RBNZ warns of growing risk of sharp correction in Auckland house prices; says now watching Hamilton, Tauranga too; says dairy debt manageable, but wants banks to do dairy stress tests; RBNZ collecting loan to income multiple data

RBNZ warns of growing risk of sharp correction in Auckland house prices; says now watching Hamilton, Tauranga too; says dairy debt manageable, but wants banks to do dairy stress tests; RBNZ collecting loan to income multiple data
Reserve Bank Governor Graeme Wheeler at an earlier Monetary Policy Statement news conference.

By Bernard Hickey

The Reserve Bank has warned in its half-yearly Financial Stability Report of a growing risk of a sharp correction in Auckland house prices.

It said it was too early to tell if its tougher limits on Loan to Value Ratios for Auckland landlords was reducing those risks. It repeated its estimate of a two to four percentage point reduction in Auckland's annual house price inflation rate because of the measures. It said the new LVR speed limit of 70% for landlords in Auckland was expected to effect 13% of all transactions in Auckland.

"With prices becoming increasingly stretched relative to household income and rents, there is increasing potential for a sharp price correction in Auckland," the Reserve Bank said in the report.

"A correction could be triggered by a range of demand-side factors, such as a deterioration in labour incomes, an unexpected rise in mortgage rates, a reversal of migration flows, or a sudden reduction in investor appetite," it said.

"There is a risk that a downturn could be amplified by a rise in sales by investors, given that investors have more elevated debt to income ratios, and appear to be purchasing on the basis of expected capital gain," it said.

"Falling house prices could in turn weaken economic activity if indebted borrowers attempted to restore balance sheets by reducing consumption."

Now watching Waikato/Bay of Plenty too

Elsewhere, the bank noted house price rises of 18% and 14% respectively in Hamilton and Tauranga.

"While this could be positive for financial stability if it reflects demand shifting from the overheated Auckland market, a prolonged period of rapid house price inflation in these areas could increase financial stability risks," the bank said.

"The Reserve Bank will monitor regional housing markets carefully as the higher LVR speed limit outside of Auckland takes effect," it said.

It also said it had begun collecting data on debt to income multiples and had found 40% of loans were with loan to income multiples of over five, with 60% of landlords borrowing with loan to income multiples of over five.

Governor Graeme Wheeler told a news conference after the release of the report that the bank was not currently considering imposing UK style loan to income multiples or limits on loan serviceability.

Dairy debt modeling

The Reserve Bank also included some new modeling of what might happen to bad loans to dairy farmers if land prices fell as much as 40% and the payout rose only to NZ$5/kg by 2018/19.

It estimated its worst case scenario could see 44% of loans becoming non-performing, with those loans held by 25% of farmers. Eventual loss rates under the scenarios ranged from 2% to 14%, which amounted to losses of around 2-18% of bank before-tax profits.

But overall, the bank said it expected banks to take a medium term approach to dealing with loss-making farmers and it expected the banks to put aside realistic provisions.

"Losses for the banking system as a whole are expected to be manageable, even if low milk prices persist for a number of years," it said.

However, the Reserve Bank said it had asked the five biggest dairy lenders (ANZ, ASB, BNZ, Westpac and Rabobank) to undertake stress tests of their dairy portfolios, "providing an institutional level view of potential losses under similar scenarios." The bank said it expected the results to be returned by the end of the year and would be reported on at a later date.

Although non-performing dairy loans were still low at 1%, up from 0.6% a year earlier, the Reserve Bank said "watchlist loans," that provide a leading indicator of non-performing loans, have increased over the last year and are now running at 5.8%.

Capital review with eyes on Australia

The bank also reiterated that it was reviewing capital requirements for banks over the next year.

"That is motivated, in part, by potential changes to the Basel capital adequacy framework and a likely increase in bank capital requirements in Australia as part of the Financial System Inquiry," it said.

The first stage of the review would deal with issues around the big four banks' internal models approach to risk weighting.

Deputy Governor Grant Spencer said in the news conference the bank did not have a pre-conceived view about the banks needing to put aside more capital, but also said he did not expect banks to need less capital.

"The review is about overall capital adequacy," Spencer said. "We don't expect that capital ratios would be reduced, but it's not necessarily the case that they'll be increased. We do think that we've had a pretty strong set of standards relative to the international norms and we just want to review it again and make sure it continues to be strong compared to international norms."

Economist reaction

Westpac Senior Economist Satish Ranchhod said the Reserve Bank sounded cool on the idea of introducing loan to income restrictions.

"The RBNZ seemed to indicate that it would wait and see how its latest round of mortgage lending restrictions would affect Auckland housing, rather than introduce any new measures to cool the market," Ranchhod said.

"Furthermore, the RBNZ seemed to view the dairy situation as manageable from a banking system perspective," he said.

ANZ Senior Economist Philip Borkin said the Reserve Bank's comments about watching regional housing markets was interesting.

"While changes don’t appear to be pending, it suggests to us that the RBNZ would quite quickly re-tighten lending restrictions if these regional pressures were to intensify," Borkin said.

Borkin said the FSR's slightly increased focus on housing rather than dairy must be considered when thinking about monetary policy, but ANZ remained of the view that the next OCR cut would come in March rather than December.

