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New Zealand runs the risk of a sharp correction in property prices, credit ratings agency Standard & Poor's says

Posted in Property

International credit ratings agency Standard & Poor's is warning that New Zealand and its banks are vulnerable to a sharp correction in property prices.

In a report on the New Zealand banking outlook S&P says its "base case scenario" sees real estate prices continuing to stabilise at current levels over the medium term, and such an occurrence having a stabilising effect on asset-quality ratios, especially as residential mortgage loans account for approximately 60% of the total banking sector loans.

"That said, given the uncertain short-to-medium term outlook for the global economy, we are of the opinion that there remains a significant risk of a sharp correction in property prices," S&P said.

"We believe that a scenario that may lead to such a weakening of New Zealand's macro-economic factors is a deterioration in the terms of trade or a widening in the current account deficit from its current cyclical low, which could heighten the risk of a sharp depreciation in currency and a sharp fall in property prices.

"In our view, such a scenario, in conjunction with a rise in unemployment, could increase the risk of a significant rise in banks' credit losses, on the back of a build-up in housing prices and domestic credit over the period that preceded the global financial crisis.

"We are of the opinion that such a scenario would have a material impact on the financial strength of the balance sheets of New Zealand banks."

The warning salvo from the ratings agency comes amid a stream of news suggesting more and more heat in the property sector. Statistics New Zealand figures for January  showed that construction consents for new houses (excluding apartments) were up a seasonally-adjusted 9.6%. Reserve Bank sector credit figures for January showed a NZ$952 million rise in home lending during the month - the most in dollar terms for nearly five years and the biggest annual rate of increase in four years. Real Estate Institute figures for January showed that the annual median house price was up 4.2%, while the number of houses sold hit a five-year high for the month.

S&P said it had noted the recent increases in property prices in regions such as Auckland and Christchurch and considered that a continued rise in house prices could amplify the credit losses if there was a subsequent sharp correction in property prices.

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"We are also of the opinion that the current subdued credit growth environment may also lead to an increase in competition between banks that could increase the risk appetite of New Zealand banks, especially in light of modest earnings outlooks relative to historical levels."

S&P rates countries' economic risk from 1-10, with 1 being the least risky. New Zealand currently has an Economic Risk Score of '3' . Should the economic risk buildup and the Economic Risk score be lowered to '4' from '3' the ratings on New Zealand banks could be lowered, the ratings agency said.

"We are of the opinion that such a change in the Economic Risk score would have a direct impact on the stand-alone credit profile of all New Zealand incorporated banks and the issuer credit ratings of banks that do not benefit from group support. A change in the Economic Risk score could also impact our capital and earnings assessment especially in instances where risk adjusted capital ratios are close to our threshold levels."

S&P said it was also of the opinion that there remained a significant risk of disruption in the banking sector's access to funding, given the sector's material dependence (37%) on external borrowings.

"In particular, we consider the New Zealand banking system's sensitivity to a disruption in external funding could be more pronounced during a period of rapidly depreciating currency, falling property prices, or increased credit losses. Nevertheless, we consider that the major banks are likely to benefit from their parents' support in normal as well as most stress scenarios."

 

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

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75 Comments

Don't worry. Be happy! ;o)

Don't worry. Be happy!
;o)

Problem with these

Problem with these predictions is that their timing can be off by years. Credit growth can drive itself, but the predictions are probably right; it's a matter of time until the debt-growth wanes and fails.
I think we all need to take some warning from Austrian school economics and the dangers of credit-based growth.
Those who believe that to make housing more "fair" we should allow deductions to home-owners as well as landlords (as they do in the US) are being led down a destructive path. Ultimately those who benefit from the housing and debt game are those who collect the interest, namely all the rent NZ pays as a nation. The beneficiaries of all this is the banking institutions, and unfairly so, and all this ends in instability: In a fractional reserve system they create money/debt from just a book entry, ie. from nothing. Pretty easy money isn't it? (While the time's good.) This simply puts entire nations, public and private sector, into debt saturation. Even Thomas Jefferson spoke of this. His words on this echo ominously as we see our indebted government selling assets.

