Recent increases in house prices in New Zealand are "at odds" with the fundamental drivers of the market and in the coming years prices are "likely to come under pressure to realign with fundamental values," according to the Reserve Bank (RBNZ).
In an RBNZ Analytical note: Measures for Assessing the sustainability of house prices in New Zealand, senior economic analyst Matthew Brunton says that until 2020 the growth in NZ house prices had been against a backdrop of falling long-term interest rates, strong population growth and an insufficient supply response to the additional demand.
"In this context, while household incomes were becoming stretched, measures on the relative benefits of owning property (mortgage interest-to-rent, user cost, and rental yield models) were steady. The high house prices observed, while increasingly unaffordable, could have reasonably been considered sustainable," he said.
"However, the recent increases in house prices through 2020 and 2021 are more at odds with fundamental drivers. Estimates of serviceability ratios using long-term interest rates are well above their historic average. As interest rates increase towards their long-term values over the coming years, households’ ability and willingness to service mortgages at current prices may be limited."
This new analytic note from the RBNZ was released in conjunction with a speech from the central bank's Governor Adrian Orr, which, in large part, was a plea to New Zealand households to diversify their investments and not put all their eggs in the housing basket.
And it came a day before the RBNZ was due to release its latest six-monthly Financial Stability Report.
In his analytic note Brunton says that for both households and investors, measures around the benefits of property ownership are suggesting that current prices are becoming less attractive.
"Furthermore, prices are now above user cost estimates based on previous experiences around rent inflation. If the strong supply response limits rent growth over the coming years, estimates around the sustainable price of housing will remain flat or ease back. However, if these supply responses represent a more structural change then this could more persistently reduce rent inflation and cause the more significant declines in sustainable house price levels."
He also says the removal of tax-deductibility and the extension of the bright line test will reduce the potential return, and therefore sustainable value, on existing properties for leveraged investors. As a result, investors may reduce their demand for investment properties until prices realign with their required rates of return.
"Together, these measures suggest that current house prices are becoming increasingly unsustainable.
"As interest rates normalise and supply continues to enter the market over the coming years, prices are likely come under pressure to realign with fundamental values."
Below is the RBNZ's description of what a 'sustainable' house price is:
50 Comments
They'll do ANYTHING to keep the bubble going..
Why people believe a word Adrian Orr has to say is beyond me. Looks like everybody is falling for it yet again.
There is plenty the RBNZ and Labour government can do to keep house prices rising:
- Allow RBNZ to buy 100% of government bonds
- Labour increases buying houses on the private market
- Labour buys ALL houses on the private market
- RBNZ takes rates negative
- Subsides for homeowners
- Subsidies for renters
- MORE helicopter money
- RBNZ puts the bad debt of the retail banks on their balance sheet
- HUGE increase to FHB grants
- Removing the foreign buyers ban
First wee crash [10% - 30%] and they'll pull out all the stops. The country will of course pancake, but house prices will increase, in NZ dollar terms - it's what NZers expect?
Well, I'm doubtful of my above comments coming true, it would result in:
- The eventual collapse of the NZ dollar [down to round USD $0.50]
- Rampant wage inflation [$30 - $40 per hour starting rates]
- Mass collapse of established small businesses [30% - 50% closures]
- Mass government bond buying by the RBNZ
- Mass exodus of skilled workers
- Rates remaining low [3-year-mortgage-rates remaining sub 6%]
It's shaping up to be a choice between propping up the housing market or destroying the fabric-of-society/remaining-economy.
They will choose the path of lest resistance. Though it's true the 'main stream media' are brought off by Labour, it's also true they're brought off by the property lobby. The media will beg and resist declining house prices..
Labour and the RBNZ will try to kick the can down the road. The growing feeling on interest.co.nz is they're running out of runway for the 'can kicking'.
The reality is; 'Inflation' means: an increase in the money supply. Keep allowing leveraged borrowing (credit creation) and house prices will continue to increase.
Vast numbers of Kiwis could be homeless, emaciated, begging for a potato - yet if the credit tap stays on - house prices will increase. Homeowners are a large block.. they vote and they vote often.
John Locke and his Appeal to Heaven Flag is an interesting story.
Buying a property are like investing in an index fund and mortgage repayments are your dollar cost averaging. It doesn't matter if interest rates goes up or down or house prices goes up or down over the short term; what matters is the buyer's ability to service the cost of investment.
Aside from untimely personal misfortune, if anyone got a loan from a big four and claims he suddenly can't service it, the problem isn't with him, it's the bank
A Bank only cares if it can get its money back (with interes), and with recourse loans and rising valuations its very easy to do. I suspect there are a lot of borrower's out there who believe if the bank is willing to lend them the money then its means they are in a financial position to repay it. With conditions changing I suspect this will prove this line of thinking to be naive at best and financially crippling at worst.
Everyone loves to claim that banks stress test at X% ... but that relies on a sound assessment of a borrow's real (not claimed) expenses. I recently spoke to a colleague who bought their first home on interest only terms, and who literally said "we can't really afford it, but if we don't buy now we feel we will miss our chance". That is IO terms at rates that are very rapidly going to higher. But the bank lent it to them, so they should be fine ... right?
