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Opinion: Don’t expect capital gains again until 2018
March 26th, 2008
New Zealand’s housing market is so overvalued and wages are growing so slowly that we expect median house prices will not rise back above their November 2007 peaks until 2018 at the earliest. The size of the bubble is so large it may take until 2028 before prices recover and people who invested in 2006 and early 2007 start seeing capital gains again.
We realise this is a controversial view. Most property investors and real estate agents are predicting a housing slowdown lasting a couple of years before prices get back on their inexorable climb higher, delivering capital gains for property investors as it has done for most of the last decade. They point out there has never been a significant fall in house prices for very long and that prices will bounce higher within a year or two, as they have done after previous slowdowns.
We say it’s different this time because the scale of the boom in the last seven years is unlike anything in New Zealand’s modern economic history. House prices simply exploded in 2002 off the trend line we have been on since the 1970s.
A perfect storm of factors drove this unprecedented boom, including:
- Interest rates fell as low as 6%,
- Aggressive lending by banks, who saw mortgages as a low risk assets that required less capital backing under new Basle II capital adequacy rules,
- High migration post 9/11 as a wave of Asian immigrants arrived and New Zealand expatriates returned,
- A slowdown in new home building after the introduction of complex and costly new leaky building laws in 2004, and,
- A rash of tax avoidance-driven property investing via family trusts and LAQCs after Labour imposed the new 39 cent tax bracket.
These all combined to push prices into a stratosphere where there was so little affordability oxygen that a steep fall was the only result. And now we are seeing that steep fall.
The median house price, as measured by the Real Estate Institute of New Zealand (REINZ), has already fallen 4.2% from its November 2007 peak of NZ$352,000. Remember that number. It will be seen as a high water mark we don’t reach again until 2018 at the earliest, we say.
House prices are likely to fall 30% over the next 2 to 3 years or so if the market is allowed to return to affordable levels.
Housing was last affordable at the beginning of 2003. Back then it took around 40% of the after tax pay of a median salary to service the mortgage on the median house. That 40% threshold is the one many bankers use to say whether a home loan can be afforded. Since 2003 house prices rose by two thirds and the 2 year fixed mortgage rate rose from 6% to 9.6%. That blew out that affordability ratio to over 80% by early 2008.
| Prices have already fallen sharply in some areas. The first quartile house price in Northland fell 25% to NZ$187,500 in February alone. The sample size on this is small, but even the median price in Northland has fallen 15.3% to NZ$284,000 from its peak of NZ$335,000 in December. The Auckland median is down 7.2% to NZ$427,000 from its December peak of NZ$460,000. So some areas have already gone a long way towards that 30% fall. |
The Reserve Bank is forecasting a 5% fall in house prices this year, but has acknowledged that prices are 20-30% over valued by independent measures and could fall much more sharply this year and next year.
So assuming prices fall 30% to a low of NZ$246,000 by 2011, how long would it take for prices to rise back to that NZ$352,000 peak again? That answers the question of how long will property investors who bought in 2006 and 2007 have to wait for capital gains.
We’ve approached the question of how long will it take for prices to rebound in three ways.
Firstly, it’s worth looking at the long term trend for house prices. If house prices were to follow the trend they were on before the bubble blew up in 2003, then it would take until around 2027 before prices ground their way up again to that NZ$352,000 level again. That trend is the blue line in the chart above. We’ve projected that house prices will fall back to that trend line in 2011 and then follow it back up again to NZ$352,000 by 2027.
Secondly, it’s worth looking at the underlying affordability trends. If interest rates were to remain unchanged and take home pay was to keep rising at its current rate of 3% then it would take until 2032 before a median house price of NZ$352,000 was affordable again. By then the mortgage on that house would again cost 40% of a single take home pay to service. Even taking into account that household income is higher than single median salaries, then it would still take until 2021 for affordability on household income reached that 40% threshold.
Under this scenario we’re assuming a household income was equal to 1.27 times a single median income plus NZ$4,000 a year of other income.
| Finally, you can use another method of measuring the underlying value of houses. This was suggested by a poster on this blog back in February. He assumed that the housing market would return the same as the six month term deposit rate invested at the bank over the long term and allowed to compound. He has produced a chart showing a close correlation using that method from 1992 until 2003 when house prices exploded. |
If prices were to return to that trend and we assumed a 7% rate for bank deposits over that time then you’d expect house prices to return to that NZ$352,000 peak in 2018. That is the blue line in the chart above.
So we have a range from 2018 to 2021 to 2027 to 2032 before prices get back to their level of November 2007. That assumes that the median price falls 30% to start with and that we don’t see massive changes in migration, interest rates or house building activity.
Here’s the caveats.
The government could boost migration to bolster the housing market and take pressure off wages. That is seen as unlikely in the next year or two around an election.
Interest rates could dive because the economy is in recession and we no longer have an inflation problem. That would also bolster house prices as home loans become more affordable. House building could dry up completely, meaning the little extra supply of new housing coming on to the market now is further reduced. This would increase pressure on supply and keep prices high.
Without any of these acts of parliament or god, then property investors are staring down the barrel of a decade or two of little or no gains.
Tags: House prices
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March 26th, 2008 at 3:10 pm
Excellent Bernard
It amazes me that some people cannot see the bubble that is right in front of them.
It happened with tulips and Human nature doesn’t seem to have changed.
Hopefully your simple explanations will enlighten them if they are of a mind to to be enlightened.
Steve
March 26th, 2008 at 5:07 pm
Bernard
A good summary though I think you should also consider in your caveats that repatriation may occur en masse because of the current global economic meltdown (home is a nice place to be when you can’t afford to heat your flat in London), These returning NZers will have lots of dosh, add to that cashed up europeans. I expect house building to tumble as the compulsory registration of builders hit (and all the older ones chuck it in), confusion will reign as no-one knows what the average home-owner can do to their own house (a historically important method of renewing house stocks) due to limits put on this, so are houses in NZ globally unaffordable, no, just unaffordable for the resident NZers
Nevn
March 26th, 2008 at 9:18 pm
That is great. The rent will keep increase for next 10 years and the house price will be drop 30% for next three years.
So my plan is to buy as many properties as possible from 2010 since the rent will cover the mortgage from my calculation(rent up and House price down). I may be able to live on rent in 2015.
I wish it is happening.
March 26th, 2008 at 9:37 pm
Neven – I wouldn’t count on high repatriation rates to bolster the NZ housing market. As part of that London based cohort that you described – many of us here have far higher disposable incomes, wages and standards of living than we could ever hope to achieve in Auckland. Our experience of working and living in London is far different to the one had by the baby boomers of the 1960’s – 70’s who were stuck in low paying bar jobs whilst on their brief OE (post their free education). We may return between 2015 – 2020 but then again there are many stunningly beautiful, warm and comparatively cheap places to buy in Europe. Wake up to the fact that it is still significantly cheaper to service a mortgage in London than it is in Auckland, furthermore house prices are much cheaper here relative to incomes (we should know as we have owned in both countries). Perhaps the single most determining factor for return will be if a new government has the courage to see why it has alienated so many younger people (any one not yet 45). We live in a global world and we have been disenfranchised by blind intergenerational greed in our country of birth. NZ would have to rise up to some serious competition before we would ever consider returning.