We need to realise, our rent goes to service interest on some landlord's debt to a bank that created that debt from nothing. The entire property game and landlords banking on tax-free capital gains is a game that puts us all at risk in the long run. It is an unstable state of affairs.

Hey S&P get your own

Hey S&P get your own ideas...we been blathering on here for yonks about exposure while our Banker friendly RBNZ along with the current adsministration tell us wer'e in great shape,nothing to see here, all systems go...etc etc.
 I should think Wheedler will be on the phone this very afternoon in full damage control mode, I mean we can't have all those offshore property investors thinking their ghost town portfolios might lose a bundle just ater the wash cycle.....now can we.

Happy days are here again

Happy days are here again ...... Dont less those clueless buggers from S&P piss on our parade or take away the party punchbowl  (, they are the blokes who get every prediction wrong)

I guess in keeping with

I guess in keeping with normal "commercially sensitive" information practice this announcement had prior approval amongst the entitled before the general population were introduced to it's contents - the recent sell the rumour buy the news today action in the NZD/USD pair could not suggest otherwise, right?

Right. There is some other

Right. There is some other reason the Kiwi went down during a risk-on 36 hours.

The NZD was the biggest loser

The NZD was the biggest loser across the G10 currency spectrum overnight, losing over 0.9% against the US dollar to a low of 0.8224.- courtesy of BNZ

Absobloodylutely Stephen

Absobloodylutely Stephen H.......in fact , if you consider the feasability of S&P being the messenger of cooling down the hype here, on the part of an RBNZ that is just so ineffectual any concerns expressed by Wheedler & Co fail to even wake the audience... let alone invoke a response.
 So I'd guess approval, agreement,consensus of opinion on a need to cool things down was undertaken based on very real concerns the wider public are not yet privy to.
The old reverse nothing to see here.....nothings happened here ...but you know...uh...just watch it ...ok.

Is the same S & P that now

Is the same S & P that now stands accused of massive fraud on the much the same topic?
How can you trust their views?
Maybe they have an agenda in mind....
 
 6/2/13

The US Department of Justice on Monday filed a civil suitcharging Standard & Poor’s Ratings Services, the world’s biggest credit rating agency, with defrauding investors and the public by inflating the credit ratings it gave to subprime mortgage-backed securities in the run-up to the 2008 financial crisis.

Coming nearly four-and-a-half years after the Wall Street crash, the suit is the first federal action against a credit rating firm. S&P and its main competitor, Moody’s Investors Service, played a critical role in the vast edifice of financial speculation and fraud that came crashing down following the bursting of the housing bubble in 2007.

S&P, Moody’s and Fitch Ratings are all private, for-profit companies. As previous US government investigations have documented, S&P and Moody’s made huge profits between 2004 and 2008 by landing contracts from Wall Street banks to rate residential mortgage-backed securities (RMBS) and collateralized debt obligations (CDOs), which were assembled by the banks from home loans and sold to other financial institutions and investors around the world.

http://www.madein-greece.com/News.aspx?pid=2311&langid=72&mdl=news&ncid=38&itemid=1375#sthash.djPBp9lG.dpbs
 
and
http://topics.nytimes.com/topics/news/business/companies/standard_and_po...
 

C'mon, be realistic - they

C'mon, be realistic - they are only being sued because they downgraded the USA sovereign rating. Egan Jones undertook a similar task and have been issued a ratings suspension notice by the egregious regulatory authorities in the States.

The US Department of Justice

The US Department of Justice on Monday filed a civil suitcharging Standard & Poor's Rations Services, the world's biggest credit rating agency, with defrauding investors and the public by inflating the credit ratings it gave to subprime mortgage-backed securities in the run-up to the 2008 financial crisis.
You think S&P are forecasting too benign again?

Interesting if one look at

Interesting if one look at the fuller list
https://www.standardandpoors.com/products-services/articles/en/us/?articleType=HTML&assetID=1245348000467
Who'd have thought singapore has the same rating as NZ ???

