Logically house prices have to fall further given the conditions of the economy. Baby boomers are finally in trouble according to latest Veda Advntage report on credit defaults.

Unfortunately the RBNZ is using the wrong OCR tool to control inflation and stimulate economy. This tool wont be effective given our excessive overseas debt, speculative house buying, tax-free profits on housing investment etc.

Bernard: In relation to housing prices, I was interested in this section of the Financial Stability Report:

"Another significant credit exposure for New Zealand's banks is the residential mortgage market, which accounts for around half of total bank lending in New Zealand. The major banks experienced a significant rise in past-due mortgages during
the latter part of 2008 (figure 4.3), with rental property investors understood to account for much of the increase. Most of these exposures appear to be soundly collateralised, however, with the major banks reporting that less than a
tenth of all residential mortgages have a current loan-tovalue (LVR ) ratio in excess of 90 percent, with some variation across institutions (figure 4.5)."

So far, so nonchalant. But look at the next sentence:

"These LVR measures are based on the value of the property at the time the mortgage was arranged, rather than the current market price."

EEEeeekkk!! Now, we know there was a huge uptick in the number of housing loans during the boom, & of course values had skyrocketed at that time - so the "value at the time the mortgage was arranged" was probably inflated & will often have gone down about 9% (based on QV data). Now looking at the graph on P.29, one notes that a bigger tranch the loans has a loan-to-value ratio of over 80% - in fact, now more than 20% of the total. It seems likely that perhaps a much bigger chunk of house loans than they are letting on are close to under water.

Am I reading this right do you think?

It doesn't seem to ring true with the very soothing RBNZ report of Mizuho Kida on housing debt that Neville Bennett reported on 4 May, which I think Neville wondered about a bit.....

It seems clear that RBNZ wants housing values to gently decline in a stately & orderly fashion - not precipitously, nor (heaven forbid) take off again. But, reading between the lines.......

Hi Bernard
I was driving aroung central Auckland yesterday I found there is hardly to find any open homes. So I can see the the housing market (sales volumes) will be be cooling down in next three months. According the rule the price is lagging three months of sales volumes so I can see the house price will drop in three to six months time.

If we all just wait and see, we will see the reality.

"....if the banks were forced to mark to market the assets underneath their lending...."

Looks a little like what they might be going to do to rural lending...

"To address these concerns the Reserve Bank proposes to
amend the relevant bank capital adequacy framework in the
following respects."

http://www.interest.co.nz/ratesblog/index.php/2009/05/14/farm-sales-weak...

"The report's measure of a "˜typical' first home buying household shows...."

"This measure is for a median income earner aged 25-29 buying a first quartile home. "

Is the "first quartile home" in the stats taken off the overall ave inflated due to high numbers and well above ave value....
Maybe the "˜typical' first home buying household, should be taken from an 'Ave' area that is typical of what the 1st home buyer purchases.
Crunching numbers on this basis from QV, with our children in mind, avordabilty is far better than represented by interest.co.nz formula.

Doug

"only people buying homes presently, are speculators and real estate agencies playing "˜hot potato' with each other's properties in an attempt to re-inflate the marketplace", I have been wondering who's buying, so now I know they are all speculators.

http://business.theage.com.au/business/end-of-the-age-of-plentiful-debt-...

The present debate misses the point that it may not be feasible to reach again the growth levels in the global economy of the past 20 or so years. Recent global prosperity was founded on a series of elegant Ponzi schemes.

Consumption rather than investment drove growth, especially in the developed world. A deregulated financial system supplied the borrowing to finance the consumption. In the new economy, to borrow from Earl Wilson, there were three kinds of people "” "the haves", "the have-nots" and "the have-not-paid-for-what-they-haves".

Like consumption, growth in global trade was also fuelled by debt. Since the 1990s, there has been a substantial build-up of foreign reserves in the central banks of emerging markets and developing countries that became the foundation for a trade-financing arrangement.

Bernard - oh my gosh you are clutching at straws again... and I thought you were finally getting over that...

You say "The housing market usually cools off in winter and this worsening of affordability is likely to add an extra chill,"

You could say " Despite usual cooling off of properties at this time of year, the property market is really starting to heat up again despite my previously claims of a pending 30% drop, whoops I was wrong, sorry to all those who missed the boat"

Hey, what's this nonsense - Affordability remains slightly out of reach for most individual home buyers - WTF? Since when have we had individual home buyers, individuals go flatting with their mates, or go looking for the other kind of mate for mating... mostly single home owners are divorcees, and they only own half..