March 26th, 2008 at 10:09 pm
I am not the least bit surprised that the Herald has picked up this story because like all media it believes that news and negativity are one in the same thing. The constant search for and commenting about how bad the economy is, and housing in particular, is becoming a self fulfilling prophecy. The more they run these stories, the more self confidence evapourates and the worse the economy becomes.
This particular article has some interesting points, but like most of the doom and gloom it lacks balance. The caveats, which are buried at the end of the article, will almost certainly come to pass. Interest rates will fall, the flow of housing stock will decline, as rates fall and rents rise investors will return to the market and, most importantly, as more and more people retire (how could you miss the impact of the baby boomers) the immigration flood gates will open.
Without a flood of immigrants this country will be bankrupt – who the hell will be here to pay sufficient taxes to cover the cost of all those old people (of which I will be one). And you cannot rule out that at some point we might actually have a government that does something (lowering corporate taxes is my favourite) to encourage investment that improves productivity which dramatically increases incomes. This will not just make housing more affordable (why oh why does the media talk only of high house prices, not low wages) but it should also close the gap with Australia and people will stop leaving and start returning (as they did in Ireland). And you cannot rule out the impact of global warming which if the worse comes to pass means that NZ will be one of the best possible countries in the world to live.
I think the possibility of house prices not reaching Nov 2007 levels until 2026 is NIL and, for good measure, the possibility of them taking until 2018 to reach these levels is also NIL. But why let that view get in the way of a good (ie: extremely negative) story.
March 26th, 2008 at 11:26 pm
nothing controversial to me here Bernard… As Steve says the bubble is right in front of us, and the rent/mortgage ratio is the tell.
What we need is a good bout of inflation to help everything else (salaries included) catch up.
March 27th, 2008 at 1:03 am
Great article Bernard – We have an economy that is apparently booming and relatively low interest rates by historical standards. Despite this housing is more unaffordable than it has ever been with mortgage stress levels at record highs. Normally we would expect this when the economy is really bad!!! So this says 2 things 1) Our debt levels have raced way ahead of our increasing wages and 2) it is going to get a lot worse when our economy is less than benign. Recessions do happen and we are staring one in the face.
I do think you may be a bit optimistic for house prices though. Just as irrational sentiment has pushed them way ahead of true value, on the way down it may have the opposite effect. Think Japan where prices are 40% below early 90s peak. The caveat as you point out is that the goverment could open the flood gates to asset inflating immigrants – this would be a sell out of generation X and Y on a grand scale but I would not put it past a vote hungry government. It would spell disaster for NZ as a place to grow up in and is something we should all be wary of.
March 27th, 2008 at 1:12 am
one other thing – those foreigners with supposedly heaps of dosh who are going to underpin the market. their comparative purchasing power has been greatly reduced over the past 2 years due to NZD appreciation. Therefore even if immigration remains high we should expect housing to drop to reflect the reduced money coming into the country. (eg USD from .4 to .7, GBP from .29 to .4). Britan is also staring a recession in the face, and most high earning NZers on their OE earn the big bucks in the city which will be facing the biggest job cuts. The easy money of the last 5 years is disappearing all over the place, not just NZ.
March 27th, 2008 at 10:51 am
Good article again about doom and gloom and if this causes the housing market and prices to fall so be it. Would be great to be able to buy a cheaper house and more off them so my rent income can cover my mortgage, but again as government in NZ goes they will probably try and put a leash on that to as they cant seem to keep thier grubby little hands out of other peoples business.
Anyway to me there is contradicting stories and figures floating about.
On the oen hand house prices are leveling out and dropping but also there is not enough houses in Auckland (According to the Herlad of this morning 4000 odd). Now anyone will know that ask and demand is a big factor in the price off any commodity. So to me this means that seeing as ther is a lot more people wanting houses than there is houses, that must mean that the price goes up (the most basic economic principle). I cant see that changing until there is a big huge house building boom, but in saying that you cant build affordable houses as the local building cost is round about $2000 per square meter and also NZ is loosing builders to Aussie at a alarming rate.
My suggestion would be, as mentioned above, NZ should wake up to the fact that it should become a lot more competative with salaries, that way more people will be able to afford houses.
March 27th, 2008 at 11:59 am
Sharon
It may be confortable now in London if you have a nice income but in the next couple of years you are going to face a serious economic storm, rising energy and food prices, With the decline of the North Sea the UK’s sunshine is going. Expect double digit cost increases in Gas and Food, research the Gas market in Europe, The LNG market.
IMHO The world housing bubble was Greenspans last puff before the energy crisis hit the US, at least in NZ we’ll have something to eat, we won’t freeze and the lights will be on
Neven
March 27th, 2008 at 1:08 pm
Borrowing money to buy houses has pumped around 8 billion a year into the economy,this is why it is booming, as house prices stabilize this will dry up and we will just be left with our 9 billion current account deficit while we pay off all the money we have borrowed.
We will need the income from another dairy industry to offset this or the ecomomy will contract.
A recession will lower wages and increase unemployment, making meeting mortgage repayments more difficult.
A 30 % drop in house prices is not unlikely
March 27th, 2008 at 3:54 pm
The comments about Japan are interesting. It also experienced a property bubble in the late 1980s and then had its own lost decade (or two) through the 1990s and early 2000s as prices were not allowed to collapse and banks hid the losses in zombie loans.
I don’t think that will happen here. We’ll have a short sharp fall if the market is allowed to clear.
The points made by those about supply are valid and heavy supply overhang is one of the big reasons for the price falls in America. But the big difference here is affordability is so vastly out of whack. Yes supply won’t change much. But the demand is drying up very fast as now both first home buyers and property investors withdraw from the market. So yes supply must meet demand. But with demand dropping and supply static that equals price declines.
Cheers (if that’s possible)
Bernard
March 27th, 2008 at 4:13 pm
Bernard
I can’t say I have taken the time to read your blog (oddly for an economist, I actually don’t typically enjoy reading about economics), but I did notice something.
You’ve graphed property prices in a linear fashion in your forecasts of future fair values. If you think about the effect of compounding interest (eg $100 compounding at 10%, the first year it goes up $10, the 2nd year $11, the 3rd year $12.10, the 10th $23.58, and so on), you’ll quickly realise that is an exponential relationship, not a linear one.
That being the case, you may wish to convert your linear graph to an exponential one and see how that effects your predictions.
Sincerely
Mark Bailey, B.Bus., M.Econ.