In a report on the New

In a report on the New Zealand banking outlook S&P says its "base case scenario" sees real estate prices continuing to stabilise at current levels over the medium term, and such an occurrence having a stabilising effect on asset-quality ratios, especially as residential mortgage loans account for approximately 60% of the total banking sector loans.
"That said, given the uncertain short-to-medium term outlook for the global economy, we are of the opinion that there remains a significant risk of a sharp correction in property prices," S&P said.
Exactly my view. Property bulls should not be complacent. 
 

Obviously S&P big wigs are

Obviously S&P big wigs are struggling to get a foot-hold on Auckland property ladder because of high prices (not overvalued of course), and therefore trying to manipulate the market so they can get in! Typical! Never ever trust these rating types... It's only ever about them!

The Economist, North and

The Economist, North and South, Gareth Morgan, Bernard Hickey etc, etc - they all said property prices would go down but now Auckland prices are well ahead of 2007 and 27% higher than they were at the worst of the recessionary dip and the rest of the country is following suit.

yes but that doesn't mean

yes but that doesn't mean that a crash can't still happen. S+P correctly indicate that there is a significant risk of a crash. All the observers you mentioned expected a crash because the fundamentals were out of whack . They still are. Most housing markets in the world have gone down the same path when prices go mad - they eventually crash.
My view is basically the same as S+P. There's probably a 70% chance prices will stabilise, and a 30% chance there will be a nasty crash. No one knows for certain. Only charlatans (not naming any names) can claim that they know with certainty what will happen.
And before BigDaddy rabbits on about Olly predicting a boom, it should also be mentioned that Olly said last year that there were some crash danger signs. 
Believe that property is a one way bet at your peril!!!!  

I would agree with you if it

I would agree with you if it weren't for the fact that houses are actually undervalued in NZ when compared to their replacement cost (i.e. building a new one). They are only considered over-valued when compared to our rubbish wages.
I think other countries with popped housing bubbles all had houses that were worth more than they cost to build, so prices could fall to sensible levels without decimating the building industry.
If prices did fall here (perhaps they will) it will utterly ruin our already suffering building industry as the cost of building would far exceed the likely valuation of a post-crash house. All the builders would have to flee to Aus I guess, and we'd be left with no building industrry and an ever-increasing housing shortage. So prices go back up....
I think house prices will fall if the cost of building a new one falls. I'd say there is a 99% chance that won't happen. Unless you believe David Shearer that Labour can build swathes of state houses for about $300k. I don't.

good points but I don't think

good points but I don't think they negate the potential for a crash. They certainly might reduce
the potential for a crash.

You state I would agree with

You state
I would agree with you if it weren't for the fact that houses are actually undervalued in NZ when compared to their replacement cost (i.e. building a new one).
Maybe so, or not. Building costs are somewhat inflexible. However land cost is very flexible and the real reason for regarding prices as too high is possibly the land content. While that is aggravated by local body charges, it is a fact that the huge differences that exist between land inside and outside boundaries suggest flexibiliity.
Land banking could be made unprofitable at the stroke of a pen. Taxation changes could make investing in rentals less profitable and shift the balance of ownership from the under 60% in Auckland back to the 75%+ it once was, over time. That requires acceptance of a falling market which maybe unpalatable to some but very advantageous to those who are currently shut out. It would also shift spending power away from the accumulators (who don't spend it anyway) to the families who need to see a decent future for themselves.

Land value as a component of

Land value as a component of housing cost varies widley. A villa in Grey Lynn might be 80% land value so reducing land cost makes a huge difference. For affordable housing it's less  relevant - apartments can have a land cost component like 5%-10% ( half the cost of the development  tax for the unit) so makes little difference.

Many small towns its not

Many small towns its not worth building new it seems even with sections at $10-20,000 when existing 3 brm homes on large sections can be bought for $60-100,000 and are slowly declining still. Sure they're not palaces but they're ready to live in/rent.
 
