The Reserve Bank is set to come under "huge pressure" in the first quarter of next year in the face of a softening property market, a leading Auckland mortgage broker believes.
John Bolton, principal of Squirrel Mortgages, said in a blog on the company's website that he had been warning since September that new RBNZ rules limiting high loan-to-value lending that came into force in October would "bite much harder" than most commentators had suggested.
The latest monthly BNZ-REINZ Residential Survey showed that since the LVR limits came into force first home buyers had deserted the market.
Bolton said there were "bound to be more negative headlines in the press over the coming months".
"We are starting to get the odd comment about auction clearance rates dropping below 50%, which is a huge signal. I suspect we will get our first average price fall reported in January.
"...Bank economists pooh poohed the RBNZ approach and said it wouldn’t work. Many are still sceptical and think this is a temporary aberration."
First home buyers were "clearly" out of the market, Bolton said.
"Almost nobody can buy with less than a 20% deposit. We can sometimes help first home buyers by using guarantees but other than that there are very few options. We still have pre-approvals out there for some existing clients above 80% but these are running out fast.
"We’ve had good settlements in October and November due to our pipeline. But, when it comes to First Home Buyers our pipeline has been dropping rapidly. In terms of new approvals we are down about 50%. This will bite."
He said therefore the RBNZ was going to come under huge pressure around March.
"A soft property market and first home buyers cut out of the market is too political for an election year.
"Look for bank economists to get stuck in, egged on by their masters. I think you could see some exemptions to the new LVR policy creep in for first home buyers around March but no let up for property investors."
Bolton said latest media coverage "would suggest we are heading fairly quickly back into a buyer’s market".
"It can be a good time to buy, but is also a good time to consolidate and cut loose any deadwood."
Selling investment properties
Bolton is himself a property investor and said that he and his business partner had sold three properties this month, including two that "were supposed to be holds". They had repaid $2.3m of mortgages in the past six weeks.
"This is partly because we have a large development in the pipeline, but also because we have struggled to find anything in the market that we would consider good value, and a sense that the market is getting riskier."
Another area of the market that had been severely affected but not given as much public attention was younger property investors, Bolton said.
When getting started in property the idea was to buy, get capital growth and then recycle your deposit into the next property.
"There really is no other way to start. Up until the RBNZ changes, it was possible to buy up to 3 properties at 90%. We had clients with multiple properties at 80% still able to buy the next one at 85% or even 90%. Now, even if you own one property with a 75% mortgage, you no longer have enough equity to buy another property in Auckland. Using leverage to grow your portfolio is basically dead," Bolton said.
Overseas buyers
In terms of interest from overseas buyers, he said there was still a "lot" of money coming in from offshore.
"However, Chinese like to buy in a confident market, they like competition, and they like to buy at auction. They often buy without much due diligence based on location and land-size. They take a lot of advice from the real estate agent (often acting as a buyer’s agent) who points to increasing prices everywhere to justify price.
"Confidence” buying relies on positive media headlines, record prices, busy auctions. When you’ve got lots of positivity combined with unconstrained buying power and a limited supply of property for sale, then you’ve got the perfect storm for price increases.
"Confidence has waned. At the moment, Chinese investors are sitting back more than they have in the past year. They are slightly spooked by the market. If the market surges again, they’ll be back in big time. However, I suspect Chinese will be more subdued over the next year and will buy more off plan."
48 Comments
When interest rates start going up next year a few of the first home buyers currently unable to get finance might be pleased they are renting rather than paying large amounts of rent to a bank. There has been some talk of first home buyers in Auckland borrowing more than $800,000.00 to buy their first home. One of them must be working to just keep the bank at bay. Now that is crazy. Why not start with a more modest home and move up a step or two when some debt is paid off like our parents did. Why do people have to have the flash home in a good area first up? Life is so busy and goes by so fast. Why would you add to the stress by borrowing to the extent you end up working to solely keep the Australian landlord happy?
In theory you are right - just as: Banks Warn Fed They May Have To Start Charging Depositors
Equally, a vendor may be forced to leave capital in the property and pay the purchaser interest on said sum to secure the privilege of a recorded sale.
