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Many investors believe Auckland house prices have peaked and are selling up to cash in their capital gains

Property
Many investors believe Auckland house prices have peaked and are selling up to cash in their capital gains

By Greg Ninness

We may have seen the end of capital gains in the Auckland housing market’s current cycle, with the rapid price rises of the last few years coming to a halt over the last couple of months.

The accompanying chart (below) shows the changes in the REINZ’s Auckland median selling price this year, starting off at $660,000 in January, then taking a breather in March and April when it hit $720,000 before it resumed its climb to $755,000 in June.

It has come back a bit since then, back down to $735,000 in July and edged back up to $740,000 in August, but basically it has been bouncing around just below June’s peak.

To me that suggests a classic peak and plateau, where prices hit a high and then stay around that level with relatively minor movements from month to month, with the overall trend being flat.

However I also believe that you need three months of consistent figures before you can be confident there’s a trend in real estate, which means we’ll have to wait until next month to see whether prices have plateaued or not.

If they have, you can kiss goodbye to capital gains from Auckland house prices for the time being and that would leave the market finely balanced and in a potentially precarious position.

Listings surge

One of the features of the Auckland market this winter was an unusual increase in properties being listed for sale.

What I’m hearing from the market is that this surge of new listings was from two main sources.

Firstly, investors who had seen the value of their portfolios increase significantly over the last couple of years and decided that the big rise in prices had run its course and were selling properties to lock in those capital gains and avoid the possibility of having to sell when prices were going backwards.

The second group were home owners who had been thinking of moving but were hanging on while prices were still rising quickly to get the best price for their homes.

They have obviously decided that a bird in the hand is now worth two in the bush.

So there appears to be two groups of people who have already decided that the market has peaked and are confident enough in that belief to act on it.

When there’s a big increase in the number of homes coming on to the market it can put downward pressure on prices but so far that hasn’t happened.

Demand from buyers has been so strong that it has soaked up the extra supply and maintained prices at their near record levels.

But I suspect the balance is a delicate one and it may not take much of a further increase in supply or a lessening of enthusiasm from buyers to see prices start to decline.

The actions of ethnic Chinese investors over the next few months are likely to play a pivotal role in determining which way the market heads.

Two drivers

Over the last couple of years the rapid rise in Auckland house prices has been driven by two main fundamentals.

The excess of demand over supply, driven largely the sharp increase in net migration, and the enthusiasm of investors who have been prepared to pay prices that provide exceptionally low, perhaps unsustainably low, rental yields.

And over the last year or so ethnic Chinese buyers have been increasingly dominant in the residential investment market.

It is not difficult to understand their enthusiasm.

The transformation of China into an economic powerhouse has been one of the great wonders of the modern age and it has created a whole generation of people who have only known constantly improving prosperity.

Many of them see rapidly rising markets as normal and if there is a problem, Big Brother in Beijing will intervene and prop the market up.

When a market is seen as hot they pile in and lately Auckland property has been hot.

Then when mums and dads start seeing the value of their homes rise, mortgage interest rates being cut to next to nothing and the quick and sometimes enormous capital gains that can be made from investing in property, they pile in as well.

At that point the increase in prices that’s been caused by the underlying demand from owner occupiers exceeding supply becomes supercharged, as investors  chasing capital gains start paying inflated prices that can’t be justified by the income returns the properties are capable of providing.

But what happens if prices stop rising and the ability to make quick capital gains disappears?

Herd mentality

I believe there’s something of a herd mentality among many of the investors who have been piling into the Auckland housing market with such enthusiasm lately.

When the river of capital gains dries up, as it may have already, we could see many investors cutting their losses and exiting the market with the same enthusiasm they entered it.

We are already seeing the first signs of that in the unseasonable rush of new listings coming on to the market over the last couple of months.

If the current rising tide of new listings turns into a flood over spring and summer, it will push more properties on to the market while reducing buyer demand, and I doubt that prices will be able to withstand the downward pressure that would create.

Although the currently low, and potentially even lower, mortgage interest rates and the fundamental imbalance between supply and demand of homes for owner-occupiers will provide a floor to any price falls, it’s a floor that could be a fair way down from the highs we’ve become used to lately.

The market is teetering on the edge of a correction.

It won’t take much to push it over.


