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David Hargreaves analyses the crucial roles in the house market that the investors, the first home buyers and Kiwisaver have been playing

David Hargreaves analyses the crucial roles in the house market that the investors, the first home buyers and Kiwisaver have been playing

The Spring is Sprung, The Grass is Riz...I wonder where the housing investors is?

As we prepare for the onslaught of August housing sales data, and view tentative signs of a Spring upswing, the key thing to watch for in coming months, in my view, will be whether there's a Spring upswing in investor interest.

I reach this view after trawling through yards of historic information and figures and attempting to make sense of them.

To this end, I've been having some fun with both the RBNZ's monthly mortgage data and with the IRD's Kiwisaver withdrawal figures.

I do this, Dear Reader, so that you don't have to. All I ask is that you be kind in the comments stream.

The RBNZ's monthly series breaking down lending by borrower type has been an excellent addition to the central bank's data sets since first being published in August 2014.

And while here at we've been keenly following the developments through that data every month, some times it pays to sit back and have a bit of a broader view at the grand scheme.

The RBNZ's figures give us a good picture of what's happened in mortgage borrowing trends and ergo the broader housing market post-introduction of the central bank's loan to value ratio (LVR) restrictions in 2013.

It is unfortunate we don't have a clear picture of how the market looked before that.

What we know from what the RBNZ has said is that the initial impost of the LVR limits did have a disproportional impact on the first home buyers. Their figures dropped away. At the same time the figures for investors rose.

It is clear enough to work out why that dynamic would apply.

With everybody facing exactly the same LVR restrictions, the investors were in a better position to raise deposits and therefore to outbid the would-be FHBs.

The vital moment came, I still think almost by accident and born of desperation, when the RBNZ in 2016, smashed the investors across the bridge of the nose with 40% deposit limits.

Suddenly the supposed level playing field, which as explained above wasn't really level for the FHBs, was tilted hugely in favour of these would be first time home owners.

And back they came.

The fascinating thing to observe has been the extent to which this revival of the FHBs has been funded by Kiwisaver.

The below table summarises withdrawals made from Kiwisaver by members in the past four years to June.

It's all on the house for these Kiwisaver members
June year withdrawals to buy a first home (source IRD)
  Withdrawals (full number) Amounts ($mln)
2016 25,569 494.989
2017 32,682 601.479
2018 34,343 768.521
2019 40,606 986.882

I've only highlighted the past four years there because the accompanying information from the RBNZ's mortgage figures, that I'm shortly referring to, only covers four full June years.

It's worth noting though that on the Kiwisaver withdrawals, the year to June 2015 saw $257.834 million withdrawn to fund a first home. So, in very rough terms the withdrawals have increased close to fourfold across a five year period.

I've previously opined on the usage of Kiwisaver money to buy first homes and it's fair to say there's a reasonable level of debate about the pros and cons. My colleague Jenée Tibshraeny had a differing view.

I won't climb back into detailed discussion of this subject, since that's not the main point of this article, but perhaps just as one shot at it, what if Kiwisaver was re-organised so that there was a specific 'homestart' or similar category to put your funds into? That way maybe people could direct a portion of their Kiwisaver money to a house and the rest to their retirement fund.

The other point about that differentiation would be that, on the assumption that saving for a house is a fairly short (say five-year) timeframe then the risk profile of savings for a house is very different to that for the longer term, which might well be 40-50 years.

So separating money that you want to go towards a house from money you want to go directly towards retirement (accepting before the commenters even start shouting, that owning houses can help towards retirement) would make sense.

But anyway, things are as they are.

And unquestionably, the rise and revival of the FHBs since the investors got slapped back in 2016 has come with great dollops of assistance from Kiwisaver funds.

If we look at the Kiwisaver withdrawal figures for the 12 months to June this year we can see that nearly a billion dollars was taken out.

On a very basic level, assuming the 'normal' 20% deposit for a house, that billion dollars would be able to access $4 billion of mortgages. In reality, with a number of mortgages likely to be high LVR ones, the amount that could be borrowed with that money would be rather higher than that.

So, at this point I refer back to the RBNZ's lending by borrower type figures. And here's a table that summarises the past four June years.

Who borrowed? A breakdown of house market lending
Nationwide NZ mortgage figures for the past four years ending June (source RBNZ)
  First home buyers ($bln) Investors ($bln) Owner/occupier ($bln) All borrowers ($bln)
2016 8.235 23.813 40.284 73.168*
2017 8.709 16.679 39.283 65.395*
2018 9.352 13.734 37.200 60.953*
2019 10.983 12.511 40.592 64.805*

*Figures don't exactly add up as the All borrowers total includes small amounts of business purposes loans 

If we look at the FHBs figure on the left there for up to June 2019, it's a touch under $11 billion. 