"On the face of it, it makes further OCR cuts much closer calls," he said.

ASB Chief Economist Nick Tuffley said the FSR did not deliver any surprises and had no implications for monetary policy.

"There had been some talk in the lead-up to the FSR that the RBNZ may introduce debt-to-income ratios. However, the practicalities around such restrictions mean that it would be some time before such a measure would be possible, assuming the RBNZ judges the net benefits are worthwhile," Tuffley said.

"For one, there is currently no consistent definition of income across the banks, which would need to be in effect first," he said.

Political reaction

Labour Finance spokesman Grant Robertson said the Government's failure to control the housing bubble was increasing risks to financial stability.

“Graeme Wheeler must be getting sick of sounding like a broken record. In each recent financial stability report he says risks from the dairy and housing sectors are increasing. But each time Bill English ignores him," Robertson said.

“Bill English has failed to fix the Auckland housing crisis. At every step of the way National has ignored warning signs about the housing bubble in Auckland, and now he seems to be paralysed by his fear it will burst under his watch," he said.

“The stark truth from today is Government inaction is fuelling risks to the economy. Graeme Wheeler is the messenger but he is not the solution. Bill English needs to take action now.”

Green Finance spokeswoman Julie-Anne Genter said the Reserve Bank's warnings about Auckland house price inflation showed the Government had not done enough to curb property speculation.

“National’s failure to take action on housing speculation has left our economy at risk, and is locking out a generation from being able to own their own home,” Genter said.

“National finally took a tiny step in the right direction with the two-year bright line test, but the reality is the proposed law before the House has too many loop-holes and is too limited in scope to make a substantial difference in curbing speculation," she said.

“National is continuing to back property speculators making short-term profits, rather than working to unwind the risk to our wider economy that this price bubble is causing.”

(Updated with Wheeler saying not considering loan to income limits at the moment and Spencer comments on bank capital review; also comments by economists and politicians)

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

We welcome your comments below. If you are not already registered, please register to comment.

Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.

101 Comments

Comment Filter

Highlight new comments in the last hr(s).

Price rises to 18% are so sustainable, it is untrue..

Borrowing to put a house over your head, fine.

Borrowing to put your head underwater, how stupid is that.

Soon there will be nothing in reserve.

How stupid is that.

and what is different now to 4~7 years ago? "you cant lose with property mate"

When the 20% LVR came in a couple of years ago the market went quiet for about three months, after which things went back to normal. Then last year there was a slow down in the housing market for a few months before the election due to fear of a Labour capital gains tax. Then the market kicked off again. Now we have a National capital gains tax at a much higher rate than Labour were proposing and soon a withholding tax as well.

Suspect that the latest 30% investor rule in Auckland and the new 2 year capital gains tax will also slow things until the New Year then pent up demand from migration and banks lowering rates to under 4% will see another surge in housing activity.

The banks will now have to drop their mortgage rates as demand for the stockpile of cash they are sitting on is going to take a hit.

Wheelers next move could be to no longer allow mortgage interest to be offset against rent paid on investment properties and/or require banks to only run principal and interest loans - i.e. No more on interest only lending.

what stockpile of cash?

The banks borrowed billions offshore recently at 1% and now there is less demand for the funds. The term deposits are also growing so they need people to borrow from them in order to make a margin.

The banks borrowed billions offshore recently at 1%

Proof please.

i thought they had to increase capital, the big four just went through that process i should know i particapated.
as well as selling assets
as well as the new regs saying they need to get to 16% by 2019
i would suspect credit is tighting a bit especially if house prices are to fall the banks will need to maintain their ratios

If they borrowed money at that, they why wouldn't they just lend it to the RBNZ and make a 175 odd bps margin??

I think there is some wishful thinking going on...

Because NZ deposit rates are so high (yes over 3% interest is very high internationally) gazillions of $ end up in NZ banks looking for a better return than...0.5% so yes the NZ banks are awash with cash, Which they need to loan to someone, that's why the interest rates dropped by a lot more than the 0.75% OCR drop. This tide of cash looking for higher returns in NZ has of course the effects of raising the NZ$

Big Blue

I asked the Governor about interest only loans and interest deductibility for tax purposes and he said the bank was not looking at those or recommending the Government do it.

cheers

Bernard

Hi Bernard
are they still looking at debt to income ratios or has that been scapped as well

Bernard, your question was too easily fobbed off by the Govenor (essentially just giving an elaborated "no" answer).

What you should have asked was... is the Reserve Bank considering restrictions on interest only residential mortgages or placing limits on the term length of residential lending to counteract the impact of low interest rates fuelling the Auckland housing bubble?

Then they couldn't have given the spuffle about interest only lending being needed for certain non residential purposes and we would have seen what genuine rationale they have for disregarding this option (or is it that they haven't actually considered it??)

It seems far too easy. No interest only residential investment lending. Maximum 20 year term mortgage on all Auckland residential investment property lending...

Easy credit gone. Boom busted...

There will not be many auctions sold under the hammer over the next 6 weeks!

All ready happening parts of Aucklands Northshore down 200k Sunnynook,Forrest Hill,Hillcrest.
Like watching 1987 at Auctions at the moment it is that bad.Most of the dirty money seems to have dryed up from 1 October and we are heading back to a real market.