March 27th, 2008 at 4:36 pm
Mark
Many thanks. The third chart in the post has the compounding exponential chart that takes us to 2018.
cheers
Bernard
March 27th, 2008 at 10:45 pm
Neven
The point is, NZ housing is dangerously over inflated compared to incomes and if NZ wants to keep what should be its most valuable resource (its younger working population) then it needs to address how this imbalance came about (tax & RMA are an obvious place to start – but your government refuses to address these issues effectively – why?). I guess when everyone gets to suffer (post housing correction) – this review will happen. I hate to burst your bubble but NZ is a very expensive place to live in if you are young and starting out and this situation has got progressively worse. I am glad you still believe that NZ is the land of milk and honey – and immune to the problems of the rest of the world. That must be a comfortable ‘reality’ for you. Last time I checked the cost of milk in NZ was prohibitive and the honey was toxic. I do not understand why NZ products are considerably cheaper to buy in the UK than they are back there – perhaps you might like to take this inconsistency up with Fonterra and its ilk if you want to ensure your cheap supply of food for the future. Re energy – check the latest developments re entente cordiale – the French are actively marketing their brilliant technology to a very receptive UK government. Yes, the age of oil is coming to its end and I believe we are better prepared than NZ, in terms of infrastructure to deal with this. I do hope you can see the light in your survivalist, isolationist future. For good or bad the capitalist machine of our increasingly global world teaches some rather hasher realities. I would love to see NZ perform the kind of miracle that Ireland did – but this will not happen until some uncomfortable truths are faced first.
March 27th, 2008 at 11:35 pm
Excellent article Bernard, I hope the predictions play out, as I would dearly love my sons to be able to purchase houses…….for homes.
The potential social issues associated with a large percentage of the populace renting has not really been explored
As far as supply is concerned, I think people underestimate the effect of the baby boomers, who probably have 100,000 properties as investments. It is said that a down turn doesn’t really affect housing as an investment, you just ride it out until prices go up again. But there is no point having an investment unless you can one day free up that money, and many of these baby boomers aren’t getting any younger and want that money to spend in their retirement. I think 2-3 years of negative capital gain will start to flush out a lot of people, which will see a huge surge of supply.
Thanks
March 27th, 2008 at 11:37 pm
I find the comment about better afordability in Uk quite interesting. It IS a lot more affordable despite the far higher density. What is even more interesting is that the UK has the 3rd most unafforable proeprty in the world behind Australia (2nd) and you guessed it ….. NZ (1st). So if we look awful next to the UK things are dire indeed!!
Totally agree with Sharon about the younger generation being sold out. What good is debt and immigrant driven “economic growth” when it leads to a comparatively more expensive cost of living for those starting out. I was far better off earning a lower income in 2002 than I am in 2008 earning 60% more. Bring on recession and high inflation I say – its really only the banks and propertied class who truly benefitted from low rates anyway.
March 28th, 2008 at 3:04 am
Re. the possibility of falling house prices. All the economic indicators seem to suggest falling prices and a possible recession, whether it be a natural correction or a self fulfulling prophecy. Therefore, it would seem prudent for the government to recognise that and apply policies that will REDUCE or minimise rising costs to taxpayers and or consumers.
Current NZ emigration records show that record numbers of people are leaving NZ and our Government seems to wonder why… The cost of living in NZ is rising continually and disposable incomes declining rapidly – partly through Government policy & also local bodies not sticking to core services. If present policies continue, most of our remaining industry will have relocated to China or Asia, Those industries will be the culprits poluting the planet – New Zealand will have become an industry lacking economy with a shrinking tax base and, to add insult to injury, the citizens left to pay impending carbon taxes etc.
The Government have more than HAD their CARBON TAX by way of extra GST revenue on the escalating cost of fuel !!
With fuel approaching $2.00 per Litre before the impending Carbon tax and Regional Fuel Taxes etc. – imagine what New Zealanders could be paying for fuel after our currency eventually dives, that result on infllation and the resultant damage to industry and the economy.
Not long ago, the the government stated that they were concerned with the escalating cost of local body rates. I suggest that that is happening because government legislation provides for it.
Regional PetrolTaxes – eg. Auckland petrol taxes and… Other Regions.
Wellington Regional Council are on record as suggesting that they could also impose such a tax and it could enable them to service a $400 million loan.
Imagine ratepayers, faced with falling house prices, some with negative equity, petrol food and energy, costs escalating rapidly – and additionally, Regional Council Rates spiralling to service their loan.
Is that in itself not a recipe for possible ratepayer hardship and a likely recession (R).
With a looming recession, the impending legislation approving such should be put on hold by the government indefinitely. Sure councils may not like it, but if we are to minimise any economic downturn, we must be prudent and learn to live within our means.
Perhaps more people may take the government up on this issue before it becomes too late !!.
The $140 million offered by our Prime Minister, over ten years, to so called “clean up the Rotorua lakes” – of which the government & the local councils will pay half each. So the the government is only offering half, $70 Million and the other half THEY are seemingly offering, is to be funded by local body rates. How can the government OFFER money that is NOT THEIRS and to be paid by OTHERS… until there are signs of an economic upturn, the councils should refuse to approve it.
The merits of improving the lakes may be fine – BUT Once again, the timing for imposing increased costs is wrong – other than election promises to appease a few – and this is not the economic climate to be irresponsibly doing such.
“concerned with escalating cost of rates” – not likely, merely lip service !!.
March 28th, 2008 at 9:00 am
One of the comments above:
>> Borrowing money to buy houses has pumped around 8 billion a year into >> the economy,this is why it is booming, as house prices stabilize this will dry >> up and we will just be left with our 9 billion current account deficit while >> we pay off all the money we have borrowed.
I’m not sure whether this figure is accurate or not, but regardless nobody doubts that with house prices doubling banks have really creamed it. Never before have they had so much money farmed out earning interest.
But the problem is this profit is not necessarily re-appearing in the local economy to spur growth. ALL major banks in NZ are Australian-owned so you can be sure those profits are heading back over the Tasman to fund dividends and further investments offshore.
So if greater than 40% of incomes (the benchmark level of mortgage stress) is going on servicing debt, that means:
(a) Less income is disposable and therefore won’t be spent on discretionary consumables – behaviour that is critical to keep the economy growing
(b) More income is being vacuumed out of NZ in to Australia
If this isn’t a dire predicament for a small nation to be in I don’t know what it is. Notwithstanding issues of national pride, this would seem an economic shocker for NZ.
Is it really not practical in the days of the “great global economy” for NZ banks to remain NZ-owned to protect wealth. After all they are the cornerstone of any economy and harbour most of the wealth. People seem to kick up much more stink over the ownership of Auckland airport (but being aged under 30 I’m not old enough to remember the media when our retail banks were sold off)
Matt
March 28th, 2008 at 11:02 am
Sharon
Thanks for your reply, No I’m not quite as jejune as you might think. The current Clark/Cullen socialist dogmatic disaster will come to an end in Nov. They have taxed and spent which has dragged our whole economy down, which ironically is being supported by the rural food producers. I don’t see how you can state that the UK is has better infrastructure to survive the energy crunch, you are the biggest energy consumers in Europe (and we have 70% renewables), as for French nukes, good short term move but will it happen fast enough? Survivalist?, given the current global situation not a bad attitude. I’d be interested in your elucidation of “some uncomfortable truths”.
As for comparisons with Ireland, I get a bit sick of this, given that Ireland is on the doorstep of 500 million europeans it is more amazing that they took so long to thrive, not that they eventually did.