You also say "This is a spanner in the works for many first home buyers and rental property investors who were getting back into the market,"

You could say " Goes to show there's no spanner in the works for many home buyers and rental property investors, the ones who did not take everything I said as gospel and actually got back into the market"

You also say - "The improvement in affordability helped fire up the market again in March and April, but this reversal is likely to cause many to think again before diving back into housing,"

You could say - "The improvement in affordability helped fire up the market again in March and April, and this reversal is likely to cause many to look at housing once more, before it's too late for them to do so"

Jeepers, I could go on and on, but I'm sure you'll just keep spinning your double headed coin, the one with your face on it. Somewhere out there is a whole other side to the story and you seem totally unprepared to report it as it conflicts with your ego/media driven 30% drop in property price claims.

How about this angle - owning a home is expensive, and we will just need to learn how to manage our money and our debts if we ever want one, as we can no longer bank on them getting cheaper, we need to invest in ourselves, in our financial literacy... and wow build up the courage to ask for a pay rise, that 5 minute conversation is worth more to everyone than any tax break, and sure makes things more affordable.

To others who got to reading this far - ask for a pay rise some time this week, Tuesday mid morning, and Thursday mid afternoon are good times, also there is no time like the present... like right NOW...

Hey, Prez of Property, I love your chutzpah!

Very like Napolean esconsed in Moscow in 1812.....

I really cannot see an end to this financial crisis. The world has been borrowing more than the savers have deposited for too long now.

Short term the Governments of the world are going to deleverage as much debt as they can by robbing off the savers. I reckon deleveraging is just finding ways to make the savers forgive the debt. In NZ a lot of deleveraging was done when finance companies failed. The savers lost billions there.

Then the borrowers started stealing off savers further when RBNZ lowered the interest rates the borrowers pay. Every dollar less interest borrowers have to pay is more money stolen off the savers.

The final theft will be massive inflation caused as a result of printing money.

The last theft from the savers will be when we have hyper inflation causing assets (flat screens, holidays, cars and I suppose houses) to rocket in cost. Then the savers money in the bank won't be worth anything.

The problem is the total world debt is higher than the total the savers have invested. So long term we are all shafted. The savers will end up broke and the borrowers will still crash and burn.

Prez de Property

"You could say - "The improvement in affordability helped fire up the market again in March and April, and this reversal is likely to cause many to look at housing once more, before it's too late for them to do so""

Now why would he want to say that? If you truely believe that affordability drives demand, then what can possibly improve it more from where we are, with rates (by the banks own admission) now about as low as they can go.

The only way for affordability is up or sideways, unless we magically find some way of growing income (as unemployment rises).

Those three Barfoot agents who lost their licences in a 'pass the parcel' scheme last December was proof it exists. The Real Estate Agents Act, passed last fall, may help, but it doesn't even come into effect until November 17th. Bernard: do you believe these are the only ones at it? The SFO doesn't think so. http://www.sfo.govt.nz/HousingFraud.pdf

Speculators and real estate agents purchased over 6000 properties(See Doug's comment), so let us play wait and see game. Speculators cannot play sale and buy games for too long time so the price will eventually drop and speculators and then real estates agents would out of market.

exactly veedub. in a similiar position to you. we have a large amount of cash and are in a position to buy now but our expenses are wayyy lower renting than owning a house. in a declining market we will wait for at least a year or two more, maybe longer before seriously looking at buying.

here's a great online tool for running the numbers re renting versus buying.

http://www.nytimes.com/2007/04/10/business/2007_BUYRENT_GRAPHIC.html

and bernard is right that asset bubbles don't decline in a straight line. they pretty much always go down in steps as people prematurely jump in having seen a discount on bubble prices or they wrongly try to time the market. and asset markets never bounce back up again, they splat and stay mooching along a price floor often for years. so calling the bottom of the market finally becomes a not so difficult thing to do. a v shaped recovery? to my knowledge it's never happened.

