David Hargreaves says the recent buyer trends in housing may just represent the way the market should look when freed from the distortions visited by the Reserve Bank's LVR rules

David Hargreaves says the recent buyer trends in housing may just represent the way the market should look when freed from the distortions visited by the Reserve Bank's LVR rules

If life was predictable it would be far less interesting.

In that vein, I have to say that the enthusiasm of wannabe first home buyers to mix it in the very uncertain (very risky?) post-lockdown housing market is something I certainly didn’t anticipate.

On the one hand, I admire. On the other, I fear.

Are they smart? Are they stupid?

They could be either.

Consider the two sides of the equation:

  • On the one hand, economists are predicting further house price falls. House prices still look very expensive relative to wages. And the absolute key to the house market at the moment is how bad unemployment gets.
  • However, on the other hand, interest rates are lower than low. There are now no Reserve Bank limits on the numbers of high loan to value ratio loans banks may advance. And, those FHBs who are feeling totally confident they are in jobs that won’t get cut, would therefore see this as an ideal time to get in.

Okay, investors would immediately say that, well, if house prices might go down significantly, better to wait. Sit on the sidelines.

It’s a different thought process though for the first home buyer. They just want a place to call their own. That’s the driver, not the investment consideration. They want a house now - they pay the price it takes to get them the keys. For an investor it's very different.

Right now then, one person's 'stupid' might be another person's 'smart' when it comes to buying a house in this market.

Of course, there’s many ways you can interpret the mortgage figures for June, which showed the FHB grouping taking its highest share (over 20%) of monthly mortgage lending since the Reserve Bank began gathering the lending by borrower type information in 2013 (and releasing it publicly in 2014).

More of less, or just more?

One obvious thing to consider is whether the rising market share of the FHBs is means this grouping is borrowing more now - or whether they are simply getting a bigger slice of a much smaller pie. 

Well, it's both. And to demonstrate that, it's worth going back four years to June 2016 at the height of the last housing boom to put the latest figures in some perspective.

In June 2016 some $6.8 billion was advanced for mortgages. That compares with a little under $5.4 billion in June 2020. So, a much smaller pie now.

Drilling down into the detail, in June 2016 investors borrowed $2.368 billion, which represented 34.8% of the total. In June 2020 investors borrowed just $1.04 billion, representing only 19.4% of the total.

As for first home buyers, in June 2016 they borrowed $738 million, representing 10.8% of the total. In June 2020 they borrowed $1.09 billion representing 20.3% of the total.

So, yes the FHBs were getting a share of a much smaller pie in 2020, but they were putting much more into the pie too - borrowing $352 million more than the FHB grouping did in June 2016.

Investors retreat, FHBs move forward

By contrast in June 2020 the investors borrowed much less than half what they borrowed in June 2016. They borrowed a whole $1.328 billion less.

So, investors have retreated A LOT and FHBs ARE borrowing more.

Now, I mentioned earlier that the RBNZ began gathering information on borrowing by buyer type only in 2013.

It is worth remembering the significance of 2013. That was the year the RBNZ introduced the limits on high loan to value ratio lending, or “the LVRs” as they simply became known.

The LVRs as in any form of intervention did inevitably cause some distortions in the market. Now, of course, the LVRs are gone - at least for 12 months.

Because of the impact the LVRs had, I’m not sure if its entirely possible to say what a ‘normal’ market breakdown of buyers – between the FHBs, owner occupiers and investors – might actually be. We can look at the 20%+ share of the market the FHBs have now and say it is ‘high’ compared with recent years - but first home buyer participation in the market was clearly knocked by the imposition of the LVRs.

The LVRs knocked the FHBs

In a detailed review of the LVR regime released last year, the RBNZ said that based on Corelogic sales data, the first home buyer share of house sales fell from around 25% before the LVR policy took effect in October 2013, to below 20% by early 2014. (Remember though, Corelogic data covers all sales, not just those involving a mortgage, while the RBNZ only started breaking down the mortgage; figures into buyer groups after the LVR limits were introduced).