Cheers Neven
March 28th, 2008 at 2:47 pm
As a born and bred Londoner living in Christchurch for the last years i can see the views of both Sharon and Neven.
The Clark government has sucked the life out of the NZ economy and sadly doesn’t have much to show for it. Forget ideology, it just shows that government creates an unnecessary filter between producers and consumers.
That should change shortly.
But I was back in London recently and although I enjoyed it you could not drag me back to live there. The binge on the back of the City has come to a resounding halt and I know many people who are way over extended in houses that are way overpriced.
The impending shakeout will be felt quite strongly.
Nevertheless it’s clear NZ consumers are getting shafted locally. So where’s the competition? It wont be like this forever. Already I’m seeing more direct selling from farmers, groups coming together to grow veggies locally and distribute within the community.
There’s no such thing as an earthyly paradise but I’d say we’re all in for a rough time in the next few years. That being the case I imagine the grass is a touch greener over here
As for Ireland, yes spare me. They had their snouts in the great Euro trough and did very well out of it. They have been smarter than NZ in terms of tax policy but they will also struggle in the downturn. Have you seen property in Dublin?
I heard the other day that Italy struggled to clear a government bond auction. First signs of tension within the Euro block? Greek bonds anyone?
March 28th, 2008 at 6:24 pm
I’ll be surprised if you’re not right in your predictions Bernard.
Also contributing to the long haul back to capital gains will be a significant
number of owner occupied large Baby Boomer houses due to be dumped on the market starting in about 5 years by the many owners who have no retirement savings but hope to free up equity by down sizing.
As well, it is conceivable, particularly in the current global economic climate that when the RB finally lowers interest rates it could initially have the reverse effect on mortgage rates in light of the high percentage of mortgage finance sourced from overseas lenders. Lenders who will bail out when spooked by the inevitable rapid fall in our exchange rate.
March 28th, 2008 at 7:35 pm
I see lots of things arguing in a range of directions – I guess that is the true nature of economics.
A couple of things I am interested in is
1) the baby boomers offloading property – as above not just their investments, but also in Christchurch (and maybe elsewhere) heaps have bought large 200-300m2 houses on the outskirts of the city with little in the way of a yard – I am not sure who they will sell these to (unless you have indoor only kids – then I guess the huge floorspace would be fine) and I think they will take a hit when they try to trade those in
2) Maybe, mimicking the huge social change, we have become an unabashed two income family and so measuring mortgages at 40% of one income for affordability isn’t necessarily right. Families had two income earners to get some luxuries before, but maybe now things have transformed so much there will be two incomes by absolute necessity. Stay at home parents are a rarity nowadays. So I wonder if people can (albeit unhappily) sustain higher prices than the really long term measures predict
March 29th, 2008 at 5:24 am
Neven / Raff
Point taken, London is far from perfect. But most people don’t require ‘perfect’ to get ahead. What London has offered us, and doubtless many others, is the opportunity to reap the rewards of some hard graft in a competitive environment. Granted, NZ is a great place to live if you are retired, have no ambition to work or made your nest egg in the 80’s. The utopian promise of the P.C. welfare state has undoubtedly delivered handsomely to the post war generation. The reality is that any gen X/Y’er will have to leave the country to realise an unfettered chance of any career/ business/ family /retirement opportunity. Ironically the country will not survive with its own version of the lost generation(s). Economically NZ needs these people but it offers no future in return (or a very limited one). So forgive me for concluding that NZ has sold its own future to feed the illusion of prosperity today. We know the pension pot will not be held out for us, so what we do today and how we nurture that income is vitally important.
We often joke about relocating our business to Waiheke, it could theoretically be done in this day and age and life would be lovely indeed. However, our enterprise also depends upon access to reliable high-speed internet connection, a conducive and competitive business environment, and a fair taxation system with workable compliance costs. More over it feels good to know our aspirations will not be crushed at every turn and that we are kept on our toes by the pace and challenge of life here. When Kiwi’s in London talk of returning home, that ‘home’ is now Australia. That decision has nothing to do with rich mineral reserves; it has everything to do with attitude. Australians have long recognised the value of their future and they applaud and encourage the success of their young. NZ has given its young an untenable debt to the past and mediocrity as a benchmark.
I don’t know how long you have been there Raf but surely you must have noticed that Kiwis tend to take any constructive criticism of the country very personally – it is a hangover from the past, substandard internet connection and geographical isolation. Hopefully blogs like this will go a long way to addressing that. The ability to express a differing point of view, and have it listened to in a non defensive manner is something that makes London unique and the place I am happy to call home (for now). That, and the wicked British humour of course.
As for Ireland – I was referring to its repatriation miracle not its ability to gorge in the EU cookie jar. On that note, it would appear that government, blind greed, and foreign owned banks have spent a tad too long in your cookie jar.
March 29th, 2008 at 11:06 am
Sharon,
You make some fair points and yes NZ is not quite the paradise it perhaps once was. The Labour government has run the country into the ground in all areas and really its a long time since I’ve seen a government offer so little in the way of vision. It feels like a very backward looking government fighting battles of the past and it has a very spiteful feel to it represented very clearly by the current finance minister.
Hopefully that will change soon. I still think NZ has tremendous potential but it needs new management and a change in attitude. As you say the ability to be self critical and learn is something that still needs developing here but there are plenty of very smart people here as you’ve noted in the blog world.
I’m glad London is working well for you.
April 4th, 2008 at 2:04 pm
Hi Bernard,
Is this a bubble or a fundamental change in the market? I agree the numbers seem extreme when compared against long run averages.
NZ continues to break new ground both in terms of population growth and borrowing/lending behaviours. Affordability ratios point to a rapid decline in market entry opportunities for first time buyers in NZ’s major centres and this I’m guessing is not out of line with well established major cities overseas. As I understand it the ‘income gap’ continues to widen. There is evidence amongst my contemporaries of a shift away from ‘home ownership at any cost lifestyle’ to the ‘renting with higher disposable income lifestyle’.
Perhaps the gaps between the averages and current prices signal the end of property ownership in NZ as we have known it? Are the long run averages obsolete? Perhaps those who claim a bubble is sitting in front of everyones eyes are themselves blind to a new market?
April 4th, 2008 at 2:57 pm
Every bubble finishes with comments like “It’s different this time”.
April 5th, 2008 at 12:57 pm
Nice one Chris.
Reminds me of the Farmers Exchange Bank of Rhode Island which went under in 1809 owing $580,000 against just $87 in metal reserves. The selling of bank promissory notes several times over was a “new” play here. Not dissimilar to the packaging of debt we have now and sold as “hi yield” investments.
Cause: Speculation and greed.
No it’s not different this time at all. Fred Harrison’s book: “Boom,Bust: House price, Banking and the Depression of 2010″ is worth a read as it has detailed research on the last 400 years of boom bust property cycles.
April 6th, 2008 at 1:13 pm
Hi Bernard,
Another Kiwi living in the UK here (Cambridge), but keeping an eye on home. I generally agree with the argument you’ve put forward; however your graphs would illustrate the point much better if 1) they were in real (inflation adjusted) dollars, and 2) were for the full dataset available (since ‘92 on http://www.reinz.co.nz).
