just enough each month to cover the interest owed on the loan, leaving the balance of the outstanding debt unchanged.

While most of the mortgage market worries so far have focused on the huge losses flowing from the subprime home loans made to people with bad credit, the option and interest-only ARMs held by more creditworthy borrowers loom as another calamity in the making.

If the worst fears about these loans materialize, the economic damage would likely extend well beyond the United States because much of the debt has been packaged into securities sold to pension funds, banks and other investors around the world who were hungry for high yields. The fallout could also further depress housing prices, leaving U.S. consumers feeling poorer and less likely to buy the merchandise imported from overseas.

So far, less than 4 percent of the option and interest-only ARMs are delinquent, well below the 14 percent rate for the subprime market, where about $1.5 trillion in home loans are still outstanding, according to the most recent data from the research firm First American LoanPerformance.

But there is still reason to be alarmed because the trouble with option and interest-only ARMs still appears to be in its early stages. Many industry observers suspect the biggest problems will emerge during the next 16 months as shoddily underwritten ARMs made near the real estate market’s peak in 2005 and 2006 climb to higher interest rates.

“Those loans are begging to blow up. This is a true financial crisis,” said Christopher Thornberg, a principal with Beacon Economics, a consulting firm that has followed real estate market’s ups and downs.

Lenders made an estimated $581 billion in option ARM loans during 2005 and 2006 while doling out nearly $1.4 trillion in interest-only ARMs, according to LoanPerformance. A recent study estimated about $325 billion of these loans will default, leading to more than 1 million homeowners relinquishing their property to lenders. By comparison, about $212 billion in subprime loans were delinquent through May.

The initially low monthly payments on these exotic ARMs enabled more people to buy homes and enticed other borrowers to refinance their existing mortgages to free up cash for other purposes.

Now, the exotic ARMs are tormenting overextended homeowners, reckless lenders and shortsighted investors as the teaser rates rise, dramatically driving up monthly loan payments against a backdrop of declining property values.

The mortgages were particularly popular in high-priced real estate markets like California or areas like Nevada, Arizona and Florida, where speculators were buying homes as investments instead of places to live.

Option-ARMs accounted for nearly 22 percent of the mortgages made in California during 2006, according to LoanPerformance. Other hot spots included: Nevada (15 percent), Hawaii (13.3 percent), Florida (12.2 percent), Washington (10.9 percent) and Arizona (10.6 percent).

If many of those loans go bad, major option-ARM lenders will likely be forced to erase some of the profits that they have already booked from the exotic mortgages.

Investors already appear to be seeking shelter from the possible financial storm ahead.


Its happening in the states, so it must be a GLOBAL problem….

This happened in the UK, in the late 90’s, did you even notice? You’ll survive, you’ll get over it, it’s really not the downturn of the global economy.

Once upon a time, when the US economy stalled, it was a global problem, but that’s not true anymore!

The USA protects its own economy, it fiercely controls imports to secure its own future. The side effect of this is, that despite the huge population, if you guys are in trouble, well it doesn’t effect everyone like it once did!

China’s economy is much more of a measuring stick nowadays than America’s is.

Bob

Come sit on the has been bench with your English friends LOL

[Super_BQ]

The overwhelming answer to the question of "who gets this money" is the people with savings accounts. Banks will generally make the same amount of profit (more or less) if base rates are 3% or 10%. Whatever base rates are, mortgage rates will generally be a bit higher, and savings rates generally a bit lower.

Generally this is correct. But I don't think the chartered banks in NZ see eye to eye with the reserve bank. That is, the lending banks continue to hand out mortgages as freely as before regardless of the interest rate hikes. You could say this is partly the blame of why housing prices in NZ have become un-affordable.

As most of us know, the key reason for interest rate adjustments is to control inflation. Changes in the currency value of the NZ$ is an aftermath (actually a complete different topic) - though some say it's directly linked. When the reeserve bank raises rates, it's signalling to the bank that the economy has too much $ in circulation (specifically the M1, M2, etc supply). By playing ball, the lending banks should tighten up their lending habits (thus reducing the level of surplus $ in the economy), if they don't, then you're going to see more inflation. Vice versa applies when interest rates go down.

It's incorrect to believe that higher interest rates only benefit the rich nor low interest rates only benefit the poor. What's more damaging is out of control inflation as, this will robs everyone (rich and poor). This is the case with Japan where inflation has outstripped the country's competitiveness in the world market.

Hindsight, the reserve bank should of been far more aggressive in raising interest rates. As i've posted before, larger increments of say 3/4 or 1% OCR raises are more effective than the 1/4 % raises over 3 or 4 years we've seen.

When ever people bring up the discussion of investing in property and tout big % returns, I always ask, "Are wages and salaries rising by that same proportion?".

BQ

[Super_BQ]

Though a bit off topic:

The USA protects its own economy, it fiercely controls imports to secure its own future. The side effect of this is, that despite the huge population, if you guys are in trouble, well it doesn’t effect everyone like it once did!

Uhm. This is far from true. Though the US does have some trade restriction, at least, it's more liberal in trade than say Australia for example. I recall last year that bananas in Australia went up to $20/kg - only because the country bans banana imports to protect their industry. Also recently on the radio news, NZ is trying to get Australia to relax it's import restrictions by allowing NZ grown apples to be exported to Australia.

Furthermore, US imposes a very low duty rate for virtually all goods coming from developed nations (such as China - classed as "Favored Nations"). While in NZ we still see on avg. 7% duty rates on all imports from China - 3 - 4 time higher than the US import taxes.

Perhaps we need to look at how many US controlled operations that are setup in China? ie. Boeing, the shareholders (mostly US citizens) will benefit from the profits of the company operating in China.

In short, if China tanks, the US will also tank.

[MarkS]

Hindsight, the reserve bank should of been far more aggressive in raising interest rates. As i've posted before, larger increments of say 3/4 or 1% OCR raises are more effective than the 1/4 % raises over 3 or 4 years we've seen.

BQ, you should consider a move to New York. I hear chairman of the Fed pays pretty nicely. All you need to do is tell them they've been wrong all along, and what they should have done several years ago... A few random assertions masquerading as fact won't go amiss either!

[Super_BQ]

Both you and I know that hindsight is 20/20. But I must admit that 8.25% OCR in NZ is an impressive rate. What other country in the OECD could match it? (nor match NZ's inflation rate). I don't recall a time where interest rates were this high since the early 80s where rates went as high as in the 20s. However, this was a worldwide epidemic for developed nations - please correct me if i'm wrong

At 8.25% it's nearly double of Canada's reserve rate. Today Japan kept it's reserve rate at a measling 0.5%.

Perhaps no one has been able to answer if NZ's high OCR has been a good thing for the country over the past few years?