Do you have an example indicating a drop of $200,000 on the north shore?

I know of one with reg valuation of 680k, top bid was 520k, neg after only upped that to 540k, vendor holding looking to rent out but not happy with rental return... So thats 140k down in a matter of weeks due to lack of china $ and/or change in sentiment.

GV of close to 600k, so prices may well be below sept 2014 levels in Birkdale at least, most if not all of the 15% gain of last 12 months erased with a stroke of a pen.

This is why volumes lead prices. People dont sell at the new drastically reduced market values initially, then slowly accept them. I believe this 15-20% price reduction has already happened (if it was a traded stock, auck property would have falling over 20% in a matter of days, reality is property is not very liquid, and data is very slow to come out). We will see data catch up to this eventually, although a likely upturn in the new year as chinese figure out what a IRD number is might smooth out the dip so we may see a much lesser fall than 15% show up in the data.

It is going to be much harder to get it right as a valuer or loans officer in Auckland. Easy as when the market rises and rises but not so easy if it hits reverse gear. My nephew looked at a nice apartment where the arrogant owner wanted $825k. My nephew verbally offered $750k which the owner reluctantly agreed to. Unfortunately for the vendor and fortunately for my nephew he walked away from the deal as he felt the market was on the turn. What is it worth now? $700k ? time will tell. Meanwhile my nephew is sitting on his hands as time is on his side for the first time in many years.

If I was buying in auck right now Id be throwing out multiple offers at 20% below e-value, eventually you'll find someone that has to sell fast who will take it.

I dont think this is the start of a much larger, longer running down turn however.

20% below? So back to january levels ha ha.

If you do find more Freehold Auckland property with land area over 400 square meters selling for more than 200,000 below GV ( max price $500,000 per property ), please flick an email to me at portfolioExpansionpart3@adriel-ai.com . I might be able to help the old owner reduce the amount of their loss by purchasing it.

11
up

...the gummit plan is working. Bring in heaps of migrants, put unsustainable pressure on Auck to force people out of Auckland onto the new motorways to the South. And so on as they repopulate NZ with newbies. Growth and prosperity to all home owners while it's happening...and then one day we will all wake up and wonder what happened to that little clean green low poplulated pacific paradise we grew up in.

I've already woken up and am wondering...

Wheeler says "A correction could be triggered by a range of demand-side factors, such as a deterioration in labour incomes, an unexpected rise in mortgage rates, a reversal of migration flows, or a sudden reduction in investor appetite."
However incomes likely to rise, mortgage rates are not going up any time in the next three years, migration to NZ will continue to grow and investors love it when the market turns - excellent buying opportunity. The Reserve Bank even say that the latest rules will only slow house price growth.
So all rhetoric from the reserve bank but time will tell.

Really??

Incomes are likely to fall as past migration puts downward pressure on wages and unemployment will rise as the economy grinds down.

At the same time migration will reverse due to both a public backlash over recent high migration of non English speaking unskilled workers and a decline in NZ's economic fortunes. The impact will be doubly so, as recent migrants also pack up after finding themselves unemployable.

Investors will head for the exits as prices fall, not the reverse. Many will be forced to sell as they can not meet their payments.

Interest rates will invariably rise at the wrong time, as the RBNZ is only concerned with inflation. As our economy tanks the dollar will fall, inflation will therefore rise, this will coincide with pent up inflation which has been suppressed by cheap migrant labour, as this reverses, all hell breaks loose and we have 4% inflation before you know it and Wheeler is punching the OCR to 5%...

Meanwhile Auckland house prices are down 30% and OBR is looking very real...

The above is all very possible...

the above sounds like a dream to me...

..dreams come true, but so do nightmares......

Sadly, you could well be spot on.

I side with bigblue here, Kate. Anyone who can currently meet their finance commitments will continue to do so even if the market price of their property "corrects". I don't buy the "rush to the exits" scenario mainly because the fundamental shortage of housing in Auckland remains intact. In fact it has got worse since the start of the Special Housing Accord.

Regardless of market pressures nominal incomes don't go down so I would be stunned if the median household income in Auckland went down. It would take a severe recession to do that. It could happen but it is not visible right now.

Migration is complex. As we all should know by now immigration is not particularly higher now than it was a couple of years ago. But emigration has tanked. Ergo higher net migration. Yes this will increase the demand for housing but that increase will be mitigated by the shift over the last 10-12 years from issuing PR visas in favour of shorter-term student and work visas. We won't curtail student visas because that is export income; we could cut some numbers in the other categories but that won't automatically collapse demand for Auckland housing.

Every price drop now will price in someone who is currently locked out of ownership. It's not like there is no real demand.

If you are in negative equity as the occasional FHB but still paying, yes OK the bank will probably continue, however that mortgage now is not an asset but a loss/liability. If we see a decent % of FHBs underwater aka 2008 in other countries then with leverage the bank has to source more capital to stay solvent. Is housing substantially short? not sure sure due to we dont know what the speculative component is. Consider that housing should be a multiplier of 3 to 1 but is 9 to 1 with all demand. Take out speculation and maybe the true / real demand is only 6 to 1 that says a huge loss is possible. If we look at rent increases then this is pretty low / moderate suggesting to me there is a substantial amount of speculation going on.

