Credit ratings agency Standard & Poor's expects New Zealand house price rises to slow and eventually start to fall but warns that cuts to mortgage interest rates could put this country's banks under stress.
"Our base case scenario is that the rise in New Zealand house prices will slow over the short to medium term and eventually result in an orderly unwind," S&P said in a statement on the outlook for the market.
"It is also our view that the full impact of macro-prudential tools on house prices inflation that became effective on November 1 2015, remains to be seen.
"We observe that the growth in house prices in Auckland has shown recent signs of cooling."
However the recent cut in the OCR by the Reserve Bank and the resultant smaller cuts to mortgage rates by most of the major banks increased the possibility of another spike in prices and that could put pressure on banks, the statement noted.
"The lowering of the OCR by 25 bps increases the risk slightly of our low probability scenario of a spike in house price inflation occurring, resulting in further demand pressure if banks pass through the drop in official interest rates to the borrowers for home loans.
"If, contrary to our base case expectations, house prices resume their rapid growth, we expect to conclude that imbalances are rising, which would further heighten the risk of a sharp correction in house prices and expose the banks operating in New Zealand to a material increase in credit losses.
"In this scenario, we expect that the credit profiles of banks and similar financial institutions operating in New Zealand would come under pressure," the statement said.
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90 Comments
Hopefully? Since when has any Government been succesful at managing any socio-economic phenomena? I know they'd like to take credit for many things, and always blame others for the bad, but the truth is the best that they can do is to regulate factors to stop things getting out of hand. As far as the AK housing market is concerned they have failed dismally, sticking their collective head in the sand and stated it is beyond our control.
That is a big hope. Has anybody ever been able to successfully manage a bubble? That sort of market tends to be either full accelerator or full brake and nothing in between. We are well past the zone of equilibrium that a free and competitive market ensures; so all the dynamics will be violent. The Government appears to be too scared to stop the ever increasing rise because of the inevitable crash if they do.
Credit ratings agency Standard & Poor's expects New Zealand house price rises to slow and eventually start to fall but warns that cuts to mortgage interest rates could put this country's banks under stress.
Other than the fact this is the sole ratings agency sued by the US Justice Department for mis-rating structured credit securities before the financial crisis, did I not make a similar claim yesterday?
NZ Aussie bank subsidiaries are going to demand higher rates of interest to cover the cost of borrowing rising capital demands on top of funding dividend payments to disgruntled shareholders. APRA has lent on the parents after being lent on by foreign wholesale lenders - unforgiving professional taskmasters. They will end up as debt ridden hollowed out shells - this is just the beginning. Read more
The same rating agency that gave AAA ratings to ratings to junk debt obligations. Then re-rating those as default rates went up. The follow on effect was that the ratings changes destroyed bank capital and dragged down the US financial system. Yeah I wouldn't listen to those incompetent idiots.
There's a chance of an orderly unwind and there's a chance of a collapse that threatens our financial system. In either event it's a matter of who the bag holders are when prices go flat or fall. Then can they service their debts.
I agree it is incredulous a ratings agency closely linked to an international financial meltdown can feel qualified to make any comments about Australasian banks or the NZ housing market.
For example, I wonder if any of the S&P bods behind keyboards even bothered to remove themselves from their office cubicles and make some enquires on how much a new house costs in Auckland or any other region in NZ.
In short, any time S&P feel the need to comment about anything in Australasia, they should refer back to statements of Jagot J of the Federal Court of Australia, and be reminded of their pedigree.
Who keeps giving this corrupt and inept institution a platform? That's who I blame as they are qualifying international criminal activity by continued attention. Ethics matter, credibility matter. If they don't then let me know someone please so I can stop acting as such
In the national interest of. (The power of noun placement).
Or. Well done the Auckland newspaper..
http://m.nzherald.co.nz/opinion/news/article.cfm?c_id=466&objectid=1160…
So, what is to be done? In the short term, it is clearly essential that dairy farmers are able to weather the storm and stay on the land. The banks have a crucial role to play. The Reserve Bank, itself a bank whose primary concert is the health of the banking system, assures us the banks are strong and secure and have the capacity to withstand any likely losses. That presumably means they expect little impact on the more than $4 billion record profits that our Australian-owned banks send back to Australia every year.