This article was first published as a Property Line Market Update on September 22.  Property Line reports are emailed directly to subscribers of interest.co.nz's free email newsletters. The newsletters are sent out about 3-5 times a week and contain all of interest.co.nz's property articles.The newsletters are free, interest.co.nz does not share subscribers' details with third parties and you can unsubscribe at any time. To receive your free Property Newsletters and stay up to date with the latest property news, enter your details in the subscription box below:


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67 Comments

Amazing

In the days when things were more normal, the usual auction clearance rates of 65% were considered excellent, and everybody was content. Now, in Sydney, last weeks clearance rate fell to 72% and suddenly the sky is falling

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Melbourne Market Wrap. - compare - better this year than last year
A clearance rate of 74 per cent was recorded this week compared to 75 per cent last weekend and 72 per cent this weekend last year. There were 1050 auctions reported to the REIV this weekend, with 778 selling and 272 being passed in, 121 of those on a vendor bid

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Debt ponzi buyers moving focus to Tauranga and Hamilton due to actually needing some equity in Auckland, and the Chinese looking concerned that they might get identified by their government as its seeks to slow capital flight. Makes a mockery of those that said these two groups were normal market forces.

Hope the speculators above are starting to feel the risk of depressurisation as the cabin alarm starts ringing "pull up, pull up...."

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Increased supply and people shifting out of Auckland are two factors amongst many. A number of "investors" do not want the IRD in their lives as they have issues that would need to be sorted out if the IRD caught up with them. They will either do nothing more or will try to circumvent the need to register with IRD in their names. Secondly a lot of people have lost money in the share markets. It looks this scenario is starting to affect the Sydney housing market and it might be starting to bite us here. Markets are all about confidence and fear. Bears and Bulls. Maybe the bulls are starting to take their profits and see what happens in the future.

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You've changed your tune since we had our last debate on auck v provinces.

Funny how ppl need to actually see evidence of things before a concept can b accepted, of course in investing by the time u see the evidence it's too late to make money on the play

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Where is the like button?

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Seen the rumor about $3.0 bn Chinese investment in ChCh -- the fire almost will lit up for another city.

Also, a link (https://www.youtube.com/watch?v=Ob-_4r8WrRU#t=325) to complement Prof. Ang's article the other day on Chinese oversea direct investment.

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Yes I am sure it will go ahead, just like Donghua Liu investment in Newmarket Auckland?
http://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=114…

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http://icifund.com/egu.asp

The company's profile (the rumor said that the company might invest in ChCh).

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Surely the housing market is not like the share market in that the housing market never goes down. If in fact the Auckland market gets into reverse gear a few more people will look to put their investments on the market. Then they might found out what it is like in the rest of the country. It can sometimes take a while to sell a house and of course there are not many suckers who pay the list price. Get your negotiating skills in order. Carry out those remedial works. Get prepared to pay the agent 4% plus gst or so.

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The property market is not being driven this time by families buying houses. It is being driven by a frenzy of property investors thinking it is the road to riches.
The market is so far out of kilt now that it MUST correct in the next year or so.
If I had a rental property and a big mortgage, I would be very concerned now. Real estate agents, property seminar organisers and banks will spin that values will keep going up because of the millions of dollars they are making.

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I can still remember the late nineties when mainly Asian investors in Auckland could not get their money freed up soon enough and accepted ridiculously low cash offers. 20% to 30% discounts for quick cash were being accepted.

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Agree - property gets very illiquid very quickly. The smarter ones take the hit and get out fast. But most cling on and take 6-12 months to realise the party is over and they need to discount.

With the clearance rates low and listings high it means every month gets 1000 new listings with 3-400 being rolled over from the previous month. It quickly backs up. The interesting thing about this bubble is that it's got 40+% investors. Whereas home owners just tough it out cause they need a place to live, investors and speculators may head for the exits. There are more of them than any previous boom and they are no spring chickens and may not be able to ride out the cycle.

I'm happy to stick my neck out and say the sky is starting to fall. I could be wrong but taking a cold look at things, there are too many factors lining up on the negative side for prices to rise or flatline. If unemployment was falling or Auckland had some kind of non-property related sector that was booming then I'd reconsider. But there is no support except widely held belief in property as the safest place for your money. If that goes the same way as our offshore-Chinese mates it'll be carnage in Auckland.

Next months Barfoots/REINZ numbers will be interesting.

