The Big Short reminds us all what hubris about over-valued housing looks like. Bernard Hickey looks at whether Auckland's property perma-bulls are as guilty now as the US ones were in 2005-06

The Big Short reminds us all what hubris about over-valued housing looks like. Bernard Hickey looks at whether Auckland's property perma-bulls are as guilty now as the US ones were in 2005-06

By Bernard Hickey

Making a movie about collateralised debt obligations and credit default swaps that is both compelling and accurate is quite some achievement. Movies don't typically do complex financial issues and spreadsheets well. Characters, plot and emotions usually beat numbers, analysis and complexity every time.

That's why I thought Michael Lewis' book on America's financial meltdown, 'The Big Short: Inside the Doomsday machine' could not be beaten as an expose of the GFC, or be turned into a cinematic experience. But somehow, the film of the book that I saw last week did it.

The Big Short movie starring Steve Carell, Christian Bale and Brad Pitt had a verve and flair that surprised and has helped it win awards and Oscar nominations. But mostly it took me back in time and stirred up all those old feelings of shock and bewilderment and wonder from 2007 and 2008 when the world's most sophisticated financial system was melting down. Sometimes it's good to be reminded of the bad old days.

The movie is actually set mostly through 2005 and 2006 when the US housing market and economy was rollicking along with the near universal belief that house prices would never fall and that all the debt owed on those houses would never go bad. The Big Short is the story about those outsiders who recognised the Emperor had no clothes and who then worked out how to bet on the failure of the most combustible debt securities linked to all those mortgage bonds under the housing market. This band of misfits took a very capitalistic approach to calling out the wrongdoing: they looked for a way to make massive profits out of what they saw as the inevitable collapse.

It is mostly a story about how hubris, laziness and 'group think' can corrupt an economy and financial markets to the point where intelligent and normally sensible people end up rationalising and defending extraordinary things. The most telling parts of the film are about the psychology of crowds and the human tendency to go with the crowd. The crowd in 2005 and 2006 were saying America's house prices were justified and sustainable. They argued the record high house price to income multiples made sense because of the permanent financial magic of very low interest rates. House prices had never fallen much and would never fall. These bonds were incredibly safe. This market was different. It was immune from the cycle or the 'downs' that often follow 'ups' in most markets. Mortgage brokers, real estate agents, bankers and even the US Federal Reserve Chairman Alan Greenspan dismissed the naysayers with a smugness and certainty that was frightening in retrospect. Right into 2007 the misfits were proved wrong as the market just kept on rising, or like Wiley Coyote, was suspended in mid-air months after the bottom had dropped out. Some of them almost gave up their 'Big Shorts'.

Sound familiar? I sat in the movie theatre cringing. All the language of the crowd sounded exactly the same as those who defended Auckland's housing valuations this week when Demographia called out Auckland's house prices as more expensive than London and Los Angeles when measured versus incomes. Auckland's house prices have never fallen much, they said. Auckland was an international city, just like New York and Hong Kong, which made it different this time. Auckland was a special place that people wanted desperately to live in. And this would never change.

It made me wonder how the misfits of The Big Short would try to short the Auckland housing market, and whether the crowd was actually right.

Auckland is different from America's housing markets in many ways. Home owners can't just mail their keys back to their banks and walk away debt free. The supply of new houses is not cheap and easy, as it was in many US states. The response to high prices of 'elastic' supply helped burst many of the US housing bubbles. New Zealand interest rates are expected to stay low, or even fall over the next few years, while mortgage rates were rising through 2005 and 2006 in America. The debt underpinning Auckland's housing market is much simpler and cleaner than the loans to 'NINJA' (No income, no jobs and no assets) borrowers that were carved up and mushed up with good loans in CDOs. New Zealand's banks know who they have lent money to and have much higher lending standards. They also have much more of their own money at stake and the Reserve Bank has forced them ask for higher deposits.

Yet there are plenty of similarities. The debt under America's housing bubble was only sustainable with very low interest rates forever. Anyone supremely confident about Auckland's housing market simply needs to answer the question: how would it cope with 10% mortgage rates and a 10% unemployment rate. Both are unlikely right now, but are still plausible over the longer run. There are a multitude of scenarios that would produce that combination. A financial crisis in China that froze global credit markets would do the trick and that is a non-trivial risk over the next year or so.

The Big Short is a great movie because it forces you to look at your world with fresh eyes. I'd recommend it for anyone sure that Auckland's 'Big Long' is a sure thing that will never end. 

------

A version of this article first appeared in the Herald on Sunday. It is here with permission.

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.

90 Comments

Comment Filter

Highlight new comments in the last hr(s).

Why earth would you connect the Auckland Housing mkt with the "Big Short"...???

Couple of things I got out of ..."the Big Short"...