That may be reassuring, but in a contest between the maintenance of record bank profits and the health and survival of our dairy industry, there can surely be only one winner. The national interest requires that the banks should exercise some forbearance, even at the cost of some short-term dip in their profits.
Lending and borrowing are, after all, matching parts of a single and voluntary transaction. The borrower understands the risks and penalties of failing to repay a loan, but the lender also agrees the deal with their eyes open. They must be ready to stand by their decision to lend and to bear the consequences if the loan is not, or cannot be, repaid. And we must never forget that the money supposedly lent by the bank is created by the bank for that purpose; they are able to charge interest and require security, not on real money but on a book entry.
The national interest is better served by bankrupting as many unprofitable dairy farmers as possible in the shortest possible timeframe. The farms will then pass at fire sale prices to more competent owners who are not overindebted. They will then be able to farm them profitably.
Yes it is brutal and I would hate to be an overindebted dairy farmer farming land that is unsuited to dairying.
Yes it is brutal and I would hate to have you as my banker.
Seriously 'though, the current course of all banks to keep the seriously indebted farmers to remain farming is the very best strategy for the banks.
The "unprofitable dairy farmers" you mention are mostly the youngest and fittest and arguably the best long term customers to the banks, so supporting them through this current crisis would provide the best outcome for the banks.
Since you are averse to a whiff of Schumpeter's gale, what might your contribution be beyond that imposed upon the claimants of the banks' domestic liability ledger? Read more
The current idea is all about protecting the bank's loan book but it is disguised as protecting the young dairy farmer. If the fictional value of the bankrupt dairy farms can be maintained then the banks need not suffer losses. The losses are thereby transferred to society in the form of overindebted and unprofitable businesses and low wages. Choose your poison carefully.
I as with many others who frequent this site appreciate your comments and hope you keep them coming.
In respect to destruction of wealth, I know a little of what you talk about: in the early 1900's a wealthy relative instructed the estate keep 12,000 pounds in the bank to provide for his widow. When the estate was finally wound up (not that long ago in relative terms), there was still about 12,000 dollars in the account....
For many of us, we don't know how to fix the system we're in even if we could. In other words, when I play monopoly, I don't argue against the rules, but figure out how to play within them to my advantage.
I think we are on the same page. I guess I was just trying to cause a little intellectual havoc. Always choosing the easier option is what teenagers do, and their options steadily decrease until they only have very bad or not quite so bad to choose from. Better to confront the problem early on.
I guess I have a naive faith that family farms are best. Hopefully there are still enough of them to buy the mismanaged corporate farm next door if the farm is cheap enough and, crucially, create a profitable and therefore viable business out of it. I think that most of the irrigated dairy farm conversions would make excellent dryland sheep farms, but the point is that the farmer next door would know best.
Don't worry, lets all pile into the beef industry.
http://www.attenbabler.com/u-s-cattle-on-feed-update-mar-16/
I hear that pheasant plucking and ostrich feather farming is the new way to go with life sentence blocks.
I also hear that one can borrow from the Bank at record low rates to stimulate these endeavors.
It does help if you have a hefty deposit. A few tonnes of media crap are almost obligatory. It helps to stimulate both subjects.
Real Estate Agents are almost wetting themselves with anticipation.
Otherwise there is little interest, and profit in these pursuits, by overseas buyers and heads of Government.
They may have buried their heads in the sand around Syria already, ...or is it Turkey for Christmas, these days, or Belgian Waffles..
http://www.marketwatch.com/story/this-time-around-buyers-deterred-by-in…
Don't let common sense prevail. Go for it...have you Laddered your stocking yet.?
The main problem in Auckland appears to be all the worrywarts concerned about how "the children" won't be able to afford houses. This has pushed the demand for basic houses up to the just affordable if you both work and live on bread and water price of 600-700K. Houses in Manurewa, Papakura, Ranui, Papatoetoe and the like. The expensive houses haven't gone up as much proportionately. It would be better to advise young people that there are other places in NZ to live, or indeed, the world and that rent is good value in some situations as long as you continue to try and build your wealth. If this attitude was prevalent house prices could come down a bit, at least in traditional FHB areas.