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Very much in agreement with your point of view - even if I'm putting my head on the block with you.

It'll be interesting to see how long these "investors" can hold their breath on 2-3% yields once the reality of

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Lets just hope for > 8.4% annual rent increases to help us hold onto these assets then, shall we?

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.... just keep on bluffing sadr001 and maybe all the problems will go away.

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I appear to have found an article suggesting that 8.4% is realistic ?
http://www.interest.co.nz/property/77729/asking-rents-homes-trade-me-pr…

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You've found a positive article - good for you.
And if you can hold long enough then one day in the future it may be all dandy but in the meantime the world is facing some significant problems. Have a look and tell me what you think? :
http://money.cnn.com/data/world_markets/asia/
Do you think these falling markets all around the world might affect property values maybe soon'ish?

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8.4% increases may occur for a short period but anything like an 8% rental yield is delusional in Auckland at current prices.

How much blood can you get out of a stone?

People simply don't have the incomes to support that level of yield - so 1 of 3 things will happen:

1. Rents increase > People demand to be paid more > Wage inflation > cost of living increases > drive CPI higher > drive interest rates higher > less demand for housing > house prices come down > rental decreases > yield returns to equilibrium

2. Rents increase > People refuse to pay increased rental > move to other centres > less demand from renters in Auckland > less demand for rental property > house prices come down > yields return to equilibrium

3. Rents increase > People pay increased rental > have less disposable income / "investors" continue to leverage up into more houses > people spend less > economy stops growing > migration stops > unemployment rises > mortgagee sales start occuring > house prices come down > rents reduce > yields return to equilibrium.

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Many here seem to think that increase in demand equals increase price. They will shortly realise that this only works when incomes either go up or savings can be made elsewhere. Otherwise the inability to pay more means an overall lowing of prices -regardless of demand. With increases prices arriving via our lower dollar, job losses, no wage growth the ability to pay even today's rent is threatened. So good luck that demand will keep your rent growth up - it ain't gonna happen cause the rentier bucket is empty.

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What happens if the number of upper middle class increases by way of migration? Would that allow rents to rise by displacing the lower middle?
What if the income of the upper middle goes up courtesy of automation allowing them to be more productive and removing low wage workers from the equation? Would that allow rents to rise?

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Possibly but you do realise under the Proposed Auckland Unitary Plan (PAUP) that every house built in Auckland at the time of PAUP notification has the potential for a second dwelling to be added and with no need for additional parking.

PAUP will supposedly be live in a year or so, therefore we may (depending on how many households run with the new rules and add a second dwelling) see a big rise in rentals available.

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Great article, well written. Personally I can't see too many investors staying in the market once the capital gains dry up as the yields are so low. Even if only 20% of investors decided to sell up that would probably push prices down. Then the rest would try and get out before prices go down even further and that could trigger a collapse. But as you say its early days yet - people have been predicting this market to fail for almost 10 years now!

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When the capital gains stop or turn negative then investors start to look more at yeilds. Would they be better owning a property in Wellington?

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High yielding shares on the NZ exchange are still providing plus 5% yield but how sustainable is the payout. Interesting recent article in the (British) Telegraph showing dividend cover pressure coming for British Stocks - how applicable is it for NZ stocks?
http://www.telegraph.co.uk/finance/personalfinance/investing/11868717/T…

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The intro to this article includes the question "Is the party over?"

If the party is over, it has been one hell of a party.

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Particularly for the clever who sold last month.

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I'm sticking around for the after party, CG @ 25% Aug YoY, even at 5% CG most will be kicking their heals together... sounds like turkeys are trying to make more noise than the roosters.

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I agree. There is so much angst in the comments around Auckland house prices on this site.

There are alot of people here who want this market to fail. We are yet to see a major drop in prices for the last 50 or so years but by the sound of all these 'experts' on the comments section, we can expect to see big falls in Auckland prices. Yea right.

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I don't think we will see the drops that places such as North America and Ireland have experienced (30-50%) but AKL property now being the 3rd most expensive in relation to salaries - a 10-20% drop is highly possible they say. And I think it will be a good thing for Auckland otherwise we are at risk of being an aging city.

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Parts of the market will fall more than others.

South Auckland has got well ahead of itself for instance.