Keep up the good work though.
Nick
April 6th, 2008 at 5:06 pm
Hi Chris/Raf,
With respect I think you both miss the point. I doubt you’d find many who would disagree with the evidence that markets are cyclical. For a comparison between current and past market values/ratios to be of use we need to be comparing apples with apples don’t we?
Let me put my question another way. Most commentators are taking long run average values/ratios in NZ as their reference point for their forecasting of the market, which seems reasonable; but is this in some way flawed?
Forecasting rainfall in parts of the Amazon Basin with reference to the 400 year annual average is of little value after a couple of years of logging (little or no evapotranspiration).
Ignorance of the fundamentals is speculation. For example what has you both convinced Auckland’s property market hasn’t broken away from the values/ratios seen in the 20th century due to it’s dramatic population growth of the late 90’s through this decade, coupled with only modest growth in residential property supply?
I want to know if Bernard’s 30% is reasonable so I ask, is he referencing back to the right data? Perhaps a commentator might write a mock article in support of current market values/ratios as a test of the validity of the current negative market sentiment? It would be interesting to read.
April 6th, 2008 at 6:15 pm
Actually Mitch it’s all about the mathematics of compound interest and the nature of house price cycles. The fact that it has maintained a fairly consistent 14/18 year cycle is not a coincidence.
This is further reinforced in John Kutyn’s paper “The Nature of Money” which is on my website and demonstrates the maths of compound interest in the general economy.
Interestingly enough the first mortgage struck at a Birmingham pub was at 5% and took 14 years to pay off.
That aside, the NZ property market clearly had a revaluation in 2002-2004 as a wave of new demand came in from new migration. But then the tax structure and speculation over egged that pudding to leave us where we are now.
With mortgage rates at 10% and rental yields at 3-4% there is a gap in cash flow and with migration having slowed to a trickle it makes sense that prices fall until that relationship is more accurate.
I think we will probably see rents increase 10%-20% and house prices fall 20-30% (this has started already) until we see new equilibrium reached.
A fall in interest rates and/or the currency might change that somewhat as it would make property more attractive.
April 7th, 2008 at 12:42 am
It would be nice for just someone to say it will turn out okay for those with property like myself. It is gut wrenching to watch, see, hear and feel all the human ’sheep’ scrambling around banging down the dominos that hold up consumer confidence. It sure is a pain in the pocket as your individual opinions erode what unrealised equity I have and now it is really down to the nuts and bolts of the matter and that is never, never, never sell. There is still demand for property from those amongst us who never were out to make a quick buck – but a long (as in long) term investment. Easy come, easy go, easy come back again….
April 7th, 2008 at 10:43 am
Get real Brent. If you bought property as an investment then you must be prepared to accept the vagaries that exist in any investment commodity.
People aren’t talking this market down, that sounds like real estate agent bs.
Look at the key indicators, of affordability and return on investment. That is what is driving this market down. Many are surprised the bubble got so big, and Bernard Hickey’s conclusions of 2018 before capital gains occur again are as a result of that bubble getting so big.
April 7th, 2008 at 11:11 am
thank goodness though that God isn’t making anymore land (volcanos aside) – if i could wind the clock back then yes perhaps i would exit early to be cash rich to swirl around the bargains that will no doubt occur. Ideally then i could just start a city of my own somewhere. my take on it all is thank goodness i did not invest in a hands-off investment like shares or debentures, or even follow the cullen fund as that sure was a quicker way to lose it all listening to the governments advice. sure will be voting this year – and rather than thinking about the country – this time i will be thinking about my family and the future financial contibutions i will need to make to my children to give them a head start, because these days it seems everyone will need it, and for me that is guaranteed the gvnmt will not be in a position to give hand outs or leg ups to anyone, especially when my little ones grow older. the only thing i know is property, and i only want to sell one, but have been wanting to get shod of that one for ages – the other dozen i would rather keep. for the record my kids will be 14 and 12 when 2018 rolls around, so there is still plenty of time for my wicked master plan….
April 7th, 2008 at 11:46 am
Hey Brent,
Given you are an investor, you would not be too worried about capital appreciation. I’m sure you brought your property for it’s rental yield:) After all, you wouldn’t want to pay CGT to the IRD. Given the current tight supply in the rental market, your rentals returns should be stronger in the near term.
And your investment is a lot safer in a property than a finance company:)
Chin up.
Chris
April 7th, 2008 at 12:09 pm
Thanks Chris…
Guess you really get it. Little did I know that mongrel tenants, rising interest, property damage, arrears debt, rate increases, water rate increases, solicitors, accountants, property re-valuations, vacancies, property maintainance etc over the years have ensured that the net income only just stays at or below zero (LAQC), the intention is long term property investment, but the unexpected capital gains kind of made the equation seem a little kinder – with that going or gone will just have to be a hard nosed businessman when it comes to 180 day rent reviews and the like – talking of which i’m just off to get these eviction papers signed at the district court to rid myself of a bottom feeder that decided paying rent was not necessary. what a jolly process (delays, delays, delays) that is, all the while them sitting in my property effectively stealing money off me that could go along way to paying the interest only loans. little chance of ever getting that back i tell you.
Anyway – at long last higher rents are expected and the norm – so as costs go up so will the rent….
April 7th, 2008 at 2:49 pm
This discussion has gone way off topic, but some very interesting points are being made, especially from outside NZ…great stuff!
A few of my own are: (FYI I am 52 yrs old , lived in NZ all my life but travelled widely, self made after limited, but much valued, childhood support by my parents, 2 sons 22 and 25 both in NZ…for how long???)
1. Gen Y and X’s know that they will be the beneficiaries of the Trusts set up by their boomer parents and hence their financial security is underpinned by their hard working parents. Of what I have seen of Gen Y’s its it very hard to find a decent days work in most of them. Those living the good life in London mostly do so after their parents and the rest of NZ paid for their education. By the way if I had been a Gen Y I would have done the same too…we are all products of the ruling economic environment.
2. The current NZ housing price drop was triggered by the global credit crisis, don’t forget that NZ has no control over that. Yes values got too high (cheap and easy credit being the driver) , especially in low value areas like Tokoroa and Timaru, but in the “right” areas values will not fall as much…location location!
3. Values will recover sooner than 2018! Inflation, decreased interest rates and immigration demand will see to that. These will more than counter the -ve factors.
3. If the global credit crunch blows out of control of the central bankers then all of the world will be in for it, and I would suggest a good defence force will be required (or defence alliance) to stop NZ being overun by the unemployed from the North, including those running home to Mummy and Daddy(who will of course be welcome them back). Hopefully the central bankers will be able to maintain some form of investor confidence, but I am afraid there is worse to come.
Money is only one measure of wealth. I have yet to find a “wealthier” country than NZ and don’t think this is about to change. Of course we could have done better, but given the material we have had to work with, I’d say the result is outstanding!!