What that tells me is the nearly $1 billion taken from Kiwisaver accounts has been instrumental in such an amount being able to be borrowed. 

You can see too, that as the amounts taken from Kiwisaver have increased, so, have the amounts borrowed for mortgages.

Everybody knows that the housing markets, particularly in Auckland, have flattened since 2016.

But, interestingly we can see from these figures that FHB borrowing has increased by a third since 2016. Which is a lot.

Intriguingly also, the amount borrowed by owner-occupiers in the year to June 2019 is slightly HIGHER also than the same group - much the largest group - borrowed four years ago.

The retreat of the investor

And yet the overall borrowing figures are down over $8 billion compared with four years ago.

The difference? Ah, look at the column in the middle there.

Yes, Mr and Mrs Investor have hibernated.

Their amount borrowed has NEARLY HALVED in the past four years. 

They have really made all the difference.

The RBNZ smashed them in the face with the 40% deposit requirements, the FHBs were given some encouragement and have gone out and raided their Kiwisaver funds in droves, and the owner-occupiers have kind of just trucked on.

The flattening of the housing market has been all about the investor, is what these figures would tell you.

So, that being the case, are their any reasons to believe things might turn around now?

Was it normal?

Well, the first thing to consider is whether the amount of investor activity pre-2016 was 'normal'. 

With the benefit of hindsight, there's no doubt the first iteration of the LVRs, with everybody treated the same, was a mistake. It gave investors a crucial advantage over the FHBs and they took it. Investors were at one point accounting for well over a third of new mortgage borrowing.

And I call them investors. Well, clearly at least some of these were 'specuvestors', people attracted by the prospect of capital gains rather than the lure of handling unruly tenants who like having parties at 1am on Tuesday mornings.

It could be that some of those 'investors' of a few years ago have had enough now and might want to get out. 

So, we can't make assumptions.

However, and it's a huge however, it might not have escaped everybody's' attention that yields on 'safe' deposits - such as with the bank - are disappearing down a big hole in the ground.

At what point do mom and dad look at these disappearing returns and decide there might be something better to do with the nest egg?

Handling risk

On one level, Kiwis are very risk averse - even though many, in my view don't have a good handle on what 'risk' really is.

But you would have to say that housing is never regarded as a huge 'risk'. It's something Kiwis are more than comfortable with. It's in the DNA.

So, I would have to think that some people will be twitching now and thinking, well, the house market hasn't collapsed, would an investment property be better for us than the rubbish returns our bank's offering?

Therefore Spring looms very large as quite important for, not just the housing market this year, but actually our economy.

As can be seen from the tables in this article, a resurgence of investor interest could make all the difference.

And if the house market has a good Spring, then the mood of the people would be more buoyant and people may start spending more, and the economy may flip up.

The All Blacks winning the Rugby World Cup wouldn't harm matters either. A winning rugby team and a winning housing market. The whistling in gardens at the weekend would drown out the birds.

Swap the rubbish returns for a house

Investors are still faced with finding 30% deposits (gradually reduced by the RBNZ from that original 40%). 

There's got to be a good chance that the RBNZ will loosen the LVR reins further when it next makes a decision on the LVR limits in November.

If the investors have that 30% deposit rule dropped, then this could be all the encouragement some of them need. 

Swap the rubbish returns on money in the bank for a house that's paid for with money from the same bank borrowed at incredibly low interest rates.

The Spring housing market will be very interesting indeed this year. 

It is going to be all about the investors.

Are they in, or are they out?

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?

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" when the RBNZ in 2016, smashed the investors across the bridge of the nose with 40% deposit limits."


"the RBNZ smashed them in the face"

All I ask, Mr David Hargreaves, is that you be kind when writing your columns.

TTP (-;

Good artical David.
Like you adding the RWC factor in as well. I'm thinking investors are waiting on some news from the Gov't. Hard to judge what this Gov't will do if anything, the continued silence is not creating confidence. Short term buy, renovate and flick investors will be looking at present but there will be tough competition for those houses, still there but you have to work hard for them.

I'd say the renovate-and-flick set will also be nervous about market changes during the renovation period. I've seen a couple around me that have been renovated and re-sold over the last year or so, and those have definitely made a loss.

The trick to these for investors is the fast reno. One month back on the market.
Forsee the spring buyers and lower interest rates. For this you need builders on call or be a builder yourself.
Tough market if you have to pay someone to do the work and then the 30% tax.

That's probably right. But if it's turned around so fast, does it really count as a sale in terms of overall market conditions? I mean, it's back on the market almost immediately.

I would think so; because at the intital sale presumably the reno buyers outbid someone. ie increased total demand.

If there were no reno buyers at all, that means lower total demand, so lower total prices.

I’ve heard of flippers still operating in my area (from a real estate agent and an architect). Apparently they are doing 6-8 at a time and aiming to make about $20-25k per house. Pretty thin margins but it’s still happening. I know they were able to get an old weatherboard house for RV land price recently.