1. Agree we don't know what the banks attitude to underwater mortgages would be. However I am picking that the underlying demand for housing provides a floor. When we talk about FHB's we are probably talking the bottom quartile of housing which has recently shown stronger growth than other quartiles (duh!) and will likely have a stronger floor underneath it. So my first reaction is that recent FHB's are less likely to see big drops in their property value anyway.

2. Housing shortage is really easy to calculate from census data. Auckland region dwelling occupancy rate is 3.0 compared to the rest of NZ rate of 2.4. Using that data BNZ's Tony Alexander calculated the housing shortfall at 70,000 dwellings and I agree with the higher number. The current rate of creation of new dwellings is barely enough to house population growth so that shortfall remains.

Remember that there are two housing markets: the real one where people need a roof over their heads and the asset speculation one where "investors" are simply hunting capital gains. A speculator buying a property doesn't deprive the real market of a dwelling to house real people it only changes the name on the ownership deed. A collapse in the speculation market doesn't affect the real market where normal supply and demand rules still apply.

Thing is the RB has already put in place measures to stop this. The 80% LVRs were designed to stop a correction in the market putting a large proportion of new entrants to the market underwater.

In "2008 in other markets" we had new lending at over 100% so people were unlocking the door to their new house already underwater and then only going further so when the market dipped.

Also, in other markets people could walk away and hand back the keys, meaning people were more motivated to do this than try to ride it out.

Given the stratospheric rises in Auckland in the last few years and the fact that there's a mandated 80%LVR limit for most of the market, the market could tolerate a 20% dip overnight with very little panic/enfored selling. It could probably even tolerate a 40% dip before people started to get really nervous.

I got into the property market as a FHB in the last couple of years and a 30% dip wouldn't bother me, a 40% dip wouldn't have me losing any sleep. Perhaps I'd start kicking myself with a 60% dip, but I wouldn't be selling. The chances of that happening are absolute zero.

A 40% drop would not worry you or others out there!! You must be kidding. Let's look at an example. You bought at $500k. It has risen to say $750K. A 40% drop takes it to $450K. Those who bought this year would not want 40% as it comes off the top on some. I do not think it will get to 40% but if it did there would not be many who could cope thinking maybe it will drop further.

[Fragment removed. Keep the personal insults out of these conversations please. Ed.] Immigration is substantially higher than it was a year ago.

The increase in immigration is larger than the drop off in emmigration. Both were approx 6000/month a year ago, now immigration is 10,000 and emigration is 5,000.
See graph top of page 5.
http://www.stats.govt.nz/~/media/Statistics/Browse%20for%20stats/IntTrav...

Household incomes go down when the unemployment rate increases, even if the nominal income level of those individuals still employed stays the same.

Agree there is a fundamental shortage of housing pushing prices up in Auckland, but a change in migration patterns can change that very quickly.

...and the same old flawed thinking - that lack of supply = increase of maintenance of prices. Wrong..it's all about ability to pay. We could have a significant reset based on this ability.

Thing is, Donald, credit makes the world go round. When there isn't any - every aspect of the economy is affected. It was the credit crisis in the US that brought their housing market - first to a brief standstill - then to a tsunami of defaults. The defaults were triggered by all the people who used to be able to meet their financial commitments prior to the job market being severely affected by that credit squeeze.

I don't see anything on the horizon that suggests a GFCII is off the cards - quite the opposite.

Don't get me wrong. Of course GFCII is coming sometime. Just not now. This is just a reportage issue. RBNZ think the risk of and from a market correction in AKL (usually defined as a 25% drop in prices) has increased. I don't think their actual wording suggests they think it will happen anytime soon either. And they correctly identify external events such as a recession or a sharp rise in interest rates as the likely trigger.

The MSM just latch on to the lazy headline of "RBNZ warning of severe correction". Not quite the same thing.

You're missing one key point. During recessionary times those experiencing credit stress will sell prior to forced sale. And worst case scenario do go to forced sale. Those buying at mortgagee sales have been FHB, and investors. These two groups have been adversely affected by wheelers policies. What will be interesting is to see mortgagee sale data over the next few months.

We are not in a recession. So, suddenly people are not willing to pay quite as much as they were for properties in Auckland? Boo hoo. If you could afford the mortgage yesterday you can today - unless you lost your job. Which you didn't. The banks might start doing some calculations about collateral but as long as payments keep getting made they may be willing to shoulder some risk - we simply don't know.

So one more time: I'm with the RBNZ. If we go into recession Auckland property will be in deep shit. But we aren't there and the warning signs aren't there yet either. I'm with whoever said, if things continue as they are, expect AKL house prices to be similar in 2018 to what they were a few months ago.

Point is Donald this is different. There is no question asset prices are significantly inflated. Many people ( including myself) have watched the market with incredulity. As soon as prices start to wane, and your sitting on the sideline why wouldn't you just sit back and watch the market implode. As they say sell in boom, buy in gloom.

The RBNZ has removed a core group of buyers from the equation. Sure they can fluff around with LVRs after the fact, but once the horse has bolted it may be well and truly too late.

I'm interested how long you would hold a negative free cashflow investment that wasn't making any capital gains? Until 2018 and beyond?

