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Roger J Kerr likes the latest RBNZ approach to the Auckland property 'boom' but does see some risks with this new policy direction

Roger J Kerr likes the latest RBNZ approach to the Auckland property 'boom' but does see some risks with this new policy direction

By Roger J Kerr

In previous residential property boom periods in Auckland, the RBNZ response was to tighten monetary policy with higher interest rates as they feared the “wealth effect” on consumer spending would increase inflation above the 3.00% speed limit.

The wealth effect being house-owner’s ability to borrow more with the increased house value and then spend the new cash.

By making the price of money more expensive the RBNZ would slow credit growth and slow the economy. It was always the associated and resultant higher NZ dollar value; however that did most of the economic slowing.

There are many and varied reasons as to why the RBNZ on this current Auckland property boom have no fears of the knock-on inflationary impacts and therefore they have cut interest rates as other more negative and off-setting developments in the economy (e.g. dairy prices) take precedence.

  • Credit growth in the household sector on this cycle remains relatively subdued, reinforcing the view that a good part of the Auckland property demand is from immigrants and non-resident buyers who have cash.
     
  • The reasons behind the supply shortage of new houses in Auckland are well documented and ongoing; however the lower mortgage interest rates should assist to close the affordability gap for younger buyers.
     
  • The extraordinary house price increases allow older owners of residential property in Auckland to exit, downsize and re-locate to the provinces as the money equations allow them to enjoy options in this respect for the first time in many years. This section of society is hardly complaining about offshore buyers taking a liking to Auckland.
     
  • The RBNZ do have some helpers to monetary policy on this housing cycle in the form of bank lending regulations, taxation changes and fast-track property resource consenting arrangements. This was not the case in previous cycles.

So, sensible assessment that this property boom cycle is different to previous cycles and other pragmatic measures (outside interest rates) are now in place to control some of the excesses around the edges.

The Government and RBNZ are therefore hoping that the situation is containable and the property boom will not burst badly and adversely impact the wider NZ economy.

The risks, as I see them, to the overall strategy that is being adopted are twofold:

  • Local speculative property investors over-gear themselves as the record low mortgage interest rates allow this to occur. If and when the Chinese money inflows dry up for their own reasons, the housing demand/supply equation could swiftly shift the other way.
     
  • The RBNZ underestimate the speed of tradable inflation increases from the sharply lower currency value and non-tradable inflation returns to the norm of nearer 3.00% annual increases. If this scenario transpires into reality interest rates would have to be ramped up rapidly with some brutal consequences for the over-geared property speculators.

Let us hope for the economy’s sake that the above risks do not materialise, however it pays to be aware of them.


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Roger J Kerr is a partner at PwC. He specialises in fixed interest securities and is a commentator on economics and markets. More commentary and useful information on fixed interest investing can be found at rogeradvice.com

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40 Comments

5 year rates of 5.5% make risk number 2, sharp increases in OCR hurting the over-leveraged, less likely. Although with the poor rental income from the average auckland property in 5 years time the mortgage values will likely be much the same as they are now so coming off 5.5 onto 9% could be interesting. Best to never buy grossly over valued assets in the first place.

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Chinese money inflows? I thought we were all pretending that isn't going on?

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By even mentioning this could possibly be happening could brand you a racist in today's PC world. So yes best we just pretend nothings happening.

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For all the excuses house prices in Auckland are disconnected from the economic value of national production to which they should be tethered. Citizens can only subsist as a nation of impoverished real estate debtors. Moving that condition to the provinces does not cut it as a solution.

As S&P noted in Australia, which equally applies to New Zealand.

Although S&P sees Australia’s public finances as “strong” with low debt and deficits, it said that public-sector savings are a “necessary countervailing force” for the high level of external indebtedness on the part of private borrowers, which the ratings firm views as the nation’s “key credit weakness.” Read more

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Speak for yourself! I, like many thousands of other young kiwis, want either high interest rates for our savings - or more reasonable property prices.

Why is it a given that only one half of society should be looked after?

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You have my vote.