Wow - thanks for that link culver. According to the graph that I ended up with (after entering the CURRENT scenario, which obviously won't stay the same but we can only use current facts) I would NEVER be better off owning rather than renting. Again, at some point house prices WILL lift and that will alter the result drastically. So based on that, and the sentiment that you offered which is in line with Bernard's, I'll happily sit on the sideline for a bit longer and see what pans out over winter. In that time I'll be adding to my deposit to the tune of $400 a week minimum, confident that any house I would've bought right now probably won't be appreciating to the tune of $400 a week, plus a measly amount of interest! I'm really not missing anything in this am I?

So where will asset prices be if H1N1 mutates, and, say, 50mio people are wipped off the planet (an occurrence like that is WAY overdue)? Or BSE sneaks into NZ?
On the other hand, what about the WAY overdue BigOne that could remove thousands of houses from NZ?
Asset prices ALWAYS go up over the long term? You just never really know.....

POP

"Ian C - yep, i agree, affordability can only get worse or sideways, they sure aint getting cheaper"¦

ps: i believe supply also plays a part in demand"¦"

I think you misunderstand where I am coming from. If you think the lift in demand in the market was affordability driven, and that this has now (already) finished, then the heat will go out of the market. If interest rates rise, prices must fall to maintain the current affordability.

Whatever happens, there is no further scope to see affordability improve **by interest rates alone**. Since this is the case, you have to choose between either:

(1) a return to weak demand (mini boom over); or
(2) house price go down in value to maintain affordability if / when interest rates rise.

If its the former, and house prices go sideways, buying properties at current prices is uneconomic compared to renting. The attraction of a rental property for an investor without fairly constant evidence of capital gains is basically nil. A lot of work, hassle and (often) topping up negative equity for no benefit.

If you lot want to see and read about real living, go to
http://www.mrsharkey.com/busbarn/glen/glen.htm

End tax breaks on property investment, increase capital gains tax on property (and make it work properly), basically do whatever is necessary to end nzers destructive fixation with property speculation and do it now!

Eastie: What are these mythical 'tax breaks' that only apply to property investment? You mean the ability to deduct expenses from income like every other business can? The ability to treat depreciation as an expense like every other business does? Being able to deduct a loss from one income stream against profit from another like every other business does?

Name a single 'tax break' that only aplies to property investment.

Bernard - nothing like housing to get the debate going!
I've fallen into a bit of money in the last week, means I now have a 20% deposit for the kind of house in the kind of location I am looking for
However I am not rushing in at all.
I will keep eyes open and if the right property comes up and I can get a good price then I will consider. But I certainly won't panic. I still think prices are likely to drop at least another 5%, at best I think they'll go sideways in the next 12 months so as far as I'm concerned there is no rush at all.
So Veedub - its up to you but if you are like me keep your eyes open, if you see a place you like and can afford have a look, but go in with a lower offer. It will still be a buyer's market these next 12 months.

I agree with Bernard Hickey that housing is overinflated. I note the following:

(1) Auckland is even more over inflated with the average house price at 6 times the average income (and probably worse once you remove the exodus of small apartments at the bottom of the market being disposed at less than half their original sales value - deduct them from the equation and housing is even more unaffordable);

(2) despite enormous rises in the market, there has been a minimal increase in incomes - barely above CPI - this doesn't promote much gain in servicability for debt;

(3) Lower interest today doesn't mean property is more affordable. The average cost of borrowings is more important (the average interest rate over time) because interest rates do not remain the same - the fluctuate up and down - the interest rate this month is almost irrelevant within the time frame of a 25 year mortgage. To suggest a cheap interest rate today matters is absolute rubbish;

(4) Housing needs to be affordable to the masses to exist as a sustainable market. It needs average people to be actively part of that market and when they can no longer afford to purchase the average house - then the market is in risk of cataclysmic drops to arrive at a level where it is affordable to the masses. It is simply not enough to rely on wealthier people or investors to fill the gap as they too are subject the same fundamentals of affordability - borrowing against the same assets (homes).

(5) rental yields are too low to make rental investments work. If anything is a signal of how much one can afford to pay to live in a house - it is how much they will pay for rent;

(6) Bank deposit rates are too expensive - 20%. If the average house in Auckland is $480,000 then it requires a $96,000 deposit at 20% to enter. A single average income earner would take approximately 12 years to save that deposit, or 6 years for a couple. (An interesting side note - if banks really beleived their own hype they would be relaxed and okay with lending at higher amounts or does the 20% deposit expectation really signal that they anticipate values to drop?);

(7) compared to other countries which have average house prices at 3 times the average income NZ is scarily too expensive (which when considered with point (8) below makes it worse;

(8) NZ interest rates are more expensive than other countries which fundamentally means that servicing a mortgage costs more money from the average income. A higher cost of debt servicing inhibits the amount one can borrow. Hence - it isn't rocket science to note that if servicing a mortgage is more expensive in NZ - the average house price should be much cheaper - and this has historically been the case.