April 8th, 2008 at 11:57 am
I always hear comments from the likes of Mitch regarding population growth, “they are not making land anymore” etc etc. If land density is the problem in Auckland, would it not be appropriate to compare Auckland now with say melbourne in the ’50s when it had a similar population and density??? If we did that then we would find Auckland to be grossly overpriced. The density argument also falls on its face when we see that housing has boomed in sparsely populed areas in the South Island (eg Invercargill). Equally it has dropped massively in heavily populated areas like Japan.
Clearly what has happened is everyone has jumped on the housing bandwagon, spurred on by cheap and easy credit. This combined with high levels of immigration has exerted huge demand. There is not an issue with living space per se. After all, if the demand for accommodation was so great we would have had an equivalent boom in rents – but people dont speculate on rents, they do on property.
The only argument in favour of a “new” afforability equilibrium is the increasing number of double income households which massively increases disposable income. This is an unfortunate by product of the gender revolution, as we have gone from a nation where woman did not have the choice to work, to one where women do not have the choice to stay at home. This is not critical however if we address supply so couples do not need to enter a bidding battle that requires the collective household to wok longer and longer hours. After all, cars have not gone up in price due to 2 income housholds, enough supply of houses and the same applies. This is not something the banks would favour, who must be loving having 2 incomes to pay more and more interest – no wonder the BNZ suggest we should be limiting supply.
April 8th, 2008 at 12:53 pm
I think the blue trend line is incorrect for the type of graph used, it would have to be a curve because everything increases exponentially as opposed to a linear fasion. You would see this if data was used which goes back further. I wonld recommend searching the net for ausi median prices over time as they are close to us in nature and their data goes back further like to the 1930s from residex as opposed to our reinz data that goes back tp 1992. Seriously the trend line must be a curve.
April 8th, 2008 at 1:42 pm
I thought that to clarify, I might add that if we take the trend line from the top graph back to 1970 it indicates that the median house price at trend was $0 and in 1960 it was negative $60,000.
April 8th, 2008 at 1:44 pm
Raf,
Thanks for you helpful comments. It makes more sense to me now.
James,
Assuming you have your facts straight on Melbourne and Japan the scarcity of land can’t be a significant factor in our markets here. I like the double income new equilibrium theory.
20-30% fall here we come then…assuming immigration and interest rates remain at, or near enough to, current levels.
April 9th, 2008 at 8:05 am
Raf
are you avle to give your web address. I would be interested to expand my view further. Have already ordered the books suggested. Thanks
April 9th, 2008 at 9:50 am
Sure.
http://www.sustento.org.nz
April 10th, 2008 at 12:10 pm
Hi Raf,
I’ve decided to ignore the mathematics of compound interest in favour of the physics of surface tension. Apparently house prices are sticky. No worries then.
April 10th, 2008 at 10:15 pm
baby boom,high immigration,lower interest rates in 2011 ,resources boom in south and dairy will lead to higher wages. i believe invest down south island.
affordability, room for property to move. lignite ,oil,dairy is going to set this place off over the next 7 yrs. look at western auz history from minerals boom.
Wages skyrocket, so does property. Nz is cheap compared to auz ,and london.
Look ahead to what big players research is being done.
solid energy,exxon mobile to name a few. the history of property is that it doubles every seven yrs approx. This is just the cycle ,
WATCH The south
lignite plant planned to employ 3000 jobs
Wait till oil is announced in the next few years this property will go nuts when exxon mobile turns this place into a egyptian toommb
cam
April 11th, 2008 at 12:07 am
property fene,
“the history of property is that it doubles every seven yrs approx”. Do you really believe this fanciful rubbish put out by property spruikers. Check out how compounding growth works. I read an article on jenman.com.au recently – apparently if property doubled every 7 years, based on a house prices in the late 1800s, the median price in Sydney should be > 180,000,000 next year. Oh gee, I better buy quickly!!
April 12th, 2008 at 3:33 pm
Your example above seems to assume that building labour and materials costs increase at the same percentage as land prices.
Property is land. “House prices” is building plus land (30% land 70% building could be assumed today). Your result of $180,000,000 is clearly based on the late 1800s median house being worth $500 to $1000. The median house at the time may have consisted of a 250m2 dwelling plus accessory buildings and 100 acres of land. It seems you might be bang on with your calculation if you added up the land values of inner residential sydney houses on 500m2 sections until you reached 400,000m2.
April 20th, 2008 at 9:58 am
Dear Economists and Market Experts
I have a dilemma
As a NZer working on environmental projects I find it difficult to get real jobs in NZ and have wound up working on renewable energy, recycling and similary projects in the UK. I don’t know anything about London or property markets here as I live in the north of England and usually stay in digs and move around different projects in Lancashire, Yorkshire and similar northerly parts.
My life in the past, mainly as a batchelor, has been a little bit wild, adventurous and irresponsible. And as you all know, a rolling stone gathers no moss. I now find myself with atound 10 years of employment to go, saving up for my first home. That’s right – my retirement home will be my first home.
I want to buy somewhere in NZ close to the sea and have hit on an idea to buy the land first and then to build a house on it as I get closer to retirement. This way, I can fund the whole project with savings, as I gradually pull in my income over the last 10 yeaqrs of mky working life.
My dilemma is that I have been reading alot about house prices falling, property prices going into a period of decline etc. but I am having difficulty translating the predictions and warnings that I have read into the context of thinking about buying a section.
The dilemma is compounded by an understanding that developed subdivisions comprise mainly of land, a commodity that I would not expect to fall in value. Hoses (as distinct from land) are comprised mainly of materials (wood, steel, insulation, wiring, plastics (from petrochemicals) that will be subject to inflation as the cost of all raw materials is pushed up by world demand.
I will buy something in the next two years, but should I be looking at buying land and then building on it later (when materials prices have shot through the roof)? OR should I be looking at buying a section with a finished house on it now in order to capture the latent value of materials put into it when materials costs were lower than they will be.
In short, can some of you economists and real estate experts suggest a good strategy for me to buy a beach section for my retirement giving a timeline over which I should buy materials and build. My original plan was simply to pay cash for the land and then build as I find that my savings allow me to build – my pension being taken care of separately.
Maybe I should just comb the market for an already built bargain as over-extended sellers compete for my cash?
I may be a bit dumb but I fail to understand how house prices ca fall that far when most of the inputs to the building of a house are expected to go up at a rate higher than average inflation and labour must also go up more or less with inflation?
Please help me to understand.
Fat Lad
April 20th, 2008 at 9:48 pm
Just one thing to note: land can fall in value. for example i came to NZ in 2002 and bought some property. the value of land was $500m2 and now its $1000m2.
Is there a shortage of houses or land? I don’t think so.
However, as you note the cost of building a house has gone through the roof especially the regulatory aspects. So if these costs do not come down (i think they will as the building industry slows) then land prices are too high.
There’s a lot of room between 500 and 1000. I’ve seen a piece of land near me on the market for 3 years as the gut has been looking for $1500m2. He’s been dreaming for the overseas buyer wanting premium land. Well the truth is that there is enough land around but people have been wanting crazy prices for it. As the price falls i think we’ll see a clearing of the oversupply and a lowering of price demands.
Yield is coning back into fashion. Imagine if the LAQC dodge was removed and people could not negatively gear. Then we might see property yields at more appropriate levels with prices to boot.