Current asking prices are, in many cases, exorbitant in the above areas.
Face facts Zac, it's the "investor" like yourself using equity in those expensive houses to outbid FHBuyers and blow up the market.The mum&dad investor/speculator/ offshore buyers have created this mess. Don't tell us to bugger off to the provinces or are you going to fill the jobs that don't pay enough to live in this city?
thousands of cars? Me thinks max five... the motorway stops for hours when a car breaks down and is abandoned in the emergency lane... I think traffic managers go on to be local and national politicians... all seem to be as ineffective and as incompetent as the other....
Meanwhile down at Auckland Transport offices -
"Hey, we've go traffic issues. I know, lets build more bus lanes and close car lanes! Then we can save money by taking buses off the road...." BRILLIANCE at its most brilliant!
ZS - one day you'll realise when you look in the mirror in morning, that you are the main problem in Auckland. Why do you need to own more than one house?
Does it make you feel important owning many houses?
Does it make you feel good knowing that people who can't afford to buy a house for their children to grow up in despise the fact that you own many houses using the banks money (or debt....)? Or does that make you feel even more important?
One day when you grow a conscience, you'll realise how morally and financially wrong you are doing what you're doing.
I generally don't wish bad karma for other people, but in this instance I truly hope landlords and property speculators get hit hard by a downturn in the property sector over the coming years - they certainly deserve it for their greed, arrogance and lack of empathy.
IO... So in your world what would renters do..??? Who do they rent off..?? In your world would rents be extreme because there are almost no places to rent..???
Everyone I know has rented at some point..
Sure... I understand what u might be trying to say.... AND... the reality is that the more investors there are with rental properties then the more competitive rents will be...???
What u have written feels a little ugly and poisonous to me..
My own research points to supply constraint issues, compliance issues, the building materials sector and also, importantly , the unfettered growth in Money supply/credit ..
real Estate is a Market ...just like anything else...and should respond to the forces of supply and demand...
I have a friend who has decided not go ahead with a 21 unit apartment unit development because it was only marginally viable.... in todays mkt
Why on earth should that be so... with prices so high...???
IO... here is a question for u..
One of the effects of Globalization has been the deflationary force of labour wage rates..
Another effect is the inflationary force of global Capital flows... rich money buying assets..
How does that impact ordinary NZers ability to buy a house..??? To be able to afford a house..??
Why doesn't our Govt mitigate this..??
It is so easy to blame the Mom and Pop investors ..and label them greedy...
My view is that the problems run a little deeper than that..
IO there is light at the end of the tunnel. The market in Auckland is changing. Sources are telling me that auctions are not working. Some are even being cancelled as the agent is aware that there is going to be no bidders as things are that bad. And this just does not involve average houses. We are also talking here about trophy homes that would normally be snapped up. More and more houses are being listed which will only put pressure on prices as buyers will have more options. People like Zach think that prices will always go up but markets do not work that way. The market is already down 10% from its high. Another 10% will not be hard to achieve especially if buyers in Auckland hold off and think with their heads and not their hearts. There are considerable savings to be made if you keep renting for the foreseeable future and watch those prices drop. They will not need to borrow and pay back to the bank so much as they would now. Those savings are far more than the measly rent you pay a landlord in Auckland.
thanks ex agent. I am assuming you are an ex real estate agent still with industry contacts? Being the case, commentary such as from yourself grabs my attention more than the churn the Herald & co spit out on a daily basis. The Herald (and others) are continually feeding stories to keep the market pumping....you comments add some counter to the propoganda...
Funny that I thought the REINZ confirmed a 10% price reduction in Auckland since October 15. Cowpat must have more accurate sources than the REINZ itself who oversee the majority of housing sales in NZ.
Rastus the housing market in Auckland is changing in sentiment especially in the higher bracket. When you get no bids at auctions for houses that were sought after up until August or so last year you know the tide has turned.