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How tight is bank money getting?!
I have an undrawn "Standby Facility" with a local retail bank (when I moved homes a few years back I arranged for a small Floating Rate Mortgage to be 100% Off-Set in the meantime; no interest charged and at $10 per month account levy. Cheap facility fee!). The nominal Floating Rate is 6.25%. Given my view ( right or wrong) that we are staring a rebound in interest rates in the global face, I requested a change to Fixed at 4.69% for a token 2 years - the carded rate. But....there's also sorts of humming an haaing going on, because even though I have a loan already in place, and even thought the new rate is some percent lower than that which I have....."You don't have a job, sir, so how are you going to pay the monthly installments". The principal amount is already covered 100% by...cash, and there's substantial overcover there as well. The collateral cover is many time the amount of the loan amount.., and yet because I have lived from my own resources since 1993...I can't tick the necessary "Job" box to go from Floating to Fixed. I shudder to think how others looking to Fix might be awoke to a reality if I end up having trouble!
The Banks....are getting nervous.....

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What has job got to do with it, if you have steady verified income and capital to bathe in?

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That's what I thought! But.....given my possibly deluded views, I converted all my income producing assets into just one - cash. What's left is an unencumbered roof over our heads. But..and here's the kicker...the return on cash isn't counted as reliable income. Because, deposit rates might go to 0% and/or I might go on a binge and place the whole lot on Red, or something similar. So....cash ...doesn't count. "But what about your pension, sir? We can count that as income?" Well that's still 5 years away! And the capital isn't counted either. So as I say, I'm still in ( relatively seemly for a long standing Private Banking customer) 'discussions'....(NB: I haven't had a desire to do anything like this for some years. And to some extent it's an practical exercise in taking advantage of what I see happening....that's what we were trained to do!.... but it reminds me of why we have got ourselves into this 'property is the only game in town' mess. Cheers)

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If you were a dairy farmer you could get the loan no worries, don't worry that your 'job' will cost you $300k+ this year. I'm mostly in cash at the moment, and had to break a few legs to get a loan as well, not that I have taken up the loan yet, but I knew getting one wasn't going to be straightforward, because I don't have a J-O-B.
Just
Over
Broke

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bw... No.. I think that's simply a sign of the inane stupidity of the people u are dealing with... follow the rules..follow the rules..
I don't think it has to do with Banks getting "nervous"...
there is no room for common sense... for exceptions to the "rules".... UNLESS... u actually know someone further up the food chain....

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You're right! It turns out that terms of the offer specified that "Salary had to be paid into one of my accounts with them" and it was the, salary bit, that was missing. But.....we have sorted out a work-around. Box....ticked...

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Good luck with that. Do you think the politician represent us nowadays?

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Good luck with that. Do you think the politician represent us nowadays?

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You should be grateful for the low interest rates. It's your civic duty as a young kiwi to take on eye watering levels of debt. Oh you thought you would save for a house, wrong, what you need is lots of debt, yay for low intereest rates. Of course, they will never go up! Don't worry about it.....

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DELETE

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When three times as many new mortgages are taken out by investors as are by first home buyers the rot has really set in. Then add in the no-mortgage ( non residents + cashed up new arrivers) and this shows up as the REAL PROBLEM in Auckland.
Ask yourself how these problems can be dealt to by any of RBNZ, Nat led government, the suggested solutions on this site.
Answer is NONE OF THEM.

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The only reason that investors are taking out 3 times more mortgages than FHB's are the loopy rules by the RB insisting on larger deposits from them. The gaping hole left by the disappearance of FHB has been filled by investors.
As Olly Newland said: "unintended consequences" but I am wondering if he may be wrong and the RB indeed wants the consequences but for reasons not yet clear.

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BD - was it unintended consequences though? from where I'm looking it was very much what the RB was intending from the get-go!!!

The fact is the RBNZ has deliberately taken out FHB from the market....FHB had time on their side to pay off loans....and not all investors will have the time factor available....FHB have been deliberately shafted by not being treated equally by a bureaucracy.......NZ journalists need a kick in the pants here for allowing this kind of inequality to be orchestrated by public servants!!!

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Blame the absurd immigration and investment policy of successive governments, not the Reserve Bank notaneconomist. The Reserve Bank was only trying to minimize the damage that those policies would wreck on first home buyers fearful that the prospect of owning their own homes in Auckland would recede ever further off into the distance.

How can a rational thinking person not expect a migration and investment policy which encourages the already wealthy and those who can demand proportionally higher salaries to not have a distortionary effect on property prices?

