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David Hargreaves tries to make sense of recent developments in our never-dull housing market

David Hargreaves tries to make sense of recent developments in our never-dull housing market

Ah, so it really is true. You can't keep a good New Zealand housing market down. Well not for very long at all, anyway.

And as economists scramble to update their house price forecasts, pulling back from, and in some cases reversing, previous gloom and doom prognostications, it's worth taking a few moments to attempt to work out just what exactly is going on.

I would have been very surprised if we had seen the sorts of falls in prices this year that some were forecasting. Really, housing is so central to the New Zealand psyche that Kiwis would not LET house prices fall too far! So, unless people were forced to sell, a large scale drop in prices always looked unlikely.

The apparent vigour with which the housing market has reacted after the lockdown though has been, certainly to me, a surprise.

But perhaps, if you really think about it, then it should not be a surprise.  

When you look at what is driving the recent activity it is, I think, a combination of the catnip that is super, super low interest rates, coupled with the Reserve Bank's removal in May (at least for 12 months) of the bank limits on high loan to value ratio (LVR) lending. I've already said my piece on that one a couple of times, so won't keep going round on it like a scratchy old vinyl record. 

But clearly, and particularly for investors, they've seen the time as right and have moved. 

So, with Spring supposedly now with us, we move into what should be the busy house buying period. 

Whether it will prove to be so remains to be seen. Whether the wave of activity we have seen in the past few months will carry on is by no means certain and it depends to some extent whether the recent bit of heat generated in the market attracts more people to get involved.

The question I would have though is whether what we've seen to date represents those who are truly confident about buying acting now, while others will be taking a wait and see approach. Possibly for some time.

Election dithering?

With an election finally due to happen towards the end of next month, people could be excused for holding off on the decision making. There's been notable instances in the not-distant past of the housing market virtually freezing up in advance of an election because of uncertainty about the outcome. 

Sales volumes were very light in election month (September both times) in 2014 and 2017, so it will be interesting to see if we get the same thing happening in what of course is now an October election this year. From where I'm sat you would hardly know there's an election on at the moment and in this Covid-distracted year it appears most people are over the election before it's begun. But we shall see.

For anyone not worried about losing their job there's really nothing to be lost and potentially plenty to be gained from taking advantage of the non-existent interest rates and buying up large, particularly as high LVR lending is now solely at the discretion of the banks. If you are seen as good for the money, you will get it.

It's the 'not worried about losing their job' part of the previous sentence that's the real crux of the matter at the moment though.

Are we alert to danger?

The question I ask, and it's a genuine question - I certainly don't know the answer - is: How many people are out there at the moment who are not worried about losing their jobs, but actually should be?

Clearly there are plenty of people who would be in jobs that aren't going to be lost whatever happens in the economy. But there are others in jobs that have been protected by the wage subsidies and other waves of financial stimulus. How many of those jobs are going to go in coming months? That's the great uncertainty.

I really hope people are self aware enough to see if there is trouble looming with their employment. You would like to think so, but frankly I never cease to be amazed by the way some people don't seem to be able to anticipate something that's dead ahead in front of them.

It may be of course that a degree of self awareness (and therefore concern about people's financial prospects) is behind the fact that very few houses are being listed for sale. And so what we've seen with the recent housing market might to some extent represent the super confident buyers (either very sure of job prospects or financially secure anyway) competing for limited housing stock and bidding prices up.

It's again a bit of the two-speed economy theme that's becoming more and more evident. It's strange to say it, but recessions can be great for people who have jobs and money. Not for those who don't though. 

Spending from the haves

What's visible in New Zealand at the moment is that those who have money and security are out spending and that's making things look relatively buoyant. That's visible. What, unfortunately, might be rather less visible, is those who are struggling and 'hanging on'. As time goes on and if there isn't a marked recovery in economic fortunes (and think for example of people who have been involved in travel and tourism), then the impact of at least some people struggling financially is likely to become more visible in the economy at large in future. 

I think for anybody that doesn't have to worry about immediate financial security then buying a property at the moment, with these low interest rates, is a no-brainer. That's because in say five years' time we can probably anticipate there will still be housing shortages (well, do YOU believe any of the politicians when they say they will fix the RMA?) and there will be a further squeeze on prices.

In five years' time also, we may well be looking at a situation where the foreign buyer ban has been lifted and foreign investors are once again bidding up the market. And maybe also there will be further floods of perhaps wealthy migrants looking for NZ boltholes. It's all possible. 

So, a long term bet on NZ housing is a good one.

In the short term, however, we come back to what happens with the virus and what happens with the country's rate of unemployment. I don't think we are out of the woods on either score by any stretch of the imagination yet. Unfortunately.

Plenty could go wrong yet

It's really to be hoped that we can avoid a big spike in forced housing sales due to people getting into financial trouble, but it's too early to say we HAVE avoided such a scenario yet.