There’s a bit of a stand off at the moment as people ponder what the lack of capital gains means to their investment model.
I think you’ll see some bargains in the next 12-18 months but as for buying a house or just the land i’d consider whether you need an income from it. If not then probably the land alone is a better play but it really depends on your circumstances.
Others may have differing views.
April 21st, 2008 at 7:30 am
There has been heaps of coastal sections put on the market recently. I would expect some stressed developers will be initiating fire sales. So there may be oppotunities for you.
Good luck Fat Lad
April 30th, 2008 at 8:28 am
Without easy money and credit available to the market, people will no longer be able to outbid one-another (for houses that do exactly the same as they did 50 years ago…. keep us warm and dry and out of caves).
Yeah Yeah, demand outstripping supply can force prices higher, but only whilst the market has the ability to participate. 50 years ago you’d have been hard pressed to find a bank that would provide you a mortgage with no money down. This natural restriction on who can participate has a moderating effect on the market price and any appreciation in that asset class is typically going to be more robust and sustainable. Growth is ok but not at break-neck speeds.
Do you think that your average Kiwi could obtain a mortgage with 0% down in 1950?
It seems that hard work and personal discipline are a thing of the past and somehow we seem to have gotten to the point where we believe we are entitled to own a home which is a significant contrast to years gone by. Has greed, fueled by easy money and credit (the ability to spend money we don’t have and may never have) created a false sense of power?
A house is a house people ….. not and investment, and anyone who believes they are an investment can only be referred to as a speculator. In order to participate in a market as a speculator, you must be willing to lose.
otherwise we’d all be renters/owners.
Houses are ultimately a liability, they don’t produce anything. A rental property is slightly different in that it can produce a passive income. Not everyone in NZ can own a rental property
I feel sorry for the people caught on the wrong side of this market.
April 30th, 2008 at 10:29 am
Just a small point Alex. My parents purchased their first house in the very early sixties. They didn’t have much in the way of savings, but they did produce three children and so were then able to capitalise on future child benefit payments as a deposit for a home. Many people did this at that time, as only one person in paid employment was the norm then (ironically that is a luxury only the extremely wealthy or very poor can afford today). Mum and Dad were still paying 3% interest on their (by now relatively small) State Advances Loan in the 80’s while their kids were struggling with 21% for their first homes (& no government assistance at all). Point is, that if one generation has a different view of what a house ‘means’, that meaning is and has always been quite significantly determined by government policy of the time. It scares me when any one generation thinks it has the ‘truth’ of the matter when they seem to so readily forget, through a process of normalisation, the significant benefits that were bestowed upon them. We are all products of our time and we currently live in a far more competitive environment than the confines of 1950’s NZ (thank God). I think your higher moral ground needs to be dug over a bit more.
April 30th, 2008 at 4:46 pm
This fab country is in a far better position to ride out the coming storm than most:
1. high interest rates will be cut soon to stimulate growth. No other country has so much
“fat” in their rates that can be trimmed- what bad timing for Labour that this will happen coincidentally with a change in government
2. Our banking system is strong and has integrity
3. We are well placed internationally in our commodity markets
3. Our social welfare system has good supports in place for the less well off
4. We are a small economy that can recover quickly from the troughs
It will be a rough ride for the unfortunate caught with investment property and high mortgages- but the rental market is definitely on the increase as increasing numbers of people opt out of home ownership. Plus- there are the tax breaks.
Oh Sharon – do not be so hard on these fair isles- it is not all about how much money you can make – multi-cultural, intelligent and magnificently empty, only those who have deeper values will remain. It just gets better. xx
May 2nd, 2008 at 12:18 pm
Whilst I am a baby boomer and can see sense in many things on this blog-yes I want to sell to free up equity when I retire.Yes house prices are overvalued and again I agree that interest rates will come down. What seems be missing in NZ is any semblance of optimism. Oz calls itself the ‘Lucky Country” we on the other hand are real ‘Doom and Gloom’ merchants-did we lose one too many rugby world cups ? Have we become second class Australians? The negativity is fuelling a downward spiral of thinking in NZ its been so for some time, even sites like this play their part in this to a lesser degree. Is this becoming a self fullfilling prophecy?
May 2nd, 2008 at 3:03 pm
Mike,
I think maybe we could have become second class Australians not just economically but socially as well. As a nation we seem to have an inferiority complex and are constantly seeking adulation. Anyone of note who visits is asked their opinion of the place almost before their feet have stepped off the plane and criticism is never shrugged off eg John Cleese and P/North, Maoris and Russian dolls. We are heaps too sensitive and we need to get over this complex and become more confident in what we do and who we are.
As far as Government is concerned we are simply not ” governed”. This is a reflection of the poor calibre of those in parliament and of Government by committee (MMP) Let’s face it Cullen wouldn’t even make the elevator never mind an interview for an an average CFO job. There is no vision and no forward planing. Government doesn’t lead by example (BMW’s – why not Prius no retirement trips etc). it is always re-active rather than pro-active – constantly trying to patch up problems after they arise -always of course with an eye on the votes.
NZ badly needs Government that leads by example, communicates with the people, tells it as is, tackles unpopular but necessary decisions, has only 40 MP. and listens to those more qualified.
May 2nd, 2008 at 3:39 pm
Totally agree with you guys – we have a massive inferiority complex fuelled by our size and insular nature. But, we ARE the lucky country – no dropping water tables here to speak of, or plagues of cane toads, no food shortages, no poor eating out of bins (except the nutters), no crazies with backpack bombs, and a proud history of bi-culturalism and now multi-culturalism, well managed banking systems and a government that is open and accessible (no matter which party is in power) and that DOES make unpopular but necessary decisions ( E.G. delays to tax breaks in the knowledge that such breaks will fuel inflation and keep interest rates too high for too long- that’s integrity – a more cynical politician would do the vote catching breaks anyway).
May 2nd, 2008 at 5:21 pm
Its hard not to compare ourselves to Australia when we should just focus on what we have…not what is better than anyone else’s.
However, when talking Government policy for example: excluding staple food groups from GST (as they do in OZ) its just too dawnting for our politicians to even attempt. Wheras the Aussies saw it as the right thing to do from the inception of their GST and workied through the the administration frustratiions and JUST DID IT. Surely Government should be to help the countries inhabitants and not avoid issues as they are in the too hard category. We may again become a lucky country when thngs that need doing are addressed..WE dont want P in the country-simple ban products with pseudoephedrine even being imported..I for one would survive without ever taking a cold medication again. Nuts is the answer to the Govt policy makers-”Grow a pair”
May 2nd, 2008 at 5:59 pm
Most P is illegally imported- not made from products available here which are fairly hard to get hold of now anyway. I guess GST on food products was just too hard for our government But what they should drop is the tax on diesel- because that is how our food is largely transported.
May 2nd, 2008 at 8:02 pm
Simone,
We could easily be the lucky country and wealthy too if a bit of common sense governing was applied.
Cullen has painted himself into a corner simply because he didn’t drip feed tax cuts into the system when the first surpluses arrived years ago as did Australia.