Ex agent, obviously detail is not one of your stronger attributes. The REINZ and the RBNZ are not the same. And as much as I am happy to criticise the RBNZ and its decisions, I will stand by the accuracy of their numbers which indicate a further increase in mortgage credit growth. Unlke yourself I have no affinity nor linkage to the REINZ
Would be happy to , but only if a higher power were to moderate the debate , someone with their fingers on the pulse like Roger Kerr. Its ironic, that I'm the archetypal Auckland housing bear , do not even see a supply shortage given how unaffordable property is , yet are happy to look from both sides in deciding whether prices will go up or down. When prices truly start to fall and backed up by the credit data et al the snakes tail will be longer than the recent ladder.
Interesting. Anecdotal industry contacts verse data. So we stil dont really know... which is probably accurate.....searching for a trajectory either up down or stable.
I would add that mortgage credit growth could also be the new car, boat, poorly perfoming business drawdowns, borrowing to invest in Wanganui or Patea and so on...not neccesarily house price increases... ...but then again...back to the crystal ball.
REINZ. Strata Index Data. Their most accurate data. October 15 to February 16 . Down 10 per cent in Auckland. Most accurate data as it smoothes out data where there more higher priced or lower priced houses are sold in a given month. More accurate than average or median data. Nothing to do with the RB NZ but they are watching it. And likely to keep dropping as more houses on market and less buyers, especially those nasty overseas investors.
"look in the mirror", "feel important", "feel good", "grow a conscience", "morally wrong", "bad karma" - what a load of irrelevant garbage!
Wake up to the reality of a capitalist system! Real estate is a tradable object, there's a market for it that is ruled by supply and demand forces. Those who actively invest and trade in that market do it for... - guess what - for money, and run their activity as running any other business, with no place for any emotive rubbish.
Good stuff Alex13. Its all about the money. Don't worry about the people involved. Running for parliament or Auckland Council any time soon? Sounds like you have exactly the right attitudes to fit in nicely.
Everyone has a choice. I see it's clear the choice you've made.
More emotive irrelevant stuff. Does your employer "worry about the people involved"? - Maybe he does, but not more than required for - guess what - maximising the money he makes!
You may or may not like the capitalist system (I personally don't like it), but there's no better one that could be implemented with the human material as it is at this stage of its evolution.
Attempts have been made - in USSR, China, Cuba, North Korea, etc. - and the results speak for themselves.
And how much "money" has been "destroyed" by the capitalist system - we've had had the 87 stock market crash, Savings and Loan scandal, Long Term Capital Management , Asian financial crisis, the Russian financial crisis, GB leaving the exchange rate mechanism with the Euro, the Dotcom bust, Enron, GFC (and most likely others I've missed). The socialist system has largely collapsed.
Problem is they are both based on the "heaven on earth" myth - a utopia vision. The solution - I don't know - the Swiss system - set long term goals to achieve - and government is not allowed to change the goal or how it is achieved. .
There are simple ways for the Govt. to maintain house prices at a more realistic level
1. Introduce a stamp duty on foreign buyers and/or second home owners
2. Introduce additional Money Laundering rules-this needs to be implemented ASAP as our global reputation in so poor.
3. Introduce an annual wealth tax on foreign owned property
4. Raise the quality of immigration. Focus on quality rather than volume. This will also buy time to improve the infrastructure that is required.
Standard Poors 2006 Ireland . Did not foresee any near term problem with banks /economy . New Zealand February 2013, 2014, 2015 and now 2016 Standard Poors Auckland housing vulnerable to sharp downturn. We did not need a Chinese hard landing to crush milk powder prices, the terms trade are falling , Australia is deteriorating,future credit losses are already earmarked within the farming sector and house prices in Auckland continue to rise.
I don't think some people in NZ really know or fear the misery of a true housing downturn. Particularly for major property owners. It is truly bad. Friends and colleagues in the UK experienced it and many lost everything. Auckland certainly feels invincible now but then so did London. I just dont think people who have become rich should publicly crow about it. Just be quietly proud. After all pride comes before a fall.
We've never had a major house price collapse in New Zealand. I'm concerned that we could have one and the fall out would be like in 1987. You could end up with a generation that sees owning houses as too risky, the same way those who were in the stock market in 1987 never invested in it again.
Dictator - the contradiction of this all now is that the same behaviour that was prevalent in the 1987 stock market crash is prevalent in the Auckland housing market. People are buying houses because they think they are a 'safe-haven'. Won't touch stocks, they crashed in '87. I'll buy multiple houses instead and put all my eggs in one basket. Its madness.