At the moment we have still no clear idea of how long the world might be afflicted by Covid. And that's obviously the key thing. 

I genuinely think there's reasons to be optimistic that the massive efforts to develop a vaccine may well bear fruit next year. And while development of a successful vaccine isn't going to instantaneously get it into everybody who needs it, it will at least point towards some end point for the Covid era. 

In the meantime a lot could happen though. This thing is a marathon not a sprint.

The upshot is then, it's far to soon to be saying this will be a glorious summer for the New Zealand housing market. 

Yes, the long term outlook's good. But short term? Well, there's still too many balls in the air.

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61 Comments

17
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You only need to compare our property prices with other parts of the world to find the truth. While NZ is a nice place to live, its by no means the best place to live, and to think it is is pure ignorance.

Ugly

NZ is a great place to live if you were born early enough. Practically won the lottery in fact. Its one of the worst places to live if you are young or poor however. Why any younger person would stay here is beyond me. The controlling elites and previous generations are just out to parasitically feed on your earning potential.

It's amazing some can live through this but still blame it on the young and avocados.

The investors need to be screwing the renters for more of their wage. When they cannot pay more, the government should step in and subsidize.

11
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The Government already does it’s called the WINZ Accomodation Suppliment.

16
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I'm not sure I agree with the 'good long-term bet' comment. Interest rate reductions and QE (which in my view have a much more dominant effect on house prices than the supposed supply - demand imbalance) will soon be exhausted. I don't anticipate a lot of support for opening the market back up to foreigners so its hard to see where the money comes from to keep prices rising (I suspect increases in salaries / wages are likely to continue to be subdued).

Once the capital gain dries up, so does a lot of the demand...

Depends on what sort of (cashflow) return you get, compared to other investments.

Cashflow is king in downtimes, and until supply catches up with demand I can't see rents falling.

How big will the spring listings surge be? I reckon that's the million dollar question. Or maybe the 2 million dollar question...

Deep down I think The Govt is happy with the apparent vast transfer of wealth. Dividing two parts of NZ society further. It is what it is. At least one half will feel flush, and will be out spending, which will aid in the final recovery. Even during the GFC, the only thing that caused property to slump was the temporary credit squeeze from the banks. That isn't happening this time, hence the perfect storm for residential property gain will continue for now.

It certainly isn't - it's just an anecdote I know, but one bank is prepared to lend me 6x my gross income. A few real estate agents have suggested I try to get more by saying I will get a lodger (which I have no intention of doing). I think they are all nuts.

Yep every mortgage broker ive spoken to has said to me, say you'll get a lodger for the spare room, even if you dont, your can at least have that buffer if you want to bid a little more

Labour is now a party solely for the well healed and by not mentioning house prices this time they are proving that they have total contempt for the less well off.

I really can't see house prices dropping after the election no matter who wins.

National will remove the foreign buyer ban and a Labour Greens coalition wealth tax could see people taking on debt to avoid the tax.

I mean if you own a $2mil property freehold you'll be paying $10,000 in wealth tax annually so why not take out a $1mil mortgage on an investment property to bring net worth below the threshold?

Because unless the bank lends you more than the investment property is worth you still pay the same tax?

$2 million Dollar home + 1 million dollar investment property = $3m, - $1million dollar mortgage = $2 million of net property wealth.

26
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brain drain out of NZ is incoming as those who can do the math, have some dignity and not locked in with any mortgages etc will be looking to settle somewhere else , not in here. Prices are just ridiculously high for the quality you are about to receive and salary you are about to earn here .

the ability to work remotely long term for an international company could potentially change things.

this would be downside pressure on housing prices btw, However would not expect it as massive movement knowing mindset of an "average" employer. The best thing they agree is to allow remote work from other city within NZ. And working remotely from outside NZ means you are not necessarily tax resident here, not sure IRD would be happy with thatperspective

Yes that's my pick too that in a year or so tons Kiwis will be flooding back out of NZ, maybe permanently.

Unemployment numbers are important. If NZ manage to cap the number at 8% or below will not be as bad BUT if it touches 10% than will be bad and every percentage above 10% will add to disaster.

Will only know, once wage subsidy and income protection subsidy ends and if it is bad full impact of it on housing market will be felt when moratge deferral ends so is wait and watch as no one has a clue what is store in future.

15
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Good article
A couple I know in their late fifties have just purchased a rental property
He has lost his job and she is working part time but her job is up for review
They don’t appear concerned as they say they are going to tidy the place up and then flick it off ,pay the tax and pocket a nice little profit
Can’t go wrong with property they said it will always go up
I didn’t want to argue with them but I think their a lot of people out there at the moment that think the same thing
They can’t see any downside either with the property market or their job prospects
I was also shocked that the bank lent them the money in the first place
He lost his job just after the bank approved the loan
I have been predicting a massive world financial meltdown but I have wrong on that one
It reminds me of 87 before the share crash

12
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i don't believe you are wrong, it's just that there is a big damn wall holding the meltdown back. And that damn will breach eventually - quite likely US election time.

