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October 1 looms as a vital day for both the Government and the Reserve Bank

October 1 looms as a vital day for both the Government and the Reserve Bank

By David Hargreaves

Anybody that has cast half an eye over history will know that the "Phoney War" referred to the rather strange, waiting, eight month period between September 1939 (declaration of WWII) and May 1940 (invasion of France and Low Countries).

It was the pregnant and rather long pause that followed the announcement of affirmative action.

At the moment we are in our very own peacetime 'Phoney War' - this one stretching from May to October 1 as we wait for the announced (in May) 'pincer movement' of the Government and Reserve Bank to take effect against that unruly offspring of an Auckland house market.

And while October is unlikely to bring speeches from either the Prime Minister or the RBNZ Governor exhorting us to fight on the beaches, er, houses, both John Key and Graeme Wheeler will know that it is an important time for both of them and that the measures that have been announced better blinking well work.

The RBNZ has realised that it can no longer ignore the fact that inflation has fallen well and truly out of the bottom of its official 1%-3% target range and is light years distant from the RBNZ's own explicit goal of 2%. That's why we now have the odd sight of the RBNZ bringing its own tankers of petrol (also known as interest rate cuts) to the blazing house fires of Parnell, Herne Bay and rest, while also standing guard with the fire extinguisher (courtesy of a continued 10% high-LVR 'speed limit' and a new limit of no more than 70% borrowed financing for investment properties).

To me this is just plain weird and highlights the growing inherent conflict between the RBNZ's monetary policy role on the one hand and financial stability role on the other. This needs looking at.

It will work

But notwithstanding the stimulatory interest rate conditions that are coming (an Official Cash Rate cut to at least 3% this week is a given and the OCR can now confidently be expected to revert to historic lows of 2.5% by end of the year) I actually think the housing specific measures announced in May - most particularly the RBNZ's move on Auckland investors - will work. And I will stick my head on the block and forecast that we'll see a drop in the Auckland region's median house price of between 5-10% in the 12 months from October 2015 to October 2016. It is the first time I have personally specifically predicted Auckland house prices will fall.

Time will tell, but rather than being worried about whether the measures will dampen the market, I think the RBNZ particularly needs to be very careful that it doesn't precipitate the very thing it is seeking to avoid, namely a very sharp correction in Auckland prices and I think the central bank will need to be very vigilant on a month by month basis that it's not throttling the golden goose. I'm guessing that a 5-10% decline within a 12-month period, given the recent astronomical gains is certainly something the central bank - if not your average Auckland home owner - would be reasonably comfortable with.

It would be the pause that would let everybody catch breath.

Recent history would suggest that were are a very long way indeed from seeing Auckland house price rises even slow, let alone reverse.

But we are in that Phoney War period. While any new restrictive measure generally needs to have a phase-in period - just for pure logistic reasons - it is never ideal in my view. In this instance we've seen the back of the hand raised in May, but don't get the clip around the ear for three-and-a-half months. That's long enough for people to kind of half forget that the measures are actually coming. I genuinely think it is going to come as a rude shock to some people to find - as is now starting to happen with some pre-approvals - that the the 70% limit has slammed down.

Understanding demand

Auckland's perceived shortage of houses has been well canvassed. Probably less well understood has been the demand side of the equation because we just haven't had enough information on that. And, please, no, let's not go down that over-worn path again.

We can see that investors have been increasingly significant in that Auckland market, driven no doubt by low interest rates that on the one hand make borrowing money cheap and on the other make for reasonably rubbish term deposit returns. So, buying property it is, then. Figures produced by property information, analytics and services provider CoreLogic suggest that investor interest in the Auckland market has surged to such an extent that investors now account for more than 40% of sales.

Clearly anything that has a dampening effect on the investors will have some dampening effect on the Auckland market. The RBNZ's own figures, which are nationwide ones, show that among investors very few of them fall into the high (above 80% of the property's value) loan-to-value ratio. BUT, nearly half of all the money borrowed by investors (over $1 billion worth in May) falls into the 70-80% LVR bracket.