In theory gold should be rocketing in price, but it's not.
ECB and banks start charging depositors when there is too much paper money in the system.
Too much paper money floating around should make it's value less compared to hard commodities.
Hard to see what is going on here.
All the suggestions are that the economy will be humming next year so interest rate increases will be considered to hold back inflation. National will make sure it is humming in election year. Remember we are experiencing emergency interest rates historically so they will eventually go up.
There is a fly in that ointment. The FED (and EU) looks to be staying at the current 0.xx% for the forseeable future....so 2 or 3 years. The same will apply for our OCR as we stagger along IMHO. Now its possible that the lenders to the big banks decide to demand more interest and the banks are forced to put up rates, that will be a political whipping for them I suggest.
Outside of that it looks like the LVR maybe cutting deeper and faster than the RB thought. Interesting as Steve Keen pretty much laid out that a small change in the LVR limit would have a huge impact. It look like NZ might prove that in an experiemnt and in spades as we have made a big change to the LVR, in which case the impact wont just be huge it will be gianormess....
So we might see a rather large collapse...and the OCR might be going down a lot.
"Australian landlord happy" full recourse loans as well....
nasty....might be easier for households to declare bankruptcy.
regards
I'm not worried about prices dropping, I'm simply stating I think they will drop in some areas and for buyers to be more careful and not rush in. Not sure why you think I want prices to go up?
If the market picks up a head of steam again (and I hope it doesn't) it is likely to take off given the amount of cash sitting on the sidelines. It's hard to slow down a supertanker.
Thanks for your posts and article. I too thought these LVRs were going to impact and couldnt understand a lot of the economists/ tony alexander et al saying they will make no difference (primarily because he recons people can circumvent them).
What are your thoughts on the impacts outside of auckland? Some of these 'economists' I think wrongly assume the effect will be larger in the regions (simply taking the 4% grow decline predicted by the rbnz and showing how this will make some of the regions annual cap growth turn negative).
In stocks when one sector starts looking fully priced/expensive, its generally accepted that it's smart to rotate money out of that sector and into sectors that have yet to go up in value. I see the same thing happening in past property cycles in nz. And for that reason I think stagnant Auckland prices with catch up from the rest of NZ over next 2-3 years. Very interested in your thoughts on this too.
I'm not worried about prices dropping, I'm simply stating I think they will drop in some areas and for buyers to be more careful and not rush in. Not sure why you think I want prices to go up?
If the market picks up a head of steam again (and I hope it doesn't) it is likely to take off given the amount of cash sitting on the sidelines. It's hard to slow down a supertanker.
I really don't think the RBNZ will have any concern about who is or isn't in the market. Their objective was always to slow house price growth and improve price/systemic stability. Looking like it's working at this stage. It's just unfortunate that it has impacted mortgage broker revenues. Hence the reason they are beginning to squeal.
People need to get their heads around, deflation, its what our bankers are worried about.
http://d21uq3hx4esec9.cloudfront.net/uploads/pdf/131124_TFTF2.pdf
New Zealand’s foreign-currency-denominated external debt was $98.1 billion (92.6 percent of which was hedged). Read more
The fact that the foreign borrowings are hedged denotes these sums are not NZD deposits but foreign currency loans hedged into NZD liabilities via currency swaps - OBR exempt collateralised loans.
You have yet to take other forms of debt into account - bank claims are just a teaser. Outstanding government, local authority and corporate/SOE registered debt issuance has yet to be added to the total - shall I move on to aircraft, ship, crane,earthmoving equipment leases etc, etc? The list is forever expanding against that which can legally stand as collateral. Student debt might be classed as a claim due.
Maybe that was the plan - if they were "supposed to be holds" then they avoid CGT. Lots of articles about houses in the media include something along the lines of "... it was supposed to be their permanent dream house but due to unexpected changes in circumstances X and X now have to sell up and move to wherever giving someone else the once in a lifetime oppourtunity to purchase the perfect blah blah blah."
The articles never say "X and X built it to flick on at a profit"
"when it comes to First Home Buyers our pipeline has been dropping rapidly. In terms of new approvals we are down about 50%."