Maybe a centre where the sections are $50-75,000 and basic 3 brm homes sell for $250-300,000 a case can be made for basic new dwellings

I agree that land-banking

I agree that land-banking should be made unproftable via punative taxes. That would help in the short-term with a number of building-ready sections coming on the market. 
However, new sections are expensive because of the cost of turning raw land into viable building plots. New sections suffer from the same problem as new houses - putting down the roads, sewers, power cables etc costs the earth because of the over-inflated prices for materials in NZ and the costs to meet local council requirements.
I heard someone on the radio recently (forgot who it was, sorry) saying that  to create a section ready to build on, the raw land accounts for less than 15% of the cost. The remainder goes on building the infrastructure and council compliance. If a section costs a 1/3 of a new build, then the actual land accounts for less than 5% of the total cost of a new house.
So freeing up more land via zoning changes or releasing previous horded landbanks won't really make much difference in the long term.
I agree with you that it would be great to have more families owing their own house. I like the idea of removing the tax advantages for landlords, that would help. Although it would only be a temporary measure until a small number of rentals are moved from landlords to owner-occupiers. 
The bigger long-term problem is that we have a growing population and a shrinking (in relative terms) housing stock because of excessive building costs. That's the killer blow for housing affordability in my opinion.
 
 
 

It says "significant risk of

It says "significant risk of a sharp correction" but then provides no basis for this and instead goes on about why a sharp correction would be bad.
If the GFC showed anything, its that any government that want's to stay in power had better be sure there is not a "sharp correction" in house prices and don't trust anyone in the financial sector. And those S&P guys are so good at predictions....
ThaiGuy is absolutely correct but it is very hard to see a workable way out of this particualr mess.
 

Yes they do indeed

Yes they do indeed Mist.....tech people suck really bad on the small talk.....such is their preoccupation with the viariables, the permutations of the unfactorable...they miss the dumb ass that just bought it sold it spent it.
how are you anyway me ol scamp, still tinkering on the pips n clicks...? have enjoyed a few of you posts of late .....yes I have.

What was the US housing

What was the US housing market but a sharp correction? down 30~40% and only that far as there are questions about how many mortgagee sales are being held off on, plus other fraud. The NZ housing market is simialr ie as over-subscribed as the US one. The US economy is now struggling to recover as the house building binge that drove up the economy to 2007 has not returned.  NZ House prices to wages is 6 to 1 and not a norm or 3 to 1...quite a number of pointers at a risk of a big correction. 
Then we could go on to level of debt, peak oil, BBs retiring all these are significant risks or triggers to a correction.
If that isnt enough basis for their flagging I dont know what is.
regards
 
 

I disagree that the NZ market

I disagree that the NZ market is similar to the US one.
In addition to much much more NINJA loans and massive overconstruction, US homeowners that had no equity in the house could just walk away - "mail in the keys"
This is not the case in NZ where the homeowner is obliged to stay, and deal with the house or face the negative equity resulting from a morgagee sale. The vast majority of NZ homeowners are therefore less inclined to cut an run like in the US. Prices of houses in the us dropped significantly below the cost to build, we are nowere near that.
Yes there is risk and yes the status quo is less than ideal but the solution is not manipulating the property market - It's increasing wages and productivity, which is unfortunately much more difficult.
 
 

Your first observation is

Your first observation is quite correct as Mist points out. There might be very good reasons but the author didn't outline them.
 
Cost is an interesting argument though, what exactly is it. I would argue that interest, or debt, servicing is a significant component of of our money supply that distorts the figure. Wealth redistribution is built into everything we do or own. Note the construction cost of an average Auckland house in terms of energy is around 500,000 kw/h, compare that to the negligible energy content 100 years ago and the question become what does a house really cost to build?

If the NZ banks get into

If the NZ banks get into serious trouble then the RBNZ will drop interest rates further.
 