Skudiv and kane02, its going to be different for everyone. Owner/occupiers who can service their mortgages have no reason to go to a fire sale. "Investors" are more complex. Long termers (super savers) could well be comfortable about long term trends. The flippers will be the ones most likely to be under pressure but how many of them are there? And if you do want to quit would you hurry or be patient? If your holding costs are relatively low you may choose to hold until you get your price.

As i say elsewhere the underlying demand is high and will remain high for the next thirty years thanks to the explicit policies of Auckland Council. Chances are good that a cautious approach to quitting a property will be better than a fire sale.

Question is how much income especially self employed income is tied to the residential property market. How many add on industries have been established, that could massively contract, eg staging of homes. Property valuers, let alone real estate agents. Back in the GFC many agents incomes fell close to zero and most were forced to liquidate investment properties at what they could get. When your income falls and you are sitting on negative cashflow hard to hold. Also note many residential property gurus including a very prominent mainstream one, recommended buy ,fix up, revalue, draw down loan to return deposit + also bank lump sum to cover negative cashflow. Then repeat. Once lump sum for negative cashflow gone, revalue at new higher valuations and withdraw further funds to cover negative cashflow. Look forward to see how this model fares in a bear or even flat market. But there won't be any forced selling, as wishful thinkers tell themselves. The fact is the number of Auckland properties listed on trade me is up 43% in the last 2mths. Relative to population the Wgtn for sale and rental property market is tighter than Auckland, and the kicker is many properties in Wgtn sell for below replacement cost in areas with decile 8 or above schooling (not the 500K plus hovels in decile 1 zones in Sth Auckalnd), have tenants who actual earn an income and the median wage in Wgtn is higher than Auckland.

Anyone who mentions cashflow gets a thumb up from me, I doubt there are many properties brought in the last few years that have a positive free cashflow, which is fine when you are collecting the capital gains, but when the price of the asset falls, and it's costing you $350 per week..............

Chris J... Can we look on this as your prediction..???? 30% down and the OBR
(do u remember bagging Bernard for his 30% call back in 2009 )

I'd say the odds of this happening over the next 2-3 yrs. is less than ...5%... if not ... 0%..

It would take a credit Boom/bust cycle... or some kind of Black Swan event.... ( eg.. nuclear explosion in middle east )
(I remember the early 1990s' smash in NZ.... Mother of all budgets.. ( austerity... both fiscal and monetary), 12% unemployment and the shock of the Guld War..etc )

What caused the event that saw 30% losses in the USA?

NB arguably we have a credit boom with houses x3 their fair value to earnings.

I am not so sure on the not going to happen 2 to 3 year time span but then I was totally wrong in 2008/9 thinking we'd crash then. So the systems ability to stagger on yet looked well buggered is quite astounding IMHO.

Steven... u are right about that.... It is amazing how the system can stagger on...
I've followed your posts since 2008/9... and if I had to find fault with your views.... I'd have said that u underestimate the Economic power of Govts. and Central Banks...
I'm not being a smart arse... just offering my point of view..
Things changed for me when I realized just what a force they are.....

I reckon things can "stagger on" for another 8-10 yrs......

BUt.... thats just a best guess...

The fact that the IRD is now involved is clearly the big difference this time. Last week I signed an A and I to sell a property and as a director of a company I had to advise whether the property being sold was my residence or not. No problems as the transaction attracts gst and tax so nothing to hide.

I think you are right Gordon - it is the IRD, bank account, disclosure requirements and the 2 year holding period, otherwise CGT is paid, that will be the big difference this time around. This is a whole different animal we are dealing with now compared with the 20% LVR and the recent 30% Auckland investor LVR. I think perhaps real estate agents, mortgage brokers, valuers, etc have underestimated the impact of these latest rules. There will probably be a few Chinese real estate salespeople wondering what the future holds! For serious long term investors who have ample equity and who can lock in a 4.49% rate for several years they probably will ride it out. The GFC was a pretty bad event but the predicted house price falls never eventuated so will be interesting to see how the new rules combined with a looming recession will hit house prices.

Just a reminder that the US is not a homogeneous entity. The region categorised as US South never had a price crash. Despite high migration and high levels of construction and the same incredibly low interest rates, house prices never ballooned so they never crashed. Food for thought there, eh?

That wasn't a prediction, it is the hypothetical summary of one possible sequence of events.

I have previously made predictions that Auckland prices in about 3 years time will be at or below mid/late 2015 levels. I think that is a fair prediction.

Bang on Chris J!

income and rise is an oxymoron in NZ. actually most of what you said is quite nonsense

Nah mate, contractors in my industry are already being squeezed - I've had to drop my rate 10% just to stay employed, restructures and redundancies are in full effect. In the meantime I've been offered a full-time position in Melbourne paying 40% more than an Auckland salary...

Might be time to get off this sinking ship!

Same with a lot of my peers, frankly just go. Here JK will be importing cheap labour to keep your wages low so why put up with that?

Anyone notice the significant increase in listings in last weekend Heralds property section? 3-4 times the thickness of previous weeks…

Chinese money laundering slowed/stopped (check), debt ponzi investors in Akl stopped in tracks by equity threshold (check) badluck for Hamilton and Tauranga, lots of warning signals on global economy (check), talk of income to debt rations coming in that should never have been let go by the banks in the first place (check), even bigdaddy suggesting that greed has got the better of some (check).