There are plenty of other reasons to consider however the fundamentals are there - that property in NZ is way over inflated and has to correct itself. Whether this is fast or slow remains to be seen.

It is interesting that both the IMF and the World Bank have clearly communicated their concern with the value of NZ property and for the reasons above. NZ'ers have over traded in property - choosing it as the preferred method to make a buck and the chickens will come home to roost soon enough.

I suggest that we need to stop and think about what and who is communicating the message that property is stabilising and or okay. Banks and Real Estate firms make money from property and its fair to say that they will spin any positive communique they can. The reality is that without activity their businesses faulter. Don't beleive the hype.

Janet, there is a common misconception that property investment confers some sort of 'tax break' in addition to the remote possibilty of capital gains. All an LAQC does is give individuals the same tax treatment as any companys gets.

Capital gains tax is a different issue (and is already paid by those who's business is speculating and dealing in property)

Veedub,

I'm in a similar position to you and i'm sitting on my hands for the time-being. I'm concerned that if I buy a house that it will effectively dissapear. A 25% drop means goodbye equity.

I've just come back from my OE and watched house prices in London drop 20% plus. They are still falling. Month by month. Drip. Drip. Drip. Some people are still buying though in the belief that since they have fallen they must be cheap and about to go up.

The excuses as to why house prices wouldn't fall in London are spookily similar to those given as to why house prices won't fall too much here: 'immigrants will always want to come and live here' 'limited supply of land and housing stock, increasing demand' 'strong economy' 'low interest rates' 'low unemployment' 'demographic changes causing increased number of households'. None of these things saved London or California and things are still dropping.

Why should Auckland be immune to a global economic collapse?

I bought house some 15 years ago, and during that period my repayments including insurance and taxes were higher then my rent would be. I worked hard over that period to pay off my mortage, and now 15 years later Iam mortage free, and better off by around $400 p/w, till rest of my life. In meanwhile average rent has doubled and value of my property tripled. If I ever decide to move on and sell it, will ended up with cca $300k cash. How anything else can be beter investment for retirement?
Iam now in process of subdividing and renting/selling second dwelling, as have bigish section...

That's good for you Johan, but you have to recognise that the conditions for the same change in house price / rent no longer exist.

House prices have tripled in 3 years, but incomes have grown by less than 2x (same as rent, as it happens). If you think that will happen again, the house price to rent ratio will go from 6x to 10x. In 15 more years from 10x to 16x. You must agree that this is not possible - even if you think there can be a widening gap between income and house price... there has to be a limit.

Don't enter the market until the "fundermentals" are done buying at ridiculous prices.
Until then watch prices fall.

Johan and 10 years back...

i love your work - goes to show that remembering you're in the movie is worth the ticket price. some people just get so caught up in the moment they forget what's really going on.

anyone that thinks property will continue to fall, get in now, i will offer you a blanket and an axe for whatever you have, before it drops even lower.

and before everyone jumps on the fu wagon, i do have a drop or two of that blood in my veins, like most of us, so i am not having a dig a Maori land ownership, i am talking about perception.

land values will continue to rise, property will continue to rise, and of day, we can do without the petrol, but we still will need somewhere to stand/live on, as we have not yet learnt to hover without getting wet.

we need houses, people will always need homes...

we are stuffed - the secret is to catch the falling knife with a magnet so you don't get cut in the process, or to spend years learning the art of 'catch falling knife'...

:)

let others get cut.

Pick it up when it has clearly hit the floor.

it will never reach the floor

POP

"land values will continue to rise".

Real Values will continue to rise. Prices however will drop a further 20% to align with real values ... and they may even undershoot further!!

Home affordability has lot to do with Government policies. Land controls and Monetary policies (Taxation, Inflation control etc), productivity growth are the long term drivers of housing development. Bank interest rates etc may have some short term effect. Home ownership improved during Labour mainly because of cheap credit and excessive risk taking by banks and individuals. I don't think home ownership will ever jump up as happened in the last 6 years, and it will stay at about 50%. Depending on what happens at the employment front, low value houses may retain their value because of their affordability but not the high end or the beach property type of houses. Low bank interest on cash deposits, which is below the inflation rate, will sustain properties whose rental return is about 7%. I expect a skewed fall in house prices at the high end in the next 2-3 years.