I Think, or hope you are

I Think, or hope you are wrong myself. The RB has to be aware by now that if it gets behind the curve its lost it all the way down to an OCR of 0.25% in one step maybe 2.
Mind you the last CPI number was 0.8%, and that was ignored, lets see what the waffle is for the next one. If its lower, flat or little higher I think it would be suicidal to ignore it, but then thats par for the course for the neo-con CBs.  If its pathetic looking a 0.25% must be lithe only sane call IMHO.
regards

The banks getting into

The banks getting into trouble is a market signal. The result of this signal would be that banks stop lending reserves to each other, due to lack of trust of each others balance sheets probably. Obviously in this case the OCR which is a mechanism exclusively of the interbank market, will be lowered to improve stability (which is pretty much the only mandate of the RBNZ anyway). That is the way the market works, I don't know how you could possibly think it works any other way. I thought you used to work in finance?
What else is a market signal, but the way a market works (or fails to work).

Wonder if the Chinese buyers

Wonder if the Chinese buyers of one of these homes will pay tax on this intended development:
nzherald.co.nz/nz/news/article.cfm?c_id=1&objectid=10868433
 
They told the Herald they plan to subdivide the section, letting the house and building a new one for themselves behind it. They live nearby in Euston Rd and plan to keep and let their present house.

 
 
 

More to the point- wonder if

More to the point- wonder if the State will pay tax on the "Super Profits" it has made on the sale of these two properties at the expense of the public .
If not why not?
 
 

Apologies to overnight

Apologies to overnight readers - we had gremlins in our systems last night. Hopefully resolved now.

David...gremlins don't exist,

David...gremlins don't exist, you should know better than to allow staff to drink and smoke around the servers or whatever it is they get up to down there. 

My munny is on a govt

My munny is on a govt snooping effort, but they got their experts to do it...haha

MIA @ 7.43.   Pretty much

MIA @ 7.43.   Pretty much what I think too.
And just because I think the crash is unlikely doesn't mean it won't happen.  And the results would be catastrophic.  I gotta think about it at least.
If so, the screams of those financially demolished will be drowned out by the explanations of how events were so predictable.  Even inevitable.
I have no problem with S&P at all.  All they do is describe possibilities.  It's their job and thats what they do.  Anybody who wants to be given certainty is not in touch with realities. 

Agree, as was said above any

Agree, as was said above any Govn that allows a severe housing market correction is toast. So National (and indeed Im sure Labour would as well) are gambling that fraudalent chinese money allowed in here will keep prices up. Chinese banks opening here as well, no need for suitcases on planes any more either....nice and easy...
regards

Politicians (both Labour and

Politicians (both Labour and Nats) and city councillors own plenty of real estate and leaving things as they are means their properties increase in value - the are not going to tinker with the system while they are seeing such large capital gains,  

Sadly we'd just swap in

Sadly we'd just swap in another set with the same goals.
regards

Right but would you expect

Right but would you expect any honesty from Banks, Dunne or Sharples to get Key to face up?
At least Norman  and maybe even Hone would have more chance with Shearer & co. Even Winston as the attack dog may help.

Many labour MPs have

Many labour MPs have considerable property? Then there are the side effects of Hone and the Green's, very left wing policies like expectations of the Govn guaranteeing the NINJAS into their own properties, overall they could do much more damage than the fix.
regards

the only things keeping the

the only things keeping the auckland market going are foreign money and miserable house building.
Both problems could be easily solved, if there was the will.
But there isn't.
So I expect prices to keep squeezing higher, at some point they will either flatten, or possibly crash

Interesting comments on TV3

Interesting comments on TV3 last night.
Norman, Parker, and Peters all singing from the same book about Chinese speculative buying.
Meanwhile was Jonkey the only one in step with his denial of any problem?

In which case what did they

In which case what did they say they would do?
An easy fix is only allow NZ citizens or perm residents to own residential property, it would be popular with most voters I think.
but oh no that wouldnt acceptable by neo-con global finance cadre...
I really wonder at times just who is looking after us, it doesnt feel like its been successive Govns.
regards

I wonderr on house

I wonderr on house building...from what is said the price of a new house is simply too high.  So even if you re-zoned lots of land unless you forced the sale at agri-prices ie say $10k a 600m2 plot it will make no odds. The land bankers/developers will release it in small lots to max their gain.
regrads

Unless you use a land tax or

Unless you use a land tax or similar to force their hand.
Also if the tax system is used to lower existing values most of the land bankers will all head for to exit together.