Yeah I can spot them a mile off on the net. Staged photos, same paint colours, fence is a shade of black but see through up close. Take a look at the sales history if in doubt. Run a mile when you see these reno's! Cheap gear, bad finishing, slap it up get the money paint over the cobwebs attitude. They keep pushing the builders to proform faster and to cut costs resulting in decreased quality. The paint is hiding a lot... Take note of these houses and watch the tradesmen van's turn up a year later.
You sound like you are in Wellington. A poperty tutors group, $30k plus buy in for a year, 20 plus new people a year. Only 10% of those will do any good. Evil environment inside those groups, shaft the person next to you competition. If you complain you are shown the door and dont get a cent back.
Funny watching the tutor run from one property to the next, if you dont keep up you are left behind. Same spiel at the next house, do this, do that $30k cost to compleat, sell for this make $30k. BUT the real story is the reno costs $50k and they sell and make $5k. Mention that and you are shown the door.
The real money is in starting a property tutoring business.... If you can leave your morals at the door that is...

It'll show more houses sold and for a higher price.
This doesn't really matter for the investor doing the project. They made $20k and bailed out.
I'm a builder and I worked for an investor for a few years, basically that was part of my over all plan to learn the market from the inside. What I learnt is they make very little $0 to $20k on a property, high stress and risk. Builders / people who do the bulk of the work themselves get better returns.

Thanks for this work David. I would be interested in discussing further, if you wish to debate on here.
Yes, firstly, the mortgage lending is $8b lower than 4 years ago.
Auckland sales in the last 3m are 40% lower than in same 3m of 2015, which was height of the mania.
Unfortunately, LVR club was used just as foreign investor funds started to decline.
RBNZ now desperate to get borrowing (debt) going but are running out of road re cuts to interest rates.
Should we REALLY be looking to young people to pend what is intended as retirement funds, on buying a house at ridiculous prices, which are heading for a minimum 10% correction (assuming China does not have a credit event??) Have to ask serious questions as to WHY RBNZ is cutting so aggressively unless Dorian economically is coming? Also, have to look at overall sales in NZ which were, in last 3m, exactly what they were in 2017. In Auckland they are in last 3m, 12% lower than in 2018. Overseas buyer ban and China's recent decision to ban RE Corporate purchases abroad to protect their reserves in order to (perhaps) have some ammo to defend currency, all suggest that demand will not return in current economic climate. Cuts are flogging a dead horse. The market got way ahead of itself and has not corrected in price terms yet, by any stretch. Hoping that NZ is going to copy Australia's v recent dead cat bounce, is pretty linear thinking.

RE NZ Auckland listing are 20% higher than in 2017 at this time.
Sales are flat.
Sales over $1.4m are 33-40% lower than last year.
Absent Chinese monies that inflated Auckland in 2012-16, I am afraid that prices have to go down to get buyers back that were there in 2012 (last time prices were remotely affordable in terms of income multiples)
In 2012 sales in Auckland were 34% higher than now.
Also, yield is pathetic in Auckland now and no capital gains in prospect.
SO, I see little prospect of any increase in sales in Auckland and rest of NZ market will gradually fizzle out, in millpond fashion also. Economic growth has to rest on improvements in productivity and innovation, not debt for house-buyers. The 2001-2019 model I am afraid, is due for a change.

A multiyear flat/shallow declining housing market is actually a great result. Represents a controlled deflation of the bubble, as incomes rise organically to bring ratios to a more sensible level.

I don't believe house buyer/seller sentiment will allow a lengthy shallow decline. Prices would have to stay flat for at least decade with larger wage inflation that we have currently to undo the last 10 years. There would be a very significant number of home owners that would cash out and take what the house is currently worth if they conclude they wont be making any capital gains for the next 5 years and eventually there will be a panic as the decline accelerates.

Currently the reserve bank is able to create small surges of house buying activity (such as a .5 ocr drop) that banks and real estate agents can use to pump up the market keeping sentiment high but this can't last more than a few years.

Yes, diminishing returns for interest rate drops, until what? An inevitable drop in values and a lot of people left with large mortgages and negative equity. This is what the RBNZ must be concerned about.

Great article DH thanks, your figures clearly show the importance/decline of the investors on the market.
The LVR decision in November, both for FHB and investors will be pivotal but its timing won't be felt until February 2020 because of its proximity to the X-mas break.
In my opinion (I'm an investor) I think investors will return to a small degree but not en masse (max to 2017 levels by 2020) because:
1) it's very hard to find a house with a positive yield if you're not astute enough to create value and remember you cannot claim these cashflow losses against other income anymore
2) the prospect of capital gain is still dim, so axing the CGT doesn't really matter.
In summary I see a small uptick in both house sales and values (I believe the market has bottomed out) for the rest of 2019 and beginning of 2020

Yeah, the people who watch this stuff have changed from a 'maybe' to a 'it's going to happen'
The big issue is are long term investors going to off load now and buy again in a few years. The hard part of this is what to do with the dollars in the mean time.

