New Zealand banks at high risk of mortgage default

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New Zealand property marketIf the rumours coming out of New Zealand are correct then it looks as though the country could be in for a very rocky ride over the next few months.  It seems that New Zealand banks may be more at risk than the average mortgage bank due to the way in which business has been written in the past.  The slow decline in the property market has started to increase and while the authorities have stepped in with a plan it seems that all is not well in the financial community.

Concerns

While there are a number of concerns in the New Zealand financial markets the main one revolves around a large number of 80% mortgages which were agreed at the top of the market.  There is speculation that these mortgages in particular could really come back to haunt some of New Zealand’s largest banking groups.

In normal circumstances you would have expected any bank which had agreed mortgages or 80% or more to have some form of insurance to cover the short fall in the event that the property was repossessed and then sold for the best price at the time.  Well this does not seem to be the case!

When you consider that the average home in New Zealand costs in the region of $380,000 then you can start to appreciate just how much money may be at risk as the property fall continues to gather pace.  Nobody can quite understand why the New Zealand banking community decided not to make use of the many mortgage insurance services available and ensure that any potential losses in the future were capped at the very worst.

Property market

Just at a time when it has been revealed that many banks have large exposure to 80% mortgages granted at the top of the market it now appear that the New Zealand property market is starting to descend into a serious downward spiral.

The average house across the country fell by 5.8% over the last year but in some of the more popular property hot spots we have seen falls of anything up to 10%.  This is starting to put serious pressure on the financial sector and there are signs that liquidity is starting to dry up for some of the more prominent New Zealand banks.  The situation could get very much worse before it gets better and the property market in particular is in for a very rough ride.

Problems with first time buyers

Just a couple of weeks ago there has been a feeling of hope in the property markets with business holding fairly steady and many experts suggesting that the worst was over with the recovery in worldwide markets coming just in time.  However, as we all know we saw that enthusiasm in Europe and the US evaporate over the last week and we are now seeing a similar downturn in confidence in New Zealand.

When you also add to this the new found cautious approach of the banks and the fact they have increased deposit requirement substantially we are literally seeing first time buyers frozen out of the market at a time when they have never been more essential.  New blood is vital to any property market and without it there is likely to be a significant future reduction in house sales going through.

Government action

As we saw over the last few days there is an ongoing concerted effort by the central banks of the world to get capital markets moving again and to ensure that the wheels of commerce are kept well greased.  The New Zealand central bank was involved in this effort and the government has also announced its own local rescue package but it has not gone down very well.

According to the experts there need to be some major changes to the draft rescue plan because it does not offer a full guarantee of bank funds and it will therefore stop the roll over of approximately $70 billion worth of local bank funding over the next few weeks.  It was also revealed that the various assets for cash options available to the finance sector take in some rather dubious investments such as car loans and other similar types of debt.  This has caused great concern within financial markets as to the lack of understanding which the government seems to have with regard to the credit crunch and the situation developing in New Zealand.

Prospects

While the immediate prospects for New Zealand were fairly grim to start with it seems as though the government’s apparent lack of understanding with regards to the developing slowdown is piling yet more pressure on an economy literally down on its knees.  Even though there are hopes that the rescue plan will be amended in the next draft there has been very little sign of a change of stance as yet.

Conclusion

Even though in our minds we might often class New Zealand and Australia as similar countries, in reality they are very different.  The economies are not moving in synch, the property markets have greatly different outlooks and the Australian government seems very much be up with events with regards to what is needed to avert a full scale recession in the country.

On the other hand New Zealand is said by many to be on the verge of a recession and this threat has being magnified by concerns that the government is not taking the correct course of action.  Unless there are changes in the terms of the rescue plan there are grave fears that a recession is just around the corner.  This in itself would see massive losses for some mortgage lenders in New Zealand who had been offering 80% mortgages without insurance to protect their own position in case of default.

It looks as though the New Zealand property market is a place to avoid for the time being until we see a clearer picture going forward.  If the signs are correct, the situation could get very much worse before it gets better.

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