Consider where the eastern suburbs prices were 25 years ago and where the inner west was. The ratio of the two has changed enormously (eastern suburbs falling relative to the inner west) so changes within the market can be substantial.

I expect some sectors could fall 30% in nominal terms, don't doubt it.

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Bollix Chinaman1, learn your history before making uninformed comments. Following the 87' crash property prices dropped nearly 50% yet the media conveniently forget this fact.

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Since 1970 average capital gain on Auckland is 8%.

I know my facts.

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Averages are meaningless. Individual sales tell the story.

The top end of the market in Chch went catatonic after the stock market crash in 87.

In 1998 we bought a number of properties at mortgagee whichever were half their 1996 sale price. In Dunedin, a neighbouring property to one I subsequently purchased in 2002 sold in 1999 for $83k down from $185k in 1994.

In Chch in 2009 one that sold for $240k in 2007 sold for $120k. (Pre EQ same condition).

So massive drops happen, it's just that people don't notice as few buy and sell on these time frames and actually notice.

In 2001/2002 Auckland properties were being sold at losses on their 1996/1997 prices.

Losses can and will occur.

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I see you're changing your story to suit Chinaman1.

You said, "We are yet to see a major drop in prices for the last 50.." which is complete bollix and now you know it.

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Triple. Please tell us when the "major" drop happened since 1965. A link to the data would be appreciated. Thanks in advance.

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Ahhh the old "it has never happened, therefore it's totally impossible" argument. Except it has, and it will again. Delusion indeed.

Conditions are ripe and a broken clock is still correct twice a day. Tick tock.

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The greater Auckland prices drop the better. I hope many investors loose money. It is not an investment that does the country any good
The majority of people will be better off.

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FHBers who I regard as innocents in this will be shagged however. Probably for many years if not a decade, such will be ugly.

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Fear is instantaneous, greed is cumulative! It's better to be greedy investor than fear mongering complaining brigade who never come up in life!

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Interesting that you talk about fear and greed. I think a lot about those two attributes.
I subscribe to the notion that you temper your fear and greed given the circumstances.

"Be fearful when others are greedy, and be greedy when others are fearful."

At the moment there are a lot of greedy, unsophisticated people floating around who have more access to credit than they do financial literacy (who like to call themselves "investors" or "tutors").
This tends to make me fearful.

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So, what's the big deal here? House prices are approaching their peak for this cycle, they will stabilize for a while, may even go down a bit, before the next cycle starts. Have seen it (more than once) before and hope to live long enough to see a few more cycles. Many people made good money this cycle (that wasn't hard, was it?), some didn't for a variety of reasons (lack of capital, risk aversion, laziness, etc.). Again, what's different?

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Exactly. I still expect an average capital gain in Auckland of 8-10% for this decade.

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You can expect whatever you want but the reality may be completely different.

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What is different is that much of that historical gain has been derived from ever decreasing interest rates feeding the credit monster.

We are close to the interest rate zero bound now, we have inflation targeting keeping a tight lid on incomes and productivity gains in New Zealand are a joke.

So where is the extra debt serviceability going to magic itself into existence from for the next cycle of the magic money tree?

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Maybe they should make another 10 hobbit movies

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There already appears to be a fair amount of denial starting. We are entering the fun part of the cycle!

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I suspect so...

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I don't think so...
Historically , there is a "stickability" in house prices going down... ( people hate selling at a lose )

Maybe we will see a few mortgagee sales... and a flat mkt for a yr or 2..?? ( 20% yoy price gains are kinda extreme... so ..maybe those gains will be spread over the next couple of yrs..?? )

Mortal enemy of price is .... Inventory... Lets see how much that changes in Auck over the next few mths...????/ ( and I do know it can change quickly... if there has been a large speculative element and there has been alot of new construction )

ps.. Housing sector credit growth has been moderate.... about 6%.. Back in 2004-2007 it was between 13-17%... SO... I don't see that much risk of any kind of big "Top".. or downturn... especially with Mortgages rates at such low levels...???.
just my view ..of course.... and I'm no expert... and l wouldn't want to pay todays prices for a house in Auck.

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You dont think this bit will be "fun"?

Never had your heart flutter when the nice win you had accumulated in a card game suddenly evaporates in one hand?