As for that personal scenario you have relayed, this is the very reason that when this blows it will be very bad, not just a little bad. I'm seeing more and more unsustainable mortgage situations daily - and lower interest rates are not a substitute for no job.

If this is the situation that they have to sell than early they sell better. Once various subsidies and mortage defferal ends their is a possibility that many may be in their type of situation that they are now and may not be lucky as they are now with booming market.

17
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How about a bit of comparison with Aussie? Besides Sydney, Melbourne and Canberra, all other capital cities have median house prices values under $500,000 (see nice graphic in link). Now, arguably Aussie has been the world's foremost credit-driven property bubble alongside NZ. Yet, dollar for dollar, the average punter seems to get far better value for money in those cities compared to the what one can buy in NZ. Buying a slum dwelling in Auckland for $1 mio "just because you can" is not necessarily a rational decision. It can mean poor decision making or irrational exuberance. Remember, this is a country where Newstalk ZB and Granny Herald are leading media sources.

https://bit.ly/3itXEGN

This is bold call DH: "... a long term bet on NZ housing is a good one."
Does this imply homeowners should expect another house price doubling over the next decade or just enough to make it worthwhile?

This must require mortgage rates significantly lower than what they are now in 5 to 10 years time (the 5 year govt bond yield suggests this may happen) along with no reintroduction of the LVRs. The OCR will have to remain negative for a long time QE forever (defiantly no QT).
The low rates will only persist if we have a struggling economy so low wage increases and lower workforce participation and even more difficulty paying rent. The political pressure from the electorate to solve the housing crisis will increase from what it is now (it will completely dominate the elections).

I'm not going to mention the overseas risks to our banks and economy.

This must require....

You left out the most important pieces of the puzzle: greater credit and income growth. What people don't understand is that both those factors are driven by the bubble itself. We've just had an event that has thrown all kinds of 'what ifs' into NZ's version of bubble economics.

But if we have any population wide wage growth we must have a good economy and that will generate inflation unless we raise the OCR.

The full list difficulties I can think of in doubling house prices by 2030 is too long for a comment. The one thing I do believe that is absolutely required are lower rates than we currently have (at the end of the 10 years) so ran with that. I don't think the doubling is likely to happen.
Maybe house prices can stagnate for 10 to 20 years, we slowly raise rates and very few lose theirs is possible and a good out come but house prices doubling in the next 10 years considering the problems with current prices would be horrible (one way or another).

RBNZ will be certain of going negative OCR next year.
People think they will be safe with a record low mortgage rate.
But we will be very likely to see high inflation, the cost of living will be doubled really soon.
Those who planned financials with current living costs will suffer greatly.

well inflation is the key, the govt will want to inflate away some of the debt, but will have to flood the bond market with money to keep interest rates from following suite, which in turn should weaken our currency which drives up inflation.

If true inflation increases too much and wages dont follow suit, disposible income for a lot will dry up (the poor will get poorer) but the wealth effect from inflating houses will keep credit expansion steady or on the rise which will as we all know finds its way into the hands of "haves" rather than the "have nots", but will protect some jobs.

So the balancing act is a difficult one to deal with and the extend and pretend must surely find a point of exhaustion.

Will be fascinating to see how it all plays out and what our national debt per capita will be at the end of it

The question is does society survive that in a civilised manner? The sort of deliberate impoverishment of young workers and old savers seems likely to have serious moral consequences based on history.

16
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It is remarkably astonishing the lack of understanding of the most basic economic concepts when it comes to the behaviour of a housing market, no matter whether it is in NZ or otherwise .
The current trend of growing unemployment and uncertainty about the future will lead to weaker prices and capital losses. There is not a single doubt about this, the problem is that the party has gone for too long, many are already too drunk already and refuse to accept the ugly truth, which is that they will wake up next morning with a terrible hangover and will likely have run over a few people while driving their SUV back home.

15
up

But we've had uncertainty and growing unemployment since March, and it doesn't seem to have made a dent...I mean, it's baffling - it seems like it ought to. But it seems at this point that the housing market is just completely disconnected from the rest of the economy.

But it seems at this point that the housing market is just completely disconnected from the rest of the economy.

Incorrect. The housing market and the general economy are not mutually exclusive. Without the bubble, the NZ economy would be toast. H'hold savings would be decimated and the wealth effect would be non-existent thereby ravaging consumption spend.

Doesn't matter what Adrian 'King Herod' Orr, Granny Herald, or bank media releases claim otherwise.