No difference from rent to buy. As long as he can service continue to service the loan, I don't see an issue.
On a positive note, at least he had locked in the price of the property and eliminated his upside risk instead of being a bystander and having the vicissitudes of both upside and downside risks tossing him around all day long.
Buying a property are like investing in an index fund and mortgage repayments are your dollar cost averaging.
Garbage. DCA'ing into a share index fund or say the ol' rat poison means that you're buying at different price points that fluctuate over time. Paying off a mortgage, the principal is fixed. They're completely different.
Couldn't be more wrong from a FHB perspective....you don't dollar cost average with a house because you have to leverage at a very high degree at one specific point of time...you don't get to go I'll buy a little bit now, and a bit more now, and some more now....you buy the whole lot at the market price at that time...then have to live with that choice/debt for the next 30 years.
Couldn't be more wrong from a FHB perspective
Couldn't be more wrong full stop. Paying off a mortgage is not DCA'ing. Buying a property fund index monthly is an example of DCA'ing.
It's almost like referring to 'Buy Now Pay Later' as DCA'ing (chuckle). Not it's not. It doesn't even make sense.
CWBC has previously talked about flipping 30+ houses a year, so I guess for him/her then buying and selling all of the time is representative of DCA.
Bit different for most other people who enter the market once for the first time then have to live with the consequences of that entry point for the rest of their working lives.
Who knows what 'covering your backside' looks like? No? Here's an excellent example.... Pathetic, really, if it wasn't for the fact the RBNZ might really believe this load of cods wallop. (Psst... Matthew... You guys engineered all of this; all of it, and saying that you didn't expect what's happened to happen just shows you that you really don't know what you are doing. You'd think that for a million buck a year, at least one of you would know what they were doing)
...until 2020...The high house prices observed, while increasingly unaffordable, could have reasonably been considered sustainable,
Quite so. And perhaps this sums me up as well!
I (*come from) an era where Central Banks liked to keep an element of mystery and surprise. As such I’ve always disliked the forward guidance era as it encourages markets to pile on much riskier, one way positions that a normally functioning market should naturally allow. But to go from forward guidance to (*illconceived, backside saving presentations) is a recipe for huge market turmoil if the facts change.
https://www.macrobusiness.com.au/2021/11/deutsche-market-has-no-idea-wh…
*(my words)
Very well said about what actually house prices are based on in this country.
This is going to be a good lesson in history on not how to screw the whole economy and future of a country. But we are too late now to make anything better.
So our next generation will read about this in the history books on how RBNZ and current government played a game which destroyed a few lives and livelihoods.
I note the use of the word "likely" in the key phrase "likely to come under pressure to realign with fundamental values".
There is a name for this type of language. It is called a 'weasel word':
https://en.wikipedia.org/wiki/Weasel_word
There seems to be this lovely echo chamber within the Reserve Bank which reinforces their belief that "if I explain it, people will listen and act accordingly".
I tell you what, I work in finance and the amount of people who actually understand what the RBNZ mandates are, let a lone what the OCR actually does is near zero, (and those who think they know are the most dangerous), and if people who work in the field are ignorant to such simple points then think about how far removed the general public are.
If you start to enquire how much we invest as a country in teaching our children, young adults, our retirees about finance and you realize we spend more on subsidizing the America's Cup than helping educate our most vulnerable you start to see why this country has a productivity problem.
We live in a society where the blind are leading the blind and the Reserve Bank is communicating through placards they've written on using there feet and a crayon, arms tied behind it's back.
On a comical note, imagine a sweaty Adrian Orr watching two blindfolded people lead each other around near a cliff edge and he is trussed up frantically using his feet to write on placards.
It is so evident that current house prices are ridiculous and greatly overinflated, and so out of sync with fundamentals that it is not even funny. The housing Ponzi is now in an incredibly fragile state.
The last to realize this evident fact are the clowns at the RBNZ, who sadly are supposed to be the party responsible for the overall financial stability of the country.
Many housing specuvestors are not going to foresee what is going to hit them (https://www.stuff.co.nz/business/126856731/homeowners-underestimating-s…). If they only understood the implications of what is happening to the swap markets (here and overseas) many of them would run for the hills.
The risk that the housing market is going to turn ugly is growing by the week.
This new analytic note from the RBNZ was released in conjunction with a speech from the central bank's Governor Adrian Orr, which, in large part, was a plea to New Zealand households to diversify their investments and not put all their eggs in the housing basket.
What about depositors unsecured claims on bank records of what they owe (so called deposits), after purchasing mortgage securities, which have to remain in circulation on bank ledgers as long as the borrower pays down the debt, until it is extinguished?
According to the Reserve Bank, the new capital requirements mean banks will need to contribute $12 of their shareholders' money for every $100 of lending up from $8 now, with depositors and creditors providing the rest.
When did Open Bank Resolution not remain an issue of discussion when the bank regulator raises the claim of possible bank instability due to leveraged residential property speculation?