The irony of the situation is not lost on me. New Zealanders love gimmicks and gambling. Either gimmick farming or an investment get rich quick scheme. It's understandable given that slow and steady wealth building is viewed as something boring that old people do.
I hope that one day people will learn how to diversify their investments, and not accumulate large debts just because the bank let them have the money.
IO - I remember the lead up to the 1987 crash clearly, a religious like rapturous belief that the party would roll on forever and the immense pain when the music stopped. I kinda get BBrs being averse to equities, especially given 1987, the inherent suspicion of corporates that is prominent in NZ culture and observing the success that leveraged PI's have historically achieved. But the one trick property pony appears to also be the favoured steed for many of the following generation of investors, seeking to build a nest egg. This despite the multiple dire warnings from experts that diversification is critical. I've been a reasonably successful equities investor over a long period but younger eyes glaze over the moment I suggest that spreading bets a little is a good idea. Property is the only true religion in NZ among my contemporaries so I practise my apostacy in secret.
I do remember - I was there
Prior to the 1987 crash I had been an active investor in the stock market - in fairly stodgy traditional quality companies - looked on with suspicion at the rise of blue-sky companies and couldn't see how their models could be sustained
One day walked into the bank to deposit a $15 dividend cheque from one of my "investments"
The young bank-teller lady who took my deposit and processed it looked at me and began to wax lyrical about the stock-market and how she had just made $3000 on Brierly and Chase Corporation and EquityCorp
I felt stupid
Since 1987 I have never invested in shares again - I didn't lose everything like the blue-sky companies did, but they took down a lot of good quality stocks - I lost too much of my hard earned - it was too much of a shock - to this day, still can't warm to the stock market
I can't see it being allowed to happen. I believe GFC 2.0 in NZ will be at the expense of bank deposit holders. They will become the scapegoats and it's well looking that way with not only interest rates but also RBNZ and government (lack of) action in this respect. They know damn well what the effects of a crash would cause, hence they act accordingly as they themselves (MPs) have major skin in the game.
This market has gone way too far ahead of itself , and there has to be some reality coming back .
Here's the kicker , I am a Baby-boomer , still working with a good Auckland income and while my home is paid for, and I have no debt , I could NOT get an 80% mortgage from a bank if I wanted to buy my home today
.
I don't earn enough ...... now GO FIGURE that one !
Should that not be the case when trying to inflate a bubble? My point being they now require those foreigners with say the 3 to 10 million in 'some' bank to keep this thing going don't they?
What about interest only loans? You check that? cause many around the country I might add are doing that and THEY appear to be NZ born citizens.
It can't go on until it just can't go on, but you sure as hell will not see the government or the RBNZ being the ones bringing it to a grinding halt anytime soon. That is the only sure thing around this. It may continue until the next election and Im sure that is the aim to some degree but It will end at some point. All I see though 'post' of the next bubble burst is those with no debts and savings getting obliterated (and I don't use that term lightly) to save banks and mortgage holders because they are the majority. Debtors are being catered too and for like sheep, and the shepherd's are the banks who are protected by RB and government.
I have seen multiple bubbles across many asset classes over the years and I always snigger when people say "it's different this time".
As people say it is important to have a diversified pool of assets but unfortunately the young can't afford to do that. They have to purchase a home which then the bank owns the majority of and then become a slave to the banks for the next 25 years.
Although people have a fixation about property prices my equity portfolio has done remarkably well over the last 5 years. The NXZ Gross index has gone from 3500 to 6900 so has almost doubled.Something that has happened without a lot of hype but also part of QE. The leading companies have much stronger balance sheets and generally are much better established in their market places than back in 1987 hence the reduced volatility that you see now. I target a yield of 4.5-5% on my equities and don't have to worry about the tenants as I do with my rental property.
My advice to anyone buying property in Auckland at the moment is fine but do be mentally prepared for a 30% drop in prices and consider how that would impact your life going forward. I remember the London property crash of 1987 and due to the excessive debt that some one carrying it wrecked their lives for the next 10 years.
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