Labour suggests breaking mortgage contracts
It appears that the Labour party has decided that, in some cases, contracts shouldn’t be enforced. Phil Goff has suggested that people should be able to easily break out of their fixed rate contracts to jump on a lower interest rate.
I tell you what, while we’re at it why don’t we also make it that employers can break contracts and make employees reapply for their jobs when wage rates are falling (when unemployment is high)? Why don’t we make it the contracts are only a suggestion and have no actual legal force in setting the price and quantity in a transaction.
I’ll tell you why – because contracts act as a mechanism to prevent “hold-up” between agents. It allows trade to happen in places where issues of bargaining power prevent efficient trade.
People committed to a mortgage in knowledge of the costs and risks – why should we suddenly make banks pay for that? If the government goes around intervening in contracts, will the banks be as willing to loan to people who want to buy homes anymore?
Wow, I’m glad that we don’t have Labour in charge in this tough economic climate …
Update: Anti-Dismal covers here. He provides a tighter argument for hold-up than my rant 😉
Matt. I have to agree. In fact I think this idea amounts to government induced hold-up! I’m sure if banks had thought for a moment that the government would act in this way, they would not have made as many such loans. Some borrowers would have missed out. I wonder if rates where going up, and thus the banks were in hardship would Goff call for banks to be able to easily break out of their fixed rate contracts to jump on a higher interest rate? I think not. There aren’t many votes for Labour among bankers.
Goff is playing pure politics here, at best. At worst, he believes what he is saying, and is an indication as to the sort of role he has in mind for government.
So the people who acted prudently with their mortgage and/or those who did the maths and paid the break-fee to get out of their fixed term all get punished (they either took a risk and paid more in the short-term, or paid the break-fee, and so are worse-off than those who did neither) and those who stupidly got into a long-term arrangement get bailed out. The only lesson those who get bailed out learn is that somebody will step in and save them from their own stupidity.
So if that’s the lesson, then it’s just as well the Labour party are outside government.
Robin: if we’re to reward prudence, what about those who saved their money and have a small or no mortgage – arguably the most prudent? By having interest rates low are you not punishing them?
I’m not a Labour supporter, nor do I subscribe to the ideologies of the right-wing, but I do agree with Robin that this is pure politics. Unfortunately, politicisation of any issue often leads to Joe Voters idea of the best action (usually the one that puts him ahead) and often not the best action for New Zealand or our economy.
And with Nationals recent behaviour of overriding our democratic checks and submissions with their idea of good policy makes it even more dangerous, in my opinion.
“I think in particular circumstances, where there is hardship, the banks have got to come to the party and the Government has got to make that clear to the banks.”
He believed those most likely to be affected were people who had bought in the past few years at the peak of the housing boom and whose mortgages were higher than their properties were now worth.
Sounds like he is trying to encourage renegotiating loan terms where people have negative equity. “in particular circumstances… where there is hardship”.
It’s hardly a call to arms to rip up your mortgage contract and seize the means of production while your at it.
I think when a company goes bankrupt employment agreements are broken.
Yes of course he is playing politics (i do believe that’s his job).
I think in particular circumstances,
Hi everyone,
I agree he is playing politics – but why should the fact that he is a politician put him above simple economic logic? I will never accept “he is playing politics” as an excuse for mentioning bad policy – as “playing politics” in this sense is equivalent to creating misinformation, which saddens me.
Ultimately, banks and their customers signed contracts that were in their mutual best interest ex-ante. If it is in both the banks and the clients interest to renegotiate the contract (as may be the case when someone is struggling to make payments) then they CAN renegotiate a contract between them. If the government forces them to do it then they are effectively hurting one body to help the other – namely hurting banks to help some households who overburdened themselves.
If government does do this two things happen in the future:
1) banks place a higher risk on contracts (given government involvement) and increase interest rates – maybe they don’t even loan to some people when it would have been mutually beneficial.
2) households are willing to take more risk with their mortgage – as they realise the government will intervene to help them out.
No good, no no good.
What stinks about Goff doing this is that by suggesting this interference in an environment with weak protections against capricious political interference, and introducing the possibility that government will step in to abrogate rights without compensation, some measure of the negative effects will be produced even if it never happens. That’s the rational response to this new uncertainty.
Poor show, Phil Goff.
Indeed Matt, I don’t think politicians can help but create uncertainty can they 😛
If Goff had another brain, it would be lonely
I say this is good suggestion by Mr Goff that steams not from socialist idealism but good economic sense. In these tough economic times households that are able to adjust their borrowing rate downward will not choose to maintain their mortgage repayments at current levels but instead will spend any extra cash thus directly and widely benefiting the NZ economy as a whole. We know it is essential at this time that consumer spending is maintained and this may an effective instrument for acheiving this. Moreover, in times of exceptional circumstance we should not be overly concerned about setting abstract precedents regarding contractual law, property rights, etc, but should be focused on finding creative solutions to address the problems at hand.
Let me be clear however, such a policy should only apply to mortgages on home loans and definitely not investment properties.
“If Goff had another brain, it would be lonely”
I’m sure he knows what he is saying – he is a smart man. However, I just don’t like it when politics trumps sense.
“In these tough economic times households that are able to adjust their borrowing rate downward will not choose to maintain their mortgage repayments at current levels but instead will spend any extra cash thus directly and widely benefiting the NZ economy as a whole”
I’m not of the school that getting people to spend will lead to some massive improvement in outcomes. I don’t agree that consumer spending needs to be maintained – I think that we merely need to make sure we are making use of our labour resource efficiently …
However I see what you are saying – you are saying that more flexible mortgages will make the OCR more effective. However, the Bank said in June that the OCR doesn’t seem to be any less effective, even with the proportion of people on fixed mortgage rates rising markedly:
http://www.rbnz.govt.nz/research/bulletin/2007_2011/2008jun71_2sethi.pdf
(Page 10)
As a result, I think they see the OCR as influencing other important measures, such as confidence and the exchange rate – rather than solely leading to an increase in households disposable income …
Letting people break their mortgage contracts like this will undoubtably have long-term consequences which go beyond the benefit of people spending more.