Easier to buy it at the agri

Easier to buy it at the agri cost, rezone residential and sell it at agri prices in large quantity, quick and cheap. Anyone with an over-priced sub-divide closer in takes a hammering mind...no biggee.
regards

You would need a constraint

You would need a constraint on minimum ownership period  and commitment to build for own use to make that work but like the old ideas on 3% loans and child benefit capitalisation it could work

If however you release a lot

If however you release a lot of land the minimum ownership period is moot surely?  at least in the medium term, ie the next buyer will know there is a lot of land available and hence will be reluctant to part with excessive $s to get in straight off...
Also from my limited observations small one man builders are not the issue they get as hemmed in and pillaged by the developers and land bankers as badly as anyone else IMHO. So having small building companies build say 5 or 10 houses at once is what you want...surely?
Im concerned on the 3% or any other Govn loan guarantee or providing as that puts the risk onto the Govn and hence the tax payer.  i dont see after making the land available in quantity to get competition the Govn has to be involved significantly.  The consent process could be streamlined with says std house designs. Have say 10 or 15 std designs and as  long as you pick one off you go minimal paperwork ei a rubber stamp. Get a private inspector at each stage to verify the work who in turn provides a producer statement to the council that the house met the standard at each point. Make sure the private builder and inspector has adequate liability insurance for say a 10 year period against major issues.
regards
 

If you released enough

If you released enough sections to meet current pent-up demand in Auckland (100,000?) all at once then no-one would be able to on-sell them at a profit. Then you just keep feeding in the required number to keep the house prices stable.

Reprice land from the outside

Reprice land from the outside in. Would have to be done in the tens of thousands and create a glut of supply though. Small numbers would otherwise just be resold at a massive profit, revalued upwards to match existing prices

Capture said profit with a

Capture said profit with a swingeing CGT, and then ensure that this was passed as directly as possible to first-home buyers.  Small deadweight loss in the GumNut handling of the tax and redistribution.
 
Do-able, with the political will.
 
Ah.......

Yes it would only work with a

Yes it would only work with a "glut" ie no artificial constraint that can be manipulated/abused. So at least say 30,000 plots per year. Otherwise yes I'd expect that they would be re-sold at a massive profit as you say.
regards

gees...Snippy, Walter's not

gees...Snippy, Walter's not boarding at your house is he........i do miss him ,but I see your starting to fill that void.....ya might wanna take a few breaths there,
 Yes the man's a turd in a suit.....but some bugger voted him in a second time and that makes him head shit or shithead ,not sure which is the correct terminology...supporting staff are known as clingons, can't flush em , you gotta brush em.

Count you motivated me to

Count you motivated me to check in with Walter to see how he is. Do you/have you communicated with him privately? The news is not very good I am afraid.

I haven't scarfo but are you

I haven't scarfo but are you able to say if he's ok or what the case may be....I do hope it's not that bad a news. Lets know....if your able.

Well Walter never hid his

Well Walter never hid his identity so I guess it is okay to pass on the tragic news I received from his lovely wife. She says " Walter is very ill. I let you now he has not long to live,very sad."
 
I met them both about this time last year and they are wonderful people, so I am gutted to hear that news.

That's terrible news, my wife

That's terrible news, my wife and I stopped for a cuppa when we dropped our daughter at CHCH Uni, I even have a painting of his. he's a great guy. 
 I will email his wife now, thanks for letting me know.  

That is very sad news

That is very sad news Scarfo....I'll follow up on it. Thank you for the heads up......very sad, GBH will want to know if he does not already. 

Is it just me that ignores

Is it just me that ignores posts written in capitals and bold type? Speaking of which, haven't seen Sore Loser round here for a while.

See how much nicer that looks

See how much nicer that looks without all the visually offensive text.  Although minus 1 point for the use of an exclamation mark.

Though switching from

Though switching from shouting to ad-hominem is not going to help your case.