;]

In terms of "stickability" I tend to agree, but there are examples eg USA where 30% drops have occurred so its not impossible. What I tend to think of is cart before horse. Really ignoring a sizable % of foreign gamblers exiting I dont see why we need to have a big drop in house prices as long as our economy and employment stay OK? So really its all down to the world outside of our shores imploding in some way, and then some time span later it gets to us. The thing to blow is, the financial ponzi scheme as its the quickest and biggest. What tipped it over? Well oil got to $150USD a barrel in July2008 then we had a mega recession, hard not to see energy is not a key player in this somehow.

"historically" is a dangerous game if you dont go back far enough. Just have a high level look at the Great Depression and the decade before it for the similarities to today except as Steve keen says/shows this time is a lot bigger.

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In May, ANZ made the comment: "We believe sentiment could turn on a dime." I totally agree. It's too early to tell whether we are now seeing sentiment turn, but when it does, it's going to look something like this ie auction clearance rates falling, negative news articles, a spike in properties for sale as investors look to exit the market etc. I spent four hours at the B&T Wednesday auction week before last and it's very hard to gauge whether or not things are turning.

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You are dead right, it's too early. However I suspect when it comes it will come far quicker than ever before. The reason - social media and the ability to instantly communicate. Never before have we had such efficiency of communication at the time of a property bubble burst.

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Your interpretation will depend on which auction group you were at.
i.e. the B&T morning auctions last week went surprisingly well but the afternoon ones were not good. The North Shore ones had about a 40% success under the hammer and the south Auckland ones were also about the same at 40% success.
Overall, there has been a big slowdown. However for certainty, I concede we need to see this pattern repeat for a while.

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Does anyone know of a site that shows a graph of the number of houses for sale in AKl over time? That could answer a few questions that is on everyone's mind as we enter the next month.

Remember Mark Twains quote -(he could have been talking about real estate as well.) "OCTOBER This is one of the peculiarly dangerous months to speculate in stocks in. The other are July, January, September, April, November, May, March, June, December, August, and February."

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I just keep an eye on listings numbers on trademe, Auckland has gone from 6050 to 7350 over the 6 weeks. Major centre that has tightened the most over the last 3mths is Wgtn, followed by Waikato.

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I am not sure the party is over yet as the punchbowl is still being filled, some of the lighter drinkers are looking at their watch's... but the big drunks (big corporates, financials and governments) are laughing about taking the punchbowl to a strip club downtown...

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...and does the evening end messily or do they keep partying on ad infinitum?

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A stripper fell in the punch and it grew toxic and worthless, but the big drunks had already paid for the girls and all the neighbouring assets.. so they could afford a brand new cokebowl, over which they chortled and snorted, then they went off to have a rather lovely breakfast. BUT all the other people at the party (even some that didn't go!) all woke up with raging hangovers and their wallets missing and a sense of being violated...

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Brilliant :)

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After hearing what is currently happening in Auckland or rather not happening I imagine the REINZ are buying plenty of rags to try and polish the proverbial. It might take a bit of effort. Maybe market forces will make it impossible to polish. Even with record low interest rates there is evidence of less buyers. That pesky IRD. It is ruining our fun.

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It's a larger asset bubble that's enveloping the entire world, where debt and leverage has been used to stimulate growth. I think you're seeing it with China, you can see it in the US, you can see it with a lot of countries and, sadly, I think probably another big collapse is coming, or a series of little collapses.

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I agree with you, the only reason asset prices have held up is that investors are running out of ideas where to put their money. Where can you run to, that will create the big crash? I think the biggest crash in NZ is happening with our currency.

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Good point - those Big Macs are pretty expensive in USD now.

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Property investors do not want to know that their investments will never drop in price, but they are going to!
There is much more to house price inflation than just supply and demand.
When countries exercised quantitive easing and flooded the world with cheap money, that money was to be invested in production creating jobs. Instead it was borrowed for real estate, pushing up prices. As prices went up more investors joined in, concerned they may miss the bus, thus exacerbating the situation.
Prices have gone up in every OECD country. Nobody can tell me there is a housing shortage in every city in the world at the same time.
In 2 years, house prices around the world will be less than they are today. Investors with little equity in their properties will owe the banks more than their houses are worth. This is why the RB is requiring property investors to have 30% deposit.

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As much as I would like to see a house price reduction, i cant see it happening in Auckland. Immigration will see demand continue and with all the war and crap happening around the world, NZ will continue to be a magnet to many.

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