Bernard ...

Nice to see i can make you chuckle, and good to see actually take note of what is being said. i was surprised though when you made no mention of the comments that followed this one story you quickly ran and outdated, when i took note of what you said... and agreed...

http://www.interest.co.nz/ratesblog/index.php/2009/05/06/whats-happening...

IanC - well that depends on if you drink coffee and beer, and throw unused vegetables away at the end of the week because you had takeout. It also depends on if you need a shiny stainless steel patio warmer in your outdoor entertainment area, or if indeed you entertain. What a stupid question. If people try harder they get luckier didn't you know. It is okay to shoot for the stars as long as you don't have your head in the clouds, or the dark side of the moon - if you know what i mean...

I sort of know what you mean, but you're missing the point.

As I discussed in the middle of the page somewhere, strong price growth requires an increasing (and necessarily debt funded) relationship between prices and income. This isn't possible forever - eventually there isn't enough income to pay for the interest (even if you don't eat).

Once you accept there is an upper limit on house prices vs income (and lets assume that incomes won't grow any faster than the past), you have put a cap on house price appreciation at the sorts of rates you appear to expect (let me guess - double every 7 years?).

So, do you see a cap?

A related question - rents have tracked incomes (funny that). If rents keep tracking incomes ... what drives capital appreciation (beyond wage inflation) for rental properties? What justification can there be for a decreasing rental yield if there is no particular reason to expect rents to increase materially in the future?

Fundamentals are important. The housing market is just really unusual in that there are so many factors which can disconnect pricing from fundamental values for a long period of time.

Realist. I agree with all you have said. But the probelm that "we" have created is that we have taught our children that it's easy, and certain, that to get ahead, you don't need to work, but just buy property! It worked for their parents, and grandparents, so why wouldn't it work for them? Except that it will be "us" selling to them, as we all cash up; and then they can sell to ....? Looks like immigration and inflation will be their salvation.

POP - perhaps you should eat some PIE 's! Cheap money + inflation + silly tax rules have created a genuine bubble. Immigrants require jobs.. are they still flowing in?

There must be pent up demand from families who NEED to move, perhaps it is them behind this latest little push - volumes are THIN = volatile market prices. I wouldn't read much into 'price' until volumes get back to normal.

I would buy if after tax YILEDS are more or less = LONG TERM MORTGAGE RATES as I expect my loans to be DEFLATED away over the life of the mortgage making me better off. But hej, is wage inflation/rising rents a sure thing??

Philly - "LVR ratio's at time Mortgage was arranged" - scary indeed! what happened to Mark to Market??

Another spin for you; Housing Affordability may NOT GO DOWN to where 'it should be' if our productivity/incomes in real terms has declined and we already have so much DEBT to service - we're in a hole and it's a slow climb out, I'm buying XRO shares :)

sorry here is a taste, well worth reading.

After reaching peak values, Japanese home prices declined by an average of 40%. In the country's largest cities, the declines were worse, averaging 65%. Homes in Tokyo lost 80% of their value and are still on the downward slide to this day. National home prices in Japan were $125,000 in 1985. Twenty years later home prices are again at or near the $125,000 level. If the U.S. follows this path, median home prices will be $143,600 in 2020, the same level as 2000. You won't hear any "experts" making this prediction, because the economic implications would be too dire. A nice dose of runaway inflation could solve this dilemma. Are you up for it?

Japan has little relevance to NZ beyond the fact that it illustrated before our property bubble burst that property does crash.
When people said to me two years ago that property never crashes I always mentioned Japan, as well as Germany.
Their population has been shrinking for some time and they have very little immigration. Result is that demand for housing has been on a downward slide.
I doubt very much that we will see the same sort of long term decline here that we have seen there.
Also an important difference is that property is not viewed as an investment there anywhere near the same level it is here.

Matt: "Also an important difference is that property is not viewed as an investment there anywhere near the same level it is here."

I think you'll find it was considered an investment in Japan as the boom rocked on up to unsustainable levels. If anything, it is precisely because we see housing as an investment that we're potentially in trouble.

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