13
up

Incorrect. It is precisely as result of the housing bubble why the NZ economy is toast since families are so leveraged that most of their income goes into servicing debt instead of being spent in the real economy which would create liquidity and jobs.

You keep talking about a fantasy called 'wealth effect', for which it may seem someone would get free groceries just by telling at Countdown you have a 2m house in Ponsonby. Unfortunately that's not how it works, this is just another neoliberal fallacy that tries to convince people high housing prices is positive for them in the same way it is for the super-wealthy which do take advantage of it.

There is much evidence to support the idea of the 'wealth effect.' In fact, that's why bubbles are generally tolerated. They are fantastic for generating consumer spending. Furthermore, when h'holds are up the their necks in debt, the wealth effect is important as they defer savings for consumption. A good illustration of the wealth effect is demonstrated in the following link showing the relationship between house price growth and luxury car sales.

https://www.businessinsider.com.au/australia-house-prices-luxury-car-sal...

Some of Robert Shiller's most important work (“Comparing Wealth Effects: the Stock Market versus the Housing Market)” found “at best weak evidence” of a stock market wealth effect, but strong evidence that variations in housing market wealth have important effects upon consumption.

OK. So the work of Robert Shiller doesn't apply to NZ. Mike Hosking knows better. I'm not going to fight it.

You are not taking into account there's been unemployment support which is running out.

al123....not baffling. There are 100B reasons why!

At this point I can see the RBNZ taking on those non performing bank loans for people who are made unemployed and cannot service their mortgage. No way they will let property prices fall

And make them more serviceable (or undefaulted) how?....theres no room to reduce the interest cost or ton extend the term as in the 80s

17
up

"Life on Venus expected to drive up demand in NZ housing." Stuff NZ, tomorrow /s

I can already see all those Venusian coming with fresh printed cash in their UFOs.

Men are from Mars....

Once should not forget that too much spring may also lead to jump/fall over the edge.

Economy / Panademic is now waiting game.

More chances of it going down but the way housing market is up for now, it is hard to think that it can also go Down.

All prediction have turned wrong as no one realised ( happening first time in history) the power of low low interest rate and unlimited amount of money printing by government as house price rise is not only in NZ but also in USA and other developed countries and the only thing common in all be it NZ, USA, UK or any other country is low interest rate and QE besides lockdown and coronavirus.

WTH is Madmax or TTP?

Working...
Calling out bozo's is just a part-time hobby for me

Party will end when wage subsidy and mortage defferal ends. So dance for now....

Yeah but the problem is will they let it end ? An extension of the morgage holiday will mean the party continues. People are mental they get a holiday and then spend the money on other crap instead.

It will end out of exhaustion unfortunately.

Written by a member of the Labour Party, Youth Division.

The wage and salary earners of NZ will be stoked you see such an increase in their take home in the near future

I might put off buying another in this over egged market and buy in the real world.

https://www.thetimes.co.uk/article/house-prices-forecast-to-drop-by-14-n...

Whenever I calculate a 20% deposit and mortgage rate of just 3.5% interest on any property I still can't make a positive yield from 50 weeks rent (without manager fees and minus rates). I wonder if many purchasers are running at losses and relying on future capital gains only? I remember considering this scenario a few decades ago and abandoning it as costly and quite risky

Adrian Orr has issued window guidance orders too our commercial banks most probably. In return for the bond swap banks must lend so much for mortgage residential transactions. If they don't he will fine them.

This is financial terrorism designed to destroy the banks so central banks take over. Digital accounts for everyone with the rbnz and ubi.

No small business only corporate monopoly funded directly by the central banks.

Give up on predictions people. The world could go to war, or enter a post Covid boom. There is only one truth out there, you buy today's assets with funny money. The billions of dollars for the Covid response have be printed out of thin air and will be written off. Talk of future recessions caused by paying printed money back is laughable. That $1,000,000 Auckland house with rates at 2% is easier to pay than when house prices were $70,000 and rates at 24% in the 1980s. Buying a nice house in a good location is a no brainer.

Another article that fails to even mention the $62B thrown into the economy with at least another $38B coming soon. That 100B needs to find a home and much of it has/will make its way into our property mkt. David, you and your fellow contributors must be well aware of this so why is it almost always missing from your articles? Shame on you.

Ah, well David and co. are part of the Conspiracy you see and have made a solemn vow to never mention 'that which cannot be mentioned'.

Dont forget a net 80,000 people came into NZ before covid. They all need a place to stay. The labour govt cares no more about the non property-owning class than National or Adrian Orr. Once covid is over the "fill up NZ" strategy will continue.

Low interest rates, huge long term excess immigration, crazy unfair property(non) tax and latterly QE are driving the property market. I suspect that if our immigration policies had reflected the well being of the average NZ born citizen a little more that 80K+ would have been much closer to 5K annually.

Days to the General Election: 19
See Party Policies here. Party Lists here.