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Can't agree there Anarchist.....the RB did not place an LVR on Investors which it could have.....it specifically targeted FHB...........this is straight out discrimination!!!!

The whole of the Government and bureaucracy is rotten to the core always has been and always will be......I will not condone discrimination in any form but when we have Politicians, Governments and the bureaucracy constantly implementing discriminatory policies then those people who make up those groups are as I said rotten to the core!!!

I'm not sure why you find it so necessary to be defending the RBNZ.....their main job is to return a dividend to the Government !!!! Now you tell me how one can be the regulator while also making a profit....who's interest is going to be looked after first!?!?......

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I would say they are patronising rather than rotten notaneconomist. The bureaucrats on the Hill think we are not equipped to make sensible choices for ourselves. They think we need our hands held to keep us on the straight and narrow and with the track record of the NZ public, perhaps they are correct. I don't like it, but that doesn't mean its not true.
http://www.interest.co.nz/property/65980/rbnz-says-first-home-buyers-ma…

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Given our behaviour ie greed and frankly stupidity I cant blame them for that opinion.

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Speak for yourself Steven - you might be greedy and stupid...but most of us are more than capable of making our own decisions.....what gives anyone the right to take away an individuals right to make their own decisions?? For instance why should I suffer or anyone else for that matter because you have tendencies you cannot control??

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The arrogant sods on the hill are not equipped to make sensible choices never have been and never will be....if you can't make it in private business then you sure as hell can't make the right decisions for the public good!!!

They are rotten to the core, they are in their positions not for any benefit other than the one they give themselves!!! Their track record speaks for itself....as I have said previously they couldn't organise a bun fight in a bun factory so why anyone would consider them well equipped is beyond me......

I am not a religious person but the 10 commandments in there original form are all that is needed......The world seems to have forgotten what ancient right are!! Instead of our ancient rights and abiding by the 10 commandments we have the rotten cowardice crew mandating all and sundry upon us until the point we have all become totally enslaved by politicians and bureaucrats.......it is an absolute mistake to think they are only patronising - they are rotten, evil conniving lumps!!!

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dp

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The LVR would only apply to non-cashed up purchasers, that would be FHB's or speculators using NZ bank debt as far as i can see. Since the RB wanted to quieten the market then the FHB is indeed the purchaser with the greatest risk and in-experience.

The rest of it is libertarian hogwash frankly from my view point.

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You are not the bank or the borrower...so what the heck would you know about the numbers that needed crunching between the two parties.......that is a private matter and should have nothing to do with the bureaucrats in the RBNZ......The RBNZ has directly interfered in the housing market and that has pushed prices higher and people like you believe that these intervention tactics are a good thing when clearly they are discriminating against one group of people....if it was financial stability the RBNZ was after they would have controlled the selling of the security interest over a property that is created when you take out a mortgage!!!

People who have never been in business, never had to deal with banks and bureaucrats, never had to make their own way using their own steam in the world is where the problem lies........but you stick to your view point because look at all the good it is doing......Auckland house prices up.......dairy on its knees, Government debt up and then there is the current account!! How the heck you can justify your view point is beyond me!!

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agree

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The only reason that investors are taking out 3 times more mortgages than FHB's are the loopy rules by the RB insisting on larger deposits from them. The gaping hole left by the disappearance of FHB has been filled by investors.
As Olly Newland said: "unintended consequences" but I am wondering if he may be wrong and the RB indeed wants the consequences but for reasons not yet clear.

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A few comments

RJK: current Auckland property boom have no fears of a knock-on inflationary impacts
RES: misleading - please differentiate between CPI and HPI. Two different types of inflation. There is consumer inflation and house price inflation. Don't mix the two. Demarcation please

RJK: Reinforces the view that a "good part" of the Auckland property demand is from immigrants and non-resident buyers who have cash.
RES: suddenly de rigueur to acknowledge demand and where it comes from without JK's permission?

RJK: The extraordinary house price increases allow older owners of residential property in Auckland to exit, downsize and re-locate to the provinces
RES: The little kahuna cometh

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why should someone that was born in auckland , grew up in auckland and has all their family in auckland suddenly when they retire want to sell up to move to the provinces.
my guess unless pushed out a lot dont and now heartland are offering reverse mortgages they have even more chance of staying put

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Ban the NON-Residents from buying + require 50% deposit (CASH) for investors/speculators.
We will see how that will work!
It would take 'quite a bit' speculative demand and would soften the market ... i guess.