"RBNZ says recent increase in house prices 'at odds' with the fundamental drivers of the market"
Are they saying that they know it now (Many have been saying since month - in March when data was released that in February house price went up by $100000 and that too after 30% in a year - Mr Orr defended / kicked the tin that he knows / have data that house price growth will stop but was WRONG and he too knew but said just to defelect and support the ponzi).
IF they know it now (Better late than never) what are they plaining to do or will they take their time to think...think...think....and therby again support speculation.
Fundamentals are clearly promoting high prices as follows:
FHB - buy, always buy, at any price that the bank will lend. This might be your last chance to get in.
Investor (seasoned) - always looking for great value through connections and developers they know, buy buy.
Investor (sheeple) - mortgage broker says not to pay down the mortgages, just buy. So buy.
Owner-occupier non-investor - Trapped in limbo at the chaos of Covid, border closure, vaccine efficacy, and insane house valuations, Do not sell/upgrade until more becomes clear.
The first three might see their buying power tightening, but the last group is still not moving so the market _isn't_ going anywhere just yet.
Disagree, the last group is also stuck. They may have a large amount of equity but cannot place a cash offer to upgrade from their existing property as the bridging finance is too much. They won't sell with nothing to buy and potentially become homeless especially if they have kids and pets.
Market will need to significantly stagnate so seller to accept offers "subject to sale of existing property" again.
Oops, yes you are right (and I meant to support this point about those considering selling, I accidentally put 'is' instead of 'isn't' in there).
Upgrading home is a massive risk as you say, the bridging finance is too much and any complex offer has to complete with the remaining crazies, and satisfy the real estate agent who is riding the glory of the last 18 months of sale figures.
Downgrading home - I would also be worried to advise my parents or anyone else to do that right now. Maybe they'd get $1M for the old heavily-dated family home, but they need to spend $700-800K on a low-maintenance renovated 2bed, and that profit lands in the bank where there is no interest on offer yet.
Hilarious. When are economists going to stop thinking that house prices are going to 'follow the fundamentals' and behave like a commodity in a perfect market?
The housing market is a heady mix of sub-markets and each is driven by common factors to varying degrees. For example, the value of houses in a rough part of town are generally determined by how much beneficiaries and the working poor can afford to pay in rent (including by cramming 20 people in a house). Thus price is highly correlated with rental yield (interest rates), level of accommodation supplement, benefit levels, landlord confidence in capital gains, tax settings etc. Supply matters, but it is only one of several factors, and is too slow moving to make a difference in the short-term.
At the top end of town, people pay for exclusivity - including quality of local school, restaurants, transport routes, rich village feel etc. Again, prices are constrained by how much the top 5% of wealthy people in a town can afford to pay, which is a function of equity (note the feedback loop with price increases), confidence in capital gains, costs of borrowing (interest rates), wage levels and so on.
So, price growth slows down when interest rates increase, but it only actually starts to fall when confidence falters.
1) All asset prices reflect their fundamentals in the long run.
2) In the short run, emotion and imperfect information drive swings in prices away from fundamentals.
3) The most important rule for shorting any asset is worth mentioning here - the market can remain wrong longer than you can remain solvent.
RNZ: Housing prices pose risk to New Zealand's financial stability, RBNZ governor says.
https://www.rnz.co.nz/news/business/454741/housing-prices-pose-risk-to-…
Look who is talking. Perpetrar of the ponzi.
OK. RBNZ feels that housing crisis is a major risk...are they saying that they have no power / tools to control.....they only have power / tools to boost the ponzi.
They were after DTI, now that they have it, what the F$#@ are they waiting..interest only loan........
WHO IN THE WORLD WILL BELIEVE, WHEN RESERVE BANK OF THE COUNTRY SAYS THAT WE HAVE NO CONTROL ON HOUSING PRICE.....THIS F$#@S ARE TREATING KIWI'S AS IDIOTS. IF YOU SUPPORT AND PROMOTE - BE OPEN AND STAND FOR IT.
Don't forget price of new houses is rapidly climbing with material increases, labour increases and a lot more regulation. Builders now have a "Code of Ethics".
Next year, insulation standards are rising significantly. This may well mean thicker walls (more timber) as well as more insulation.
Then we have encapsulated carbon calcs to do, which adds another whole useless layer of compliance costs costs for no practical gain.
So new build costs will keep on rising.
Looks like reserve bank staff need to go back to high school,and learn the basics.
If you print loks of money you cause inflation. This starts in Financial assets like in NZ the houses and then moves to goods, services and wages.
House prices have to fall in real tearms and in the last quarter after inflation are probably down in parts of NZ.
Next the wage/inflation/interest rate spiral will supress house growth but not wages giving us a new equalibrium with lower prices and high wages. Investors will be forced to sell with the pressure of the new non-deductibility of interest kicks in along with higher interest rates making most houses negative cashflow.
Completely ignores the fact that leveraged investors will push rental prices up to recover their returns and cover their costs. Go figure
This will then be called an "unforeseen" impact, and investors will be attacked for being the rapacious criminals that Robertson already thinks they are. No connection will be made between poor policy and poor outcomes, because blind ideology doesn't allow for Labour being wrong.
RBNZ is complicit with the government, Orr is not acting independently.
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