Is it the RBNZ that is under pressure or Mr Mortage Brokers bottom line, I'm not surprised he is selling he probably needs cash flow quick.
The drop in 50% for FHBers doesn't mean my business is dropping by 50%. We've been growing fairly strongly. That growth will slow down in the current market but I'm not worried about a strong or weak market as we are still small by market size. Plenty of pond for a small fish.
I'm cashed up because I have an IT start-up www.tenanSee.com, I don't want to be over exposed to this market, and because I'm building 30 plus town-houses in Auckland.
I'm broadly supportive of the RBNZ policy changes, and I think it's a good thing they are working.
Thanks. Its .net with a SQL backend. Still in an early phase with more development in the pipe before we start getting too excited. We've got all of the banks signed up to feed transaction data in. ANZ and ASB are already live. BNZ, Westpac and Kiwi Bank going live in next 6 weeks.
Ah didums, having to pay off debt, not accrue more capital gains on a crap house in Auckland. (Or a shite house on a few or more acres)
And when the IRD catch up with him and all other beneficiaries of a bent system, we should all be in clover, as our taxes should alll go down and theirs will go up, to compensate us for helping the poor bludgers out over the past few years.
And them poor real realestate chappies, will be counting their chickens again, before they are hatched.
No doubt, they also invested their ill-gotten gains in Auckland property too and a dairy farm or three.
I hope a few MP's and their ilk, also get their dues and the IRD benefits.
A double whammy. (One can only pray, they all get their come-uppance).
Taxing this property lark.??, well it should be.
Some hopes.??!!.
Probably first home buyers hopes, the others have been milked to death to save a few poor Farmers and some way over extended loans by banks, to stop the shite hitting the fan and effluent buggers from ruining the system.
And ACC has been overcharging us all it seems. Another tax on the poor motorist, but not the rich biker.
Onwards and upwards.
I say user pays.
But that is another story.
Magic.
"There really is no other way to start. Up until the RBNZ changes, it was possible to buy up to 3 properties at 90%. We had clients with multiple properties at 80% still able to buy the next one at 85% or even 90%. Now, even if you own one property with a 75% mortgage, you no longer have enough equity to buy another property in Auckland. Using leverage to grow your portfolio is basically dead," Bolton said.
Could he help with a lease on the car/4WD?
And a credit card tied to the loan account (think school fees)?
And servicing shown by paying more tax for last year...
Magic.
And a credit card tied to the loan account
Cripes, don't go there - human abuse could be levelled against the purveyors of usury.
Waikato pensioners are starving and raiding their KiwiSaver accounts to pay back mounting credit card debt.
A Hamilton financial adviser said an "alarming" number of retired and elderly are asking for help dealing with credit card debt. Read more
Henry,
I think my comments are out of context here. I think its a good thing that the ability to leverage is tightening up. It was too loose.
I am simply stating facts, so those reading my blog can understand where the market has come from and is going to. I think the tightening of the criteria is hitting younger investors harder than first home buyers. That is all.
Confusing
John Bolton is the principal of Squirrel Mortgages a mortgage broker
One menu item at the top of his web site offers "property investing" advice
Another menu item offers "Mortgage Advice"
The disclosure statement states Bolton is a member of NZMBA
The Web Site of NZMBA says it has merged with PAA Professional Advisors Association
www.paa.co.nz says
Look for a "Trusted Financial Advisor" You will find the best ones in Our directory
John Bolton is listed in their directory of Financial Advisors
Bolton and Squirrel are not registered with FMA as AFA's - Authorised Financial Advisors
Surely this bit of fluff is simply Sqirrell Mortgage spruiking their own book. They are in fact trying to place pressure themselves on the RBNZ by coming out with this drivel as I presume their business is / will be affected by the pullback in first home buyers.
Never trust a comment from someone who has skin in the game.
Jump on to my web site and read a few more posts like the one talking about over inflated land prices.
I'm supportive of the RBNZ using policy to tighten the market. I've simply been saying for a while that it will work, which is different to what everyone else seems to be saying and makes it "news."
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