Long term investors won't offload now because
1) they have made a good capital gain and also have good cashflow because of the gradual rental increase over the years
2) as you say where are they going to invest their money for a better rate?
They are sitting pretty holding their investment

"Everybody knows that the housing markets, particularly in Auckland, have flattened since 2016."

The rest if the article was an enjoyable read but let's be crystal clear, Auckland is not flat since 2016, it is declining and at an increasing pace.

You may want to have a look at the graph for Auckland average and median house prices published today on Interest's article about B&T sales before making stuff up, here's the link:

Dryvil Yvil. As always.

Agreed David, "Yes, Mr and Mrs Investor have hibernated."

Looking at the number (I think a better indicator of activity than value) of mortgages taken out by investors there has been consistently yearly - and month on month - declines in the number of mortgages taken out by investors since 2016.
Even over the past year the number of mortgages taken out by investors is down by 10%; this year the figure has been about 20% for the corresponding 2018 month.
So not only have investors been hibernating the trend is continuing to decline.
While LVRs have been an influence, other significant factors are declining yields, lack of potential capital gains, an anti-landlord government and legislation, and recent talk of CGT.
However note, since CGT has been off the table, the monthly number of investor mortgages for 2019 has continued to decline for the corresponding 2018 month so that may not have been a significant factor as thought.
So what will waken the hibernating investor?
Probably the two most import factors in terms of housing are that yields will need to improve, and a return in confidence as to the future in the property market. In terms of the later, of all purchasers, investors will be looking to comparatively more certainty.
The RBNZ are currently indirectly providing encouragement to investors with cuts in OCR and resulting fall in mortgage interest rates and declining term deposit rates - the latter possibly encouraging cash rich investors becoming landlords by default. I have also read comment that a cut in investor LVR rate in the near future could be possible.
So the future outlook: FHB activity has consistently been increasing over the past three years, and if the Auckland market especially shows some stability, we could be currently experiencing the bottom of investor activity.

And news just in .............Jyske, Denmark's third largest bank, is offering a mortgage rate of -0.5 per cent for 10 years, which means borrowers' debts are reduced by more than the amount they pay back

As a seasoned investor of 20 years , yields on my property have never looked better. Costs are on the rise ( insurance 11% for the next year) these are being offset by rent increases in a market with short supply of quality rental stock. Having just refinanced at 3.55% we have saved over 20K on 4M of debt with the bank covering the break fees and paying an incentive, the outlook from my perspective is positive further interest rates will only increase yields. Margins on new stock has evaporated as land supply is drying up and building costs have increased , meaning if you are in the business of creating equity its time to sit on your hands. Most long term investors will be in a similar position and happy to wait.

Welcome to the forum Marky, great comment. Unfortunately for you, by stating that you are an investor and inferring that you are wealthy ($4M in mortgages) a future of abuse and lambastation awaits you on this site

Resident Property Investors we all remember 40% deposit limits that was first introduced for Auckland and how that effectively pushed us out in to the regions, most of which were Mom and Pop Investors having to downsize, looking to free up money for a first home deposit for their kids.
We also remember how Auckland continued to skyrocket price wise even though we were all fed the 3% figure for Foreign Buyers for Auckland form the National Government which we knew to be drastically untrue.
So as I and many other Investors have commented; the best business outcome is to let the market re-balance before re-investing now that the Foreign Buyers are gone.

Agree with Marky that yields on property are extremely good in many places in NZ, but no not in Auckland, and doubt they ever will be in Auckland again.
Costs have increased in ChCh with rates and insurances but due to the low interest rates, investors have had an increase in net revenue.
I can hardly wait for the announcement in regards to the KiwiFlop reset.
Word is there is going to be a Rent To Own scheme introduced and looking forward to the details of this.
There is no way in hell that a rent to own scheme is ever going to work unless the NZ taxpayer is going to be gifting all these people a substantial amount of money, which will not be met with satisfaction from the average taxpayer.
It is impossible to be to do this with a brand new house in Auckland, as the sums just won’t add up.

They will be throwing the kitchen sink at getting it to work. Fail on this one and that was the election.
Big increase in building consents and property prices stalling at best.... Great idea let's throw a heap more properties onto the market and drop the prices through the floor.... What could go wrong????

Would there be anyone to do the building, even if there was suddenly a big increase in consents?

Every city is tapped out. You may get a few relocating from Chch.
That means higher build costs, this isn't the market to go throwing even more money at a build.

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Days to the General Election: 36
See Party Policies here. Party Lists here.