The big question then is how many of these investors will be able to find a bigger deposit, or do some other regorganisation, that would get them down under 70%. Clearly at least some are going to drop out. Some may move their attention out of Auckland (there's some signs that might be happening already), with other regions now offering the advantage of cheaper prices - but also after October 1 easier access to finance.

I think this impact on the investors will alone be sufficient to start seriously dampening things down in Auckland.

The real wild card is the extent to which cash buyers - impervious of course to any credit-based restrictions - might continue to carry the market in our largest city. According to CoreLogic cash buyers make up about 20% of Auckland purchases - which is a lot. If the cash buyers keep coming then it is certainly possible these new measures could at least in part be blunted, and I happily concede, I could be wrong about falling prices.

I think the Government will do itself a lot of favours if it makes a clear signal sooner rather than later that it DOES intend to go ahead next year with plans for a withholding tax on offshore investors who sell properties. A very clear sign of a changing mood would have an impact on offshore interest.

Slowing economy

Another potential dampener on the property market is the slowing economy. While the property market currently appears to be operating in its own separate dimension, the gravitational pull of a slow-down will gradually have an impact. It must. Whereas two years ago dairy farmers, for example, were flush with sky-high global prices for their products, now the are looking at prices hitting 13-year lows and with the prospect of a second bad season in a row. This has direct and indirect impacts.

Indirectly there's a morale factor. Morale goes down, people are less encouraged to invest - and they might be less encouraged to buy houses.

Then there's the direct impact of actually less money in the economy. And, how many dairy farmers might have invested some of the strong returns of recent years in investment properties? I honestly wouldn't have a clue how many, but you would have to think at least some might have. Will they now need to sell those investments to raise cash?

The Phoney War has a little while to run yet. Unlike that other Phoney War this one's turning out to be a pretty noisy affair, one way or another.

Ironically it is when October comes that I think we'll see quiet descend. On the Auckland housing market. Then maybe we can all get some sleep.

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28 Comments

First satirical piece I've seen on this site!

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" I will stick my head on the block and forecast that we'll see a drop in the Auckland region's median house price of between 5-10% in the 12 months from October 2015 to October 2016. It is the first time I have personally specifically predicted Auckland house prices will fall."

Framed and on the wall, DH.

I'll have my knitting and a basket handy.....

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LOL - why can't journalists stick to what they do best and let the punters get on with determining prices, as they will, regardless? I could understand better if a wager was placed and announced.

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Tricoteuse ?

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got plenty on the job, heads will roll..who will be the Madame Defarge though???Annette King??

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Yes.... I'll put that on my wall as well..... your head is on the block..

I'm thinking that once the unitary plan is all go...and there is a real upswing in supply...and the reserve bank starts to raise rates...and the Govt actually limits foreign investment in Auck. housing.... then we my see your 5-10% down turn...??? ...... Maybe Oct 2016- Oct2017..???

Thats all a guess on my part...

Waymad... u are a smart guy... What do u think..??

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I do have ma leetle moments.

My humble SWAG is that it will simply set off a whack-a-mole sequence: investors will switch their attention to anything non-Auckland: Hamilton, Whangarei, Tauranga, and it will induce a similar price spiral elsewhere.

Or not, as the case may be....

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with 25% drop in NZD, imported building materials have just increased in cost dramatically. Any new supply will cost more now, and it's already expensive, no ones going to build anything and sell for less than market values anyway so prices continue to rachet up. Simply dont have the scale in NZ.

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Agree, the Q is if materials prices go higher will enough ppl still be buying? if not the importers go to the wall and there is nothing to buy.

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Yes we will be hearing that building activity is slowing up in Auckland very soon.

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If the government wanted Auckland house prices to fall, here's a new idea:

Introduce not only a stamp duty on foreign house purchasers, but add one on sales too.

20% duty on purchases out side Auckland and a total ban on purchases in Auckland effective immediatly and a 20% duty on sales everywhere announced 5 months out.

All the foreigners will place properties on the market to avoid the sales duty and prices will rapidly fall and at the same time foreigners can't buy.