And the RBNZ made just that point, saying: "While data on lending breakdown by buyer types were unavailable for most of this period, banks and mortgage brokers point to a disproportionate reduction in lending to first home buyers." The RBNZ went on to say that in some contrast to the decline in first home buyer activity, house sales to property investors were "not significantly affected by initial LVR restrictions", leading to their share of sales increasing.

That's those distortions I was just talking about. We had a market in which the FHBs were in a way actively discouraged (albeit inadvertently) from getting 'in', while the investors were probably in a way encouraged to plunge in - because THEY could.

So, while we were for a time seeing the FHBs grabbing less than 10% share of the mortgage money and the investors getting up to 35% this might not have been ‘normal’ at all. In fact, increasingly I would tend to wonder whether a more ‘normal’ breakdown might be something more akin to what we see today, with FHBs grabbing 20% of mortgages and investors around about the same.

Changing the balance

What would such a rebalancing of the market dynamics mean over time? 

Well, with more FHBs able to get into their own homes, that's less demand for rental accommodation, for a start. Potentially that's got ramifications for investors.

The next few months are in any case going to be interesting to watch from the perspective of the investors. 

I'm particularly interested in what happens for example in the Auckland apartment market. Call this a vested interest if you will because I currently rent an apartment in central Auckland. 

You can't remove thousands of overseas students from the apartment market without it having an impact - and clearly it is. 

How investors deal with that impact will be most interesting to see. And will the situation with apartments flow on into the wider housing market?

It all begins to look to me like a housing market with two very differing perspectives at the moment - potentially positive for the FHBs, but potentially quite negative for the investors.

As ever, personal circumstances will be the key here.

What of those FHBs?

To go back to the original thought about the FHBs and whether those getting in now are 'smart' or 'stupid', the ultimate determinant of that will be the employment market.

If it gets a lot worse than expected then there could be trouble.

Anybody buying into this market has to have a very high level of confidence that they are going to have a job in six, 12 months' time. Otherwise they are taking a big risk.

And, of course, it is very possible in this crazy Covid world that jobs we would think are 'safe' at the moment might prove not to be. Much depends on the virus itself and what the future direct impact might be on this country. 

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I think we have to lean towards 'stupid' here. Think about what's happened.

1) A removal of LVRs increases the number of highly leveraged loans
2) lower interest rates make those loans cheaper to service
3) Investors aren't biting as you would expect they would when those two events occur.


Because the thing about higher leveraged loans is that your downside risk increases.
A 50% mortgage and a 5% fall in property prices wipes out 10% of your equity.
An 80% mortgage and a 5% fall in property prices wipes out 25% of your equity.
A 90% mortgage and a 5% fall in property prices wipes out 100% of your equity.

Investors see the downside risks in the current market outweighing the positives of access to more leverage and lower interest rates. Essentially what they're saying by not biting is that 80%+ mortgages right now are too risky as the chances of wiping out most/all/more than all of your equity outweigh the benefits.

These FHBs would be better off waiting, the signal from investors; the market segment most likely to be attune to risk and return in housing markets is that they will likely end up losing their deposit they saved so hard for.

Of course Owner Occupiers in negative equity are more likely to just tough it through the dip if and when it occurs.

Great analysis, FBH are just taking the bait of the real estate lobby media, many will regret soon and banks will need to take responsability.

Prof Richard Werner said recently in an interview that a 6 percent drop in house prices will send the banks under..

That's quite a divergence from what RBNZ is suggesting

Risk? There's no risk at all!
"Deflation arrives for the first time in 22 years" (to be clear, this is from Australia this afternoon but a likely precursor of what we are about to get)

The Australian "deflation" is mainly due to the free childcare paid by government and less consumption of fuel (and cheaper fuel). It is important to understand the context around this -0.03% deflation.

It's hard to imagine why that would be so as a 6% drop would be quite mild. Did he elaborate?

The removal of LVRs effectively cancels out the lower interest rates, as banks are adding up to 0.75% premium for mortgages of >80% so those FHBs are paying around 3.4-3.5% anyway.
Though it has been a pleasant surprise for me as a FHB (I bought just before Covid-19), my LVR is 75% and falling so my mortgage rates are much lower than I budgeted on.
The first home buyers face book pages are awash with people asking how they can buy with a 5% deposit though, and that scares me.