No interest on student loans – purely to solicit votes – even university students I was tutoring at the time could see the consequences and made it very clear how stupid they thought that one was.
Working for families – a mortgage on the next generation, who’s going to pay when the economy hits the wall?
And there are numerous examples where your so called accessible Government has taken no notice of the wishes of the populace eg.Anti smacking,lowering the drinking age – not raising the driving age.
Of course most of the blame for tolerating this muddle of governance lies with the politically ignorant and apathetic public who it appears are more interested in the likes of Tana Umaga’s knee injury than the management of the country!
May 3rd, 2008 at 12:07 pm
Simone
The issue is dealing with things as they occur not years later when a foothold is gained…
The Police Association has been asking for Government intervention since the 1990’s for measures to deal with P(wherever its ingredients are obtained from) and with gang issues, but to no avail hence we now have a problems that Annette King sees as ‘ battles we are losing or have lost’.
if we accept thats things are too hard for the Govt to do – like the GST on food we contribute to that situation as well.
House prices up or down mean little without the security to enjoy life in a safe environment .
violent offending is up across the board in all cultures in NZ , throwing money at issues alone wont change it regardless-has the average Maori been helped by Treaty Claims? I think not.
I remain optimistic but if some basic issues are not addressed I guess we have to hope ‘that God defend New Zealand ‘ because the Govt wont
May 3rd, 2008 at 3:54 pm
Alex
Saying houses do not produce anything is absurd. People need food, clothing and shelter. A house is a shelter factory and my rentals have been producing quality shelter for decades. There is only one rule that really matters to the long term property investor and that is, “You don’t increase your wealth by selling houses, you do it by buying them.”
And the time to look at buying is when the the flock of “experts” are baaing in unison “sell, sell, sell” . Just like now.
May 4th, 2008 at 6:21 pm
Pete,
I suggest you re-read my post.
If you’re holding onto the properties and not selling them, then you’re not liable for capital gains because a sale is not taking place… which is what this page is all about anyway. These concepts really have little to do with your situation.
But…
1) I do believe in the very first sentence I suggest that houses provide shelter (a point you have tried to introduce as a new one).
As for your houses producing shelter, I believe the word you are looking for is “provide”.
2) Your houses provide the same amount of shelter now as they did when you purchased them. Therefore there is no real justification for significant price appreciation on that basis (especially the sort of appreciation we’ve seen in recent years).
3) Where you got the idea that a house is a factory I have no idea, but it leads me to believe that you think these houses provide more and more shelter over time. Are you one of those people who now gets 30 people to a 4 bedroom home where 5 years ago it was only 4 people? If so, then your argument is fine, as long as rent can increase in proportion to the number of tenants, resulting in greater capacity for higher rental returns from the original house.
As this is likely not the case the rental income will remain somewhat constant over the life of the property (moderate fluctuations experienced of course Must factor in inflation, maintenance etc for real returns).
4) Do you think your situation is representative of the entire market?
5) How many property investors do you think the market can support?
Investing/speculating (you choose) in the housing market is never without risk. It is a game for the few, not for the mases, as most people can’t afford to lose and don’t have the skills to come out on top.
Last of all I believe the term you’re looking for to describe when to buy and sell is:
“Sell into strength, buy into weakness”
If you think this is weakness, good luck
Ever heard of a market cycle??????
Last point(s) I swear:
The real winners are the lending institutions, you know, the ones that collect the interest on the money they lent you (money they typically didn’t have in the first place). These same institutions help promote the whole thing. These same institutions allow the whole price appreciation to occur (not government policy as Sharon v sugggested). If you’re still stuck on the “money they didn’t have in the first place” part have a look at the term “fractional reserve banking”.
Ever wonder if the lending institutions have a vested interest in the housing business?
All they care about is managing the default rate so they always come out on top. They don’t actually care if people default on loans, as long as the number of people that do so don’t fall outside their calculations.
Credit card providers operate the same way when it comes to managing the risk of lending money.
I do agree with one point you made, and that is: “You don’t increase your wealth by selling houses, you do it by buying them.” I would only add to that… “if your timing is right”…. ok ok, plus location, location, location.
May 7th, 2008 at 9:40 am
Interesting posts all round. I’d just like to note in response to Sharon in London that my family of 5 is currently spending 18 months in the North West of the UK and finding it pricey in comparison with New Zealand – I can imagine that a single person or couple would be better off in England but try feeding a family of 5 with UK grocery prices and then adding on petrol, clothes, childcare and all the childrens’ activities. It’s certainly not a paradise for those working outside the City of London.
May 10th, 2008 at 7:38 am
Interesting that you should remark on how expensive your family of 5 is finding the northwest of England, Emster. We have just moved here from the Dundee region of Scotland and find things more expensive here! New Zealand is no longer the “bargain” it used to be when I first came here on a visit 15 years ago. That at least is my PERCEPTION.
May 28th, 2008 at 10:49 pm
All this discussion about property got me thinking
For most people a residental mortgage is indenture plain and simple and todays youngsters are well advised to resist having one. Of course a home is a desirable asset and is more than just bricks and motar but at what price and I suggest currently that price would seem too high for our best.
Not all, but many of our most imaginative and brightest kids head off for more pounds, euro’s and experience than they’ll ever earn and learn here……..how many will return?
These are the future wealth creators and they are well advised to go and shed the shackles of this little country and its massive inferority PC complexes.
We need 1 year of chinese rule with a mandate to put a bullet in the head of every major criminal and all but irradacate our social welfare system and close down every other rort and BS they can find while at it including the treaty industry. The old model is toast.
We need a country rid of the crap concentrating its efforts on sales in whatever form that might take………
October 4th, 2008 at 10:47 pm
I agree completely with Mark Bailey above, linear charts are meaningless and making price predictions based on them are even more meaningless. And no Bernard, the 3rd chart is not exponential – the TD earnings have been compounded and graphed on a linear chart.
Exponential (I prefer to call it logarithmic) is where the Y axis shows $1 to $2 as the same increase as $10 to $20 and so on (as both increases equal 100%). If you chart rents, wages, food – whatever, on a linear chart it will show an upwards curve and a so called “bubble” due to a $10,000 to $20,000 increase several decades ago showing up as a minimal increase, while a $200,000 to $400,000 increase in the last decade draws a sharp spike – even though both instances were a 100% increase.
It’s my experience that journalists prefer linear charts because they look more impressive and make a better story, but they’re just not realistic.
I remember in 1995 hearing people talk of the “unprecedented” boom, and I’m now hearing the same things again, even though in percentage terms the booms of 1975 & 1985 were far greater! Again though, a linear graph will not show this (they almost show a flat line!) where as a logarithmic graph would.
Any graph of value (prices) over time should be logarithmic because interest & inflation compounds over time, it doesn’t accumulate in a linear fashion. On a logarithmic graph, property prices appear on a relatively straight line trend, wages appear below trend (though they have recently been catching up), and rents appear below trend – though they are likely to catch up when the current oversupply of housing dries up.
As Mark suggested, you should try some new predictions using logarithmic (exponential) graphs, you’ll find it paints a completely different story