If you are securely employed and can service you debt - walk on. If not, or if you have crazy leverage and you have been stacking debt like a banking ponzi posterchild, the next year or so could be very very interesting for you. Leverage is great as values increase, but it’s a razor sharp two edged sword if values decline. Equity decline from “not much” to “drowning” will not be your banks fault.

“Tightens seatbelt, and reaches back to grab popcorn” while not taking eyes of the well signalled approaching economic event.

Mainly due to agents running full and half page adverts instead of smaller ones - i.e. Graham Wall had about 10 pages - one property per page. He was in the news lately for selling the $24m Herne Bay home and the $39m Paratai drive home. Herald Homes is usually around 120 pages during the summer months.

Just keep it up Bigblue. You know more than everyone including the highly educated economists at the Reserve Bank. On the strength of your very positive advice I will buy some Auckland investment properties today.

Bigblue sounds like a typical real estate agent. Keep talking it up and deny, deny, deny.

Sounds like bigblue has knowledge of Real estate ups and down..

Gordon... Are you implying that you have faith in the views of academic economists...???.. good luck with that..

If i had to choose I would take the advice of someone with street smarts over a highly educated economist ...everyday of the week...

Also... seems like your'e the one who's an expert on fear and the mkts... and you are expecting a big fear based collapse in prices.
Are u a professional trader..??

My own view is that good quality real estate in Auckland will not fall very much in price.... ( even thou the price gains of the last yr seem kinda extreme to me... yet that has happened with only moderate credit growth)

What do you mean by " not fall very much in price" Roelof? I have no idea of how much it is going to fall. It depends on how many owners cannot cope with the pressure of seeing their paper profits fall backwards for a start. Yes I am a trader at heart. I am happy with 10% or so and I am happy to leave some in for the next guy as that is better than losing the opportunity to sell and take a profit. Overseas buyers have the double whammy of the NZ dollar depreciating and prices dropping so it will be interesting to see if they hold on and wait for move back up.

by "not fall very much in price" ... I'm unsure.... maybe 5%.... maybe 8%...maybe 3%..
I've found residential Real Estate prices to be "sticky" on the downside... very different to the fear based collapses we see in Commodity mkts and the sharemkt..

I think the reason is that people simply won't sell at a loss.... unless they are really forced too..
Most will batten down the hatches and hang in there........
This gets reinforced as they see that it has worked in the past.....

Good the hear u are a trader at heart.. :) hope its going well..

I've been a keen student of the mkts for 30 yrs ...and a trader off and on for over 20 yrs. ... Have A few war stories.... ( I know what its like to be frozen by fear and then capitulate at what is an extreme low..!!!! ) ekk...

I'm thinking that overseas buyers, to date , are strong hands.... Real Estate is a store of wealth for them , rather than a way to make a quick $dollar.... they are long term holders...

I am not so optimistic about the overseas buyers Roelof. With the dollar depreciating and likely to fall further from here I believe many will sell even if it means some form of loss. When I was in practice you sometimes heard about people being forced by the bank to sell but it was not an official mortgagee sale. The bank gave them some time to get it sold in an orderly fashion. This occurs more than we know. What about all the multiple owners in Auckland who are sitting on large paper profits. Are they all going to just sit there passively and watch their paper profits erode. Why wouldn't you have some fun and sell or two with the prospect of buying them back cheaper in the future.

That property was bought as a complete do up for $550.000 2 years ago. Now it is on the market.
http://www.trademe.co.nz/property/residential-property-for-sale/auction-...

I remember an article in the NZ Herald about it and the lady wanted to make it 'her home'. now selling ..... change of circumstances for sure!

What is it listed for? (can't access Trademe at the moment)

the same property.

Price? starting price, auction, free to nice immigrant, double to politician?

Listed as PBN but if you search and order by lowest price - it comes in somewhere between price marketed properties at $699K - $750K. So, the owner wants something over $700K.

that's an ok profit if you take out the RE fees and costs of doing up, 80-100k that's if you can get away with not paying tax

In 2013 it had a CV of $480K (according to the Herald article). According to the TM ad it now has a CV of $660K. Auckland City was revalued in 2014 - and if I recall correctly, the average increase in valuation was around 30% (or higher)?

Effectively, the owner might well have been better doing no reno at all.

That said though, it has to sell - and if the expectation is over $700K I think they could struggle.

I'd say yes, they likely will be sought by IRD on sale, as the nice RE agent has stated:

"our seller is keen to move on to the next project .."

Pretty strong indication that it was purchased with the intention to on sell once the "project" was completed.

These types of "difficult" properties during effervescent times acquire unjustified (call it scarcity) premiums, but when the enthusiasm dissipates, that premium also disappears. Instantly. It is a difficult property that will be hard to sell in "normal" times - have to be quick on your toes with these properties - otherwise land value

If prices do start to fall there will be cuts in interest rates and a reversal of some of the measures put in place such as LVR. RBNZ and government while not wanting to see prices racing ahead do not want them to crash. National will be relying on a lot of votes in Auckland come the next election. What have they given voters apart from increased property values?