Especially scary when that 5% comes from their KiwiSaver accounts...

My Analysis is based on the Immigration pattern in our country.

In my experience, the 5% Deposit batch stems from people who are relatively new to this country earning well enough around 150 to 180 K per annum combined.

Having worked for less than a decade with a Kiwi Saver of around the 60 to 80K mark and a pre-approval from a bank in hand they are are eager to get in now as they hear from a lot of sources the run off the mill phrase "Now's a Good Time".

Note: This lot think their rent money is dead money and are desperate to get on to the property ladder (thinking that their jobs are safe for now).

This batch will get exhausted in a matter of 2-3 months, then the banks will have no more fodder left to feed the Debt Machine, the question is will the banks start considering NINJAs (No Income - No Job Applicants), I'm sure not and will turn of those Mum and Dad investors motivating them to sell their excess, if they can't pay.

Given that we're gonna have a lot of sitting Mum's and Dads with no more Govt or Banking System Support come October, the real action will start....... Or unless there is a second shut down wherein the Govt and Banks extend the holiday period till next March 2021.

Nothing wrong with buying your own home, but.....
It's the "V" part of your equation; the variable bit, that of most interest.
If it falls ( the resale price of your current home falls) then the interest rate you are paying effectively becomes MORE expensive than when you took it out. It doesn't just stay constant on a Real Basis.
And with Deflation poking its head up here, there and everywhere, that's worth keeping in mind.

Yes, I am mindful of that.
I am certainly doing my best to make hay while the sun shines though, and using the lower rates to pay down the mortgage as quick as I can to put us in a secure position and just because I hate having debt!
Hopefully the fundamentals are still pretty solid though here in the rural Waikato where our economy is more driven by our primary industries and less by tourism, hospitality and retail. Not to say we can’t see a drop in value but hopefully less of a risk than other areas.

A comment on a property investment Facebook group. OP's friend has multiple properties and is upset as WINZ won't support them due after they have lost their jobs....

Although i feel sorry that people have been led to believe buying more and more rentals and keeping nothing for a rainy day is wise why should WINZ support effectively gambling. Only the beginning of this i reckon......

POST : Hi investors, random question but this is really frustrating if this is happening in NZ!
My friend lost their job due to Covid, hardworking family, paid tax all their lives and has a couple of rentals.
They went to WINZ as they had no income all apart from a couple of hundred dollars from their rental portfolio which they are slowly building.
Long story short, the WINZ case officer declined any kind of support as they said the rent they get from their properties cover the principal on their mortgage so it’s classified as income and so they don’t qualify. Problem is that this goes to the bank!! And they have fixed their mortgage and the banks can’t just change the loan structure to make it interest only. I mean this seems so unfair that people who have worked hard all their lives and pay taxes get declined at a time when most in need!! My understanding is that the job seeker support is income tested so no assets taken into aacount. Does anyone have any ideas?? Is this the case that WINZ takes this into account. Thanks for listening and sharing.


So they won't sell their investment properties and expect the taxpayer to support them? Wow. Now that's a serious sense of entitlement.

Deluded and entitled. Scary combo.

It's worse than that, I reckon. Money is fungible, and if they have sufficient income coming in not to qualify for benefits, they have enough income to support themselves. They want the taxpayer to give them money so they are able to keep paying off their investments - essentially they want the taxpayer to buy them several houses.

These are the greedy Mum's and Dad's, my cousin bought his 5th Property last December........ poor chap believed that it was good debt and with the way the housing market was going, would be debt free of at least 2 houses in the next 10 years.

What they didn't realize is that the motivation to own two houses debt free put them into the soup and not to mention ........... caused unrealistic premiums to be added to ramshackle houses.

Now his business is just skimming and his wife lost her job......... and they've had the audacity to go to WINZ too.......