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Go even further by putting investors on a similar footing to owner occupiers.
How?
Reduce the percentage of mortgage interest that can be claimed on a rental. This will give the IRD extra income. Then use that extra income to allow those with mortgages on owner occupied property to have a small but significant cash subsidy to their home mortgage.
Eventually changes to both the charge and the subsidy will result in each type of buyer to be on an even playing field. Another benefit would lower price gains.
In fact lower cost of purchase helps all owners.
The O-O will have a lower mortgage interest to pay.
The investor will need to collect less rent for the same yield.

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RJK ponders - If and when the Chinese money inflows dry up

I have a different view - that isn't going to happen

First:
Australia has had a Capital Gains Tax since September 1986. The existence of a Capital Gains Tax has never slowed investors down. The objective is profit regardless of the description given to it, it is income and the taxation on it is discounted to 50% of the taxpayers normal rate of tax. It is simply regarded as a cost of doing business.

Capital Gain does not have the same fear-factor as it does in New Zealand

Second:
The proposed regulations to be introduced from 1 October 2015 will be regarded by off-shore investors as an administrative chore to be complied with and they will accept any tax imposition should there be one (bright-line) as a cost of doing business, and get on with it

Third:
The current property investment environment in New Zealand is simply regarded as a free-kick to all and sundry as seen by the advertising in Singapore, Malaysia, Hong Kong and Beijing

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A property crash would be the best thing to occur to bring the cost of housing back to what the local economy can afford.
The bias for property investment is based on other failed asset classes, driven by real estate, media manipulation and access to cheap funds.
Kiwis driven by fear of missing out and greed foolishly compete with wealthy professional investor/speculators local and foreign.
Keys appears uninterested in preserving NZ culture (unless helps promote) one can't help notice we're getting more like China, a cut throat, ruthless environment with young Kiwis chasing few jobs, cost of housing un-affordable and food high, people living in squaller, unhealthy conditions.

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Well said 2 Tooth. However the property crash will not happen in isolation, it will compound on all asset classes and then be exacerbated by unemployment. The RBNZ's feeding of enormous debt into NZ society since 2003 will cause real havoc.

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The Reserve Bank had nothing to do with it Ergophobia. I think people place way to much faith in the Reserve Bank to manage the economy. Its hands have been tied behind its back with the moronic reliance on the overnight cash rate to manage this country's economy. The Reserve Bank independence is a political fob (misdirection) for the credulous public to relieve the government from responsibility for arbitrating between labour and capital in wage negotiations.

"In considering the issue of robustness, it may be noted that the testing of monetary policy rules has
been based almost exclusively on models that abstract from endogenous policy credibility, that make unrealistically strong assumptions about the monetary authority’s knowledge of the NAIRU and that ignore possible convexity of the short-run Phillips curve. Thus, the analysis to date has
abstracted from several important elements of reality...The analysis in this paper relies on an open-economy model of the unemployment-inflation process that embodies the monetary policy transmission mechanism depicted in figure 2. The authorities are assumed to control a short-term interest rate (rs) with the objective of influencing the rates of inflation (p) and unemployment (u)"
http://www.rbnz.govt.nz/research_and_publications/seminars_and_workshop…

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Anarkist. With respect, ye miss me point. It is not the RBNZ's statutory job to "manage" the NZ economy- It's job is starkly laid out in the RBNZ Act 1989 s.8. It has willfully failed in that since 2003, enriching vested interests along the way - and we plebeians pay for it. You and I agree, I think, that it's independence has become a farce. Regards, EP

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Let's all borrow cheap money to buy unproductive assets, because their price never goes down and we can get richer by selling them in the future. And let's pretend that first home buyers are lucky to find low interests so they can borrow more and make older generations even richer by transferring wealth. But let's not forget to encourage more people after us to do the same, otherwise it might not work well..

I'm trying to be sarcastic..

Interest rates will remain low, but that won't stop deflation.

The Minsky moment is closer..
"A Minsky moment is a sudden major collapse of asset values which is part of the credit cycle or business cycle. Such moments occur because long periods of prosperity and increasing value of investments lead to increasing speculation using borrowed money."

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