Robert there is a big difference between "start to fall" and "crash". Which one do you think will happen? They are starting to fall and hopefully will do it in an orderly fashion rather than crash. If they drop 20% that is hardly a crash as many people are sitting on large paper profits. If you bought at $500k and it is worth $750k now that is a 50% gain. A drop of 20% only brings it back to $600k. You still have a healthy paper profit.
A lot is going to depend on how brave people are as they see their paper profits fall backwards. Some will now be thinking seriously about selling to lock in real profits. Seeing that money in the bank earning interest makes some people feel better than reading the paper where it says the market is retreating.

Why will there be "cuts to interest rates" if prices fall?

The RBNZ's mandate is to control inflation - they won't change the OCR because of house prices.

Also, National has nothing to do with what that RBNZ does. It's entirely independent.
The RBNZ doesn't do anything to win votes.
I don't know how many times this has to be explained to people to get through.

National can't back-track on the only thing they actually have done either - the half-arsed policy of requiring bank accounts and IRD numbers - then they will be accused of opening the door up to money laundering. I'm a National voter too so have no axe to grind when making these statements.

A fall of 20% will cause a lot of stress to recent buyers. for the National Party with so few coalition options, it could be enough lost votes to change the outcome of the next election.

Recent buyers have not shown a lot of brains. They thought with their hearts rather than their heads. Whatever is going to happen to Auckland prices now is in the lap of the gods. National cannot stop it and either can Len. Overseas buyers do not want anything to do with the IRD and that is happening in Australia also. Even the lowering of interest rates will not stop the reversal of sentiment. People do not want to get caught up in the IRD system as once you are in there you are in there until you die. And once you are in you could be audited at any time by the IRD looking at your past transactions.

That is sick, not healthy. You were sold a pup, has fleas and is pregnant by a rabid dog of a Reserve Bank, born out of wedlock with a phantom overseas customer..

The Vet is coming...soon, very soon.

BTW - that house is a duplex... hence why it's going so cheap.

Savy will lock in 5 year rates sub 5% and ride any blip out, thats IF there is a correction (yawn heard this old record before!). Simple factors, there are 1000's coming in each week, no supply... I'm picking healthy 10% gains YoY for AKL property no matter how many of you doom n gloom hopefuls harp on about auction stats. Stress less.

Any kind of inputs into that forecast or is that based on "educated guesses"?

The higher Orcs house prices go, the worse the cashflow of the speculator becomes. Even if rents increase by an equal percentage, the cashflow just gets worse and worse, it's relentless maths. I'm sure you'll figure it out eventually :)

rents are not increasing by much, they are governed by ability to pay, so wage growth that is why yields have fallen to around 3%.
about the same as a term deposit the only upside is the ability to claim costs to offset tax and capital gain.

Nah, because you are imagining gross yields are net, you need to actually remove the interest, rates, insurance, agents fees, R&M just for starters, you may want to chuck in a few weeks vacancy just to be safe.

House prices have gone way into negative free cashflow territory as rentals, which is why they are now in a bind, if they don't keep rising there is no support to keep the price stable. Heaps of people are going to lose money.

Could be a long "blip"....years maybe even a decade or 2. If it is not so bad, OK but will we really be so lucky a second time and not see losses like the USA? Bear in mind 7 years later properties are now even more leveraged than before. Will the banks tolerate negative equity in investors for that long? suspect not.

As for the thousands coming in each week, the admittedly few I know / work with dont have the capital to buy so are renting. So bearing this in mind if the 1000s coming in were having such an impact I'd expect to see rents climbing just as enthusiastically (if not more so), yet they are not. The difference then I suspect has to be the increase in debt leverage by speculators.

Lets go back to rents, many ppl I suspect like myself have had virtually no pay increase since 2008 to speak of. Yet in that time power, rates, insurance, fuel etc have all gone up something like 4% per annum. These you cannot avoid paying they are simply baseline. Food, whiteware, rent are tradables, and that's showing 2% deflation with a nasty downward trend line. Also un-employment is creeping up, now 6%, I'd suggest that is as per usual more prevalent in the unskilled workforce who probably are more renters than any other group.

Also when you say yet another 10% per annum rate are you aware the multiple is already around 9 to 1? just where in the world has that been exceeded y on y?

Going to be interesting, as the curse goes.

Exactly there is going to be no dramatic change until we completely turn off the immigration tap. There is just over 1000 people a week coming in, do the math, that's hundreds of additional homes each WEEK that are required. At this rate people are going to not only be living in garages they are going to be living in tents.

Tents and garages?

Conjecture can and will only continue while information about housing is controlled and massaged and obfuscated by the lever-pullers

Where are all these inbound travellers going, where are they staying, where are they being housed? No-one knows, yet Auckland seems to have have this amazing capacity to keep absorbing more and more

Meanwhile the Government is watching its rent assistance bill grow above $2 billion per nunnum but acting as a stabiliser by controlling the individual rates - this could get out of control

Tents and garages - maybe

Apparently living in garages is already occuring and has for some years.

they are called sleepouts now better to market them that way when selling

At the last census about 3,000 people were recorded as living in informal housing in Auckland (tents, boxes, containers) and that's probably not counting the homeless. Auckland over-crowding is also worse than the rest of the country.