Hilarious. The old "work hard all their lives and pay their taxes" chestnut. Like the majority of people in society don't work hard or pay taxes. Maybe they could sell one of their rentals at a fair price to their hardworking tax paying tenants.

"Although i feel sorry that people have been led to believe buying more and more rentals and keeping nothing for a rainy day is wise"

Are you serious??

I feel no sympathy for those people.
None. Whatsoever.

In fact, I feel antipathy for them.
I'll happily watch them all get burnt.

And your friend can sell his rentals if he's so hard up.
I pay tax too - I don't pay tax to bail out people like your mate who've speculated on property.
Those are the rules of the game. He lost. Too bad.
I don't go to WINZ if my shares lose value.
No sympathy at all for him.

Er, hmmm, "inadvertently"?? As in We had a market in which the FHBs were in a way actively discouraged (albeit inadvertently) from getting 'in', while the investors were probably in a way encouraged to plunge in - because THEY could.

David, you're just such a decent chap. If it was indeed inadvertent, then doesn't that suggest the RBNZ was/is incompetent? Or was it intentional collateral damage justified by their twisted logic? How might it go? "We need house prices to keep going up so bank credit keeps going up so everyone thinks they are wealthier and will spend more so house prices will rise so the banks will lend more so everyone thinks they are wealthier and will spend more so that...." but also, "We can't let house prices get out of hand or we will look incompetent and lose our privileged position of power and prestige and our generous salaries and precious final salary based pension".

Putting it another way: Would house prices be so high relative to wages, if the RBNZ had kept interest rates 0.25% higher over the last twenty years?


That's the New Zealand Ponzi scheme, no substance (right from greedy vendors, to fake agents and pricey tradies with a shit attitude who think they're building the Taj Mahal) ........to be very honest this whole lifestyle is being fed via this cheap credit whom we get immigrants to pay off as tenants paying unrealistic rents or as stretched out First Home Buyers buying some far flung ramshackle for a huge premium.

Also may I ask, how many high paying jobs are there in the market, which would sustain this growth in prices on their own steam ? Or are most people opting to drive for Uber or work a night shift once they get home ?

Its like a giant scam to to maintain banks profits thru endless debt.

Not only that, we subsidise company wage costs (WFF) and investment property (Accommodation / Landlord Supplement). With both major parties being absolutely guilty of perpetuating this.

How poor would the country's economic performance have looked over the last decade-plus without this ponzi-based injection of record household debt?

I tend to favour incompetence over malice as an explanation for these failures.
The RB knew that prices were getting overcooked relative to incomes. Remember, they *wanted* Debt-to-income as regulatory tool, which would have tipped the balance more towards FHBs and away from leveraged investors, but the Key govt. explicitly ruled it out. And of course, CGT was out of the question - no chance of implementing any measures that would upset 'Mum&Dad'. So they used the only tool they were allowed to use, which unfortunately is one that favours the already asset-rich over FHBs.

I do notice that these days the go-to is "Won't someone please think of the ma and pa investors!"

In the 1980s "won't somebody please think of the children!" was all the rage. Guess that concern for the younger generations no longer resonates as it once did.

Are they smart? Are they stupid?

Thin line between Smart and Stupid.....only time will tell.

There's a more sinister aspect here actually - the RBNZ took the decision that they didn't want the investor class to suffer - by removing LVRs they opened the floodgates with the intent that FHBs rush in and soak up any supply.

Now this has almost worked too well, but the fact remains that FHBs have been put forward as cannon fodder by the RBNZ. Ironically it's the banks that have been the responsible gatekeepers so far, by tightening their lending standards.

The banks have lent responsibly so far ................... it's just that the Ponzi scheme was being fed by Immigration and Students........ not to mention Tourism (Those Air Bnbs) .............. as an outcome the first home buyers kept getting screwed over (paying premiums) whilst the existing ramshackle owners including real estate agents, uber drivers and tradies climbed into the speculative investor categories.