Problem solved.

Get it done, and get the foreign speculators out.

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Good article, but the predictions of a price fall, or even stabilisation, are going to be washed away by a flood of Chinese money, especially with the lack of serious stamp duty etc.
Remember with the fall of the Kiwi dollar these houses look relatively cheap to those desperate to get their money out of China, especially those who may get caught up in Chinese Govt corruption investigations

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If the government seriously wants to do something about this, in addition to the above they need to bring in the 2nd tranche of Anti-Money Laundering regulations to cover RE agents, lawyers, accountants etc and see how quickly the cheap hot money coming into the housing market dries up. They have dragged their feet on this for years, it was meant to have come in 2013. They have saddled banks, financial institutions etc with increased compliance cost and let these characters continue on their merry way. Lets see how many people then show up for auctions ready to pay millions in unaccounted hot cash.

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Money Laundering - Wide ranging liability for real estate agents already exists

Real Estate agents are currently required by law to identify and report suspicious transactions.
Not knowing that the obligations exist, or what they are, and not knowing what to look for, or not looking, is no defence.

Wonder how many referrals the RBNZ has received in the last 10 years

http://www.reaa.govt.nz/News/NewsletterLinkedPages/Pages/Feb%202014%20N…

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Trying to ride a Ponzi scheme to keep it stable, must be tricky. A lot depends on the confidence of the Greater Fool.

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The engine room is offshore for this Auckland disaster. We have no idea that any disincentive, tax, or stamp duty will have any effect whatsoever. Law or regulation will. E.g.. You have to be a citizen to buy.

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"E.g...You have to be a citizen".

So, people like myself, who are here legally, have permanent residency won't be able to purchase a home? I'm not an investor. I bought my home to live in it. I pump huge amounts of money into the economy via taxes and FIF (something you don't pay) and you want to send me home packing? Which is exactly what you will do if you deny legal residence a right to own a home.

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Am I missing something?

The government's mantra is invite overseas investment to come to NZ, lots of it, and
That overseas investment is pouring in, along with it's owners, except
We the people are none the wiser, coz we're kept in the dark about how much is coming, and
There is no prescription as to where it goes, what it does, so long as it comes, except
A lot of that newly arrived overseas investment money simply goes directly into Auckland property
Of course I'm guessing here

So, really, what's the problem people ?

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well you hear of those rich investors that come in buy assets then their project never get off the ground...

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Inflation = .3 while Auckland housing = 20%
Disconnect?

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"House prices in Akl drop in 12mths" lol with net migration at all time high:) It will drop eventually, but in the next 12 months.......NEVER!!!!

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We have Weimar Republic style HYPER INFLATION in the Auckland housing market.

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http://www.smh.com.au/business/markets/currencies/we-aint-seen-nothing-…

See SMH article. It is strange how its all very clear there's money rushing in from PRC into residential property globally yet somehow this is not the case in NZ...

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The Govt or the Banks cannot afford Property prices to drop.

The whole financial system/casino is based on property.

Such property is based on credit creation.

Therefore the RSBNZ is preparing a downward movement in the OCR to effect a decrease in the cost of money and therefore hopefully ignite inflation.

One must remember the club always wins that is the truth.

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The other point is that, the last thing the RSBNZ or the Govt does not want to happen is loads of mortgagee sales and voters out in the cold on the streets.

The Club/Casino must be keep going at all costs....

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Every thing was happy in Greece until the bills had to be paid.

Grim reaper has arrived.

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OCR at 2% by October or the wheels come off.

Provincial NZ is in for the worse of times now that the 80 year commodity cycle has finished.

Milk prices and milk products are not going up anytime soon.

Lets hope we get saved by the kiwi scenery and overseas students...

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All good, provided you really think that the Government and the RBNZ can do something to influence the goings on in the Housing sector/market. History is not on the side of believing that. Factors and developments outside NZ are the key and they have always thwarted the local efforts to control this sector. Same may happen again. What will be the outcome, no one can predict.

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