A couple of key points about immigration:

- 50% of immigrants end up in AKL (so that's 500/wk)
- natural increase adds another 300/wk to AKL
- AKL has the highest rate of internal migration outwards of any location in NZ (think the North-South Drift with the Sth Is being a major beneficiary)
- the increase in immigration in the last two years is overwhelmingly in student and work visa categories; these people require different housing from families (i.e. hostels, boarding, flatting)
- the number of families arriving is pretty much the same as a few years ago
- the number of new houses required to house immigrant families is already built into Auckland Council's Housing Action Plan 2012

The real problem is that those houses aren't getting built because Auckland Council's growth containment policies drive the underlying price of land too high for normal people to afford.

Mr Wheeler is disingenuous referring to a "correction" occurring. For over 10 years everyone has being calling a "correction" in Auckland property prices but none eventuated. Now the RBNZ and NZ Government has changed the rules with their LVR restrictions, reporting requirements and bright line test thereby setting up a fall in Auckland house prices. This is not a correction.

An analogy would be to watching a person juggling lots of balls and saying "you will drop one, there are too many" (i.e. there will be a correction)... But the juggler keeps on going so the watcher chops one of the juggler's hand off and the balls drop. It would be a bit rich for the watcher to say "I told you that a "correction" would occur"".

A "correction" occurs within the same parameters in which the market existed. It is not a "correction" when the market has changed due to new rules imposed by those with the intention of changing the market. This is a new market, not a correction of the old.

what about 2008/2009 a lot of people in Auckland lost a lot on houses, it took some until 2011/2012 to break even

No the better analogy is the jugglar keeps adding more eggs as he gets more lose change at busking the more he can juggle, so the council stops that to avoid a mess and ppl stop passing lose change as its no longer impressive.

Not sure why they are looking at Tauranga-- prices are barely above 2007 levels. In fact, if you bought a house in 2007, you have lost around 20% of your spending power in real terms.

Indeed outside of a few good suburbs in Auckland the rest of NZ's housing gains looks a bit whimpy.

I can't believe the hype and long bow that has been drawn due to a single months data. Last week it's all about a 25% year on year increase, now there is mention of a 3% drop and the sky is falling? Let me put it another way, back in 2009 someone with influence suggested a 30% slide in house prices, that advice could have cost many 100s of thousands of capital increase on their portfolio. It's only my opinion, I think this time round will be the same wolves crying.

You are probably right Brendan. According to the Reserve Bank last week their were almost more mortgage approvals granted than any week since May 2015. http://www.rbnz.govt.nz/statistics/tables/c16/hc16.xls
So how does that very high level of approvals fit into the home buying picture, or are these approvals all for people putting a new car "on the house" or for renovations or businesses that use the residential home for security - drawing down funds for that business?

The RBNZ said it was too early to tell if its tougher limits on Loan to Value Ratios for Auckland landlords was reducing those risks???
The RBNZ is still way behind the curve and it's belated responses will likely only accentuate any risky downturn. The RBNZ has increased risk, not reduced it.

I have a few bulbs for you, you can grow them in any situation, high rise, low rise, leaky building, rental, apartment, particularly in top floor ones, Penthouse ones, those with the pretty picture windows, with window boxes, but no garden. worth a bomb to those who view things differently.

You can move theese bulbs about, from Studio Apartment to those even higher up the food chain, until you can stand on the top rung of the ladder and show all the world you have grown so magnificently along with these bulbs.

People will be flocking to see you, what you have achieved in such a short time with this inflation proofed bulb.

Some even can be contained in garages, if you have such a thing.

If you cannot afford our bulbs, do not worry, we will lend you the money up front and only a small deposit will leverage you into a Green house, one day.

We are keeping the amount of bulbs available limited, so as to not flood the market and keep things buoyant, while the markets develop the way we hope.

We have Government backing in all this and Council approval can be had in time, there are delays, but worth the wait.

We have even arranged a long term float In Awkland Harbour to show your wares to the advantage of all Awklanders. People have different perspectives, especially from overseas in this growing market.

Some bulbs have been imported at great expense from overseas, though it has been a rather limited season. Hence the price to market these items.

A light bulb has been developed for those who cannot manage to raise a heavier deposit.

In fact we have dropped both our rates to almost match the rest of the world.

This will change daily as other markets come online, of course.

You can see them at the Home Show.

Entry is inflating, but 250K should see you home and hosed.

Anyone noticed how many new cars are parked on Auckland's motorway? People aren't buying those, houses are.

If houses fall the economy will fall with them.

Yes, motorway pressure does happen at peak times. But not as often as non-Aucklanders assume. Check these traffic cams ... you might find it is a lot less than you think.

are you sure, traffic around some parts of auckland is terrible, it can take a hour to go 10 ks the amount of road works is huge.
i work with a LOT of people that are telling me there journey now take twice as long as 5 years ago.
our infrastructure has not kept pace with the increase in population.
the people in charge have no foresight they are only worried about the next election
classic only widening the southern motorway to three lines yet letting huge subdivisons being built out south.
it should be four wide all the way to the top of the bombays to match the growth. but will they do that no, instead once it gets to three then it will be full and they will go uhoh we need to go to four