Another way of looking at it is, New Zealand being sparsely populated and clean compared to most countries, still attracts immigrants (rich and poor) alike (some with money come for the place, others are escapees or rejects who managed to get to NZ with the passion to get to some place cleaner and better)............ this is something the Banks (including the Central Bank) ...........BANK ON to feed the Ponzi Scheme .... a steady supply of debt servicing slaves (after all immigrants finally must buy at some point of time........ or just let them rent)............ then comes the next phase, they off set the debt to a fresh wave of prospective debt slaves and that's how its expected to revolve in the grand scheme of things over time.

Too Bad COVID came, my prediction is that the market will go into doldrums as long as this bankable pipeline is cut off.

The RBNZ have a long history of stealing from the young and giving to the investor class. They share much of the blame for the housing catastrophe. The monster they have a created is way beyond too big to fail. They are going to double down.

They are utterly incompetent, creating a system based on perpetual shareholder dilution, all the while praising their institution and their good judgement.

They have achieved house price inflation of 11.84% per annum compounded over the last thirty years. A massive failure of their institutional purpose.

"And, those FHBs who are feeling totally confident they are in jobs that won’t get cut" I wonder if the banks will cast a critical eye over this.
I've always wondered what the issue is if the capital value of your house, the one you live in, falls below the purchase price. As long as you can service the debt you're OK. If you can't the bank forecloses and takes a haircut. Unless there is a massive economic collapse, the banks will continue to operate albeit with reduced profits

So capital adequacy ratios don't come into play?

A $100 USD note costs 19.6 cents to make and probably a whole lot less if it goes digital. All the currencies of the world are backed by thin air. Today's first home buyer is paying a price that is dictated by the speed of the printing press. When they go to sell that house, there is a very good chance the printing presses will be glowing red hot. This process has been going on for years. How many people have a portion of their retirement saving in government bonds. That debt you hold is only ever repaid through the issue of more and more debt. Every asset appears to be a pyramid or ponzi scheme when the dollar values are based on indebted government backed fiat currencies.

I know how it feels being a FHB (we bought 5 years ago). You have a family, you are sick of renting, you want to buy. You are outbid 1..2..3..4.5..10x. Now the investors backed off (i would as well seeing what is happening). FHB finally can buy , they have deposit, IR are low - the dream comes true. No-one really thinks 'what if'.
Whoever says that will have work in 6 or 12 month is very optimistic. I know many people that lost their job already. The press says ' there was a better time to buy, there was better time to sell'. In my view ... it is not going to be pretty later this year.

My USA friend in Santa Fe, NM has a pending offer on his house. This is what you get for US$ 1M there with rates of US$462 p.a.

Based on my analysis there is now (approximately) between 19% and 36% of downside risk in the New Zealand housing market. I expect that at an aggregate level, we will see a reduction of up to 19% but in some areas (the usual provincial towns that investors over-cook at the peak and tail of each cycle) we will see a reduction of 36%. How that reduction or "drop" manifests might not be an abrupt crash with all of the Government intervention. The Government, I suspect, will be looking to shuffle the market side-ways for a few years and prevent the dip. They would have achieved this if it wasn't for the COVID-19 situation, but now I strongly suspect that we will see an abrupt crash regardless of any intervention. The fundamental reasons for this will be a reduction in 200,000+ work visa holders propping up the rental demand (we should see an enormous flood of rentals come onto the market in 18 - 24 months) and a change in the house-buyer distribution. Our more or less 10 year cycle of 5 years up, 5 years side-way with a dip is because of the inter generational gap. The last 10 - 15 years has screwed the dynamics of this dramatically. With our next peak of FHB's/young adults leaving home is coming through in 5 years we won't have the peripheral pressures from tourism and migrants which will undermine confidence. Regardless of all that, I expect the market to resume its climb but it will only get so far before there is "blood in the streets". A graph I made that is more of an index illustrates this in terms of household incomes (the yellow line is house prices). The bottom green line is average single income households, with the second from bottom being average double income households (or 1.74 times single income). This is the key line. It decided the change in government to Labour. The further it breaks away from these core lines, the more people realise they're not as well off as they thought and it's all too hard to achieve what others already have. That's when we'll see things like CGT gain majority support, etc. Graph can be found here: https://imgur.com/a/oSmm4L1