1/ The criminality of what went on.... from issuers of mortgages.... securitization.... rating agencies..etc..etc ( just the idea of issuing mortgages to people with no income ...and the packing those mortgages into securities which are given AAA ratings and then resold to Global pension funds...is gobsmacking )

2/ The complete abdication of prudence in regards to risk... eg.. the blackjack table scene.. where watchers of the blackjack game make bets on the outcome of the hand being played.. ( synthetic swaps).... no regard to counterparty risk...etc..etc..

3/ No one went to jail.

4/ The smart guys that the movie portrayed had to sweat it out ...till the last minute ...as the Banks made margin calls on them , refusing to "reprice" their trades until the Banks themselves had run for the exits....

All really ugly stuff that went unpunished........ AND... it shows that there really are 2 sets of laws at work here... One for the "vested, powerful interests" ..and one for the rest of us..

Disappointing that Bernard draws comparisons to the Auckland Housing Mkt....... kinda diminishes the dark ugliness and corruption which was/is Wall Street and the GFC .... and the bailing of them by the Govt...

in my view..

10
up

Roelof ,
What happened in US is not relevant in the detail.
The questions that arise in Auckland relate to how long it will take for higher interest rates to resume and whether current institutions would be able to cope with the turmoil.
Perhaps it is a little too allegorical for some. On the other hand is it a parable.
Ignore at your peril.

There things about Auckland we can learn from the movie Roelof. One is about unrealities. In the movie the guys got on a plane and went and actually looked at the actual houses. With disturbing result.
Here the information we get mostly is upper level, and issued by people with an interest in selling a point of view. Same problem.
So when I read interest.co I pay special attention to common taters who have some bit of info, today, on the ground about something they observe. Empty houses, who is buying, rental vacancies. Any info that cuts accross the plaitudes.

heres one for you. A family member selling in northshore since october last year. reg value of 680k. Auction first off - top bid 520k (gv 580), got that up to 540 in post neg's. Now for sale with asking price, still hasnt sold. So auckland prices most likely lost close to 100k across the board after the new rules on IRD numbers, bright line test, and 30% LVR's came in. Just the stats are now hidden by REINZ, and will only show up in QV index numbers in feb (maybe) or more likely March this year due to how long it takes the numbers to come through. Also, particularly bad sale can be left out of the system if they are considered not to be 'arms length' - I dont trust anyone in real estate, from my experience they do not deserve any trust. Absolute power corrupts absolutely. Why on earth would REINZ (the real estate institute of NZ) start withholding stats and charging large amounts for it? Any other NZ institutes run this way? Seems so wrong.

kinda diminishes the dark ugliness and corruption which was/is Wall Street and the GFC

I owe almost my entire Wall Street career to the Clintons. I am not alone; most bankers owe their careers, and their wealth, to them. Over the last 25 years they – with the Clintons it is never just Bill or Hillary – implemented policies that placed Wall Street at the center of the Democratic economic agenda, turning it from a party against Wall Street to a party of Wall Street. Read article

Fascinating story. The Democrats are now the party of Wall Street, just as they were the party of slavery (euphemised as "State's Rights" at the time, and now forgotten, or rewritten). Things are not as they seem in this time of DoubleSpeak and EverWar.

the film shows what can happen when a sudden downturn happens.
the world is heading into recession and when it hits, unemployment will rise made worse in NZ by our high immigration policy
http://www.cnbc.com/2016/01/21/
its not if but when, ZIRP has distorted economies and hidden problems that will come home to roost in the future
people will lose jobs, default on loans, landlords will struggle to find good yielding tenants, government expenditure will blow out raising NZ credit rating as we no longer have a buffer
will house prices still rise? of course we are NZ we are different from
spain, Ireland USA, portugal UK can not happen here so they tell me
https://books.google.co.nz/books?id=RkdPeUlKZcwC&pg=PA38&lpg=PA38&dq=cou...

A perfect example of 'group think' - rational folks making decisions to pay the prices, even though everything tells them the asset is WAY over-priced.

http://www.nzherald.co.nz/nz/news/article.cfm?c_id=1&objectid=11582356

NZ. Small stable democracy with civil liberties for all.
On its doorstep: China 1.4 billion. India 1.3 billion. Etc.
open door immigration. Open door to foreign property purchasing.
Shorting houses is a poor bet under these conditions.

10
up

The door could be easily slammed shut by a change in government.
The next global financial crisis (or interest rate rises) is just matter of when.
Auckland housing is horrendously overpriced by most accepted metrics.

Shorting could be a poor bet, but the odds for being long aren't that hot either.

Also, geographically speaking China and India aren't on our doorstep. They are as far away as Africa and the Americas. Beijing is closer to London than Auckland.

The NZ Govt has a special focus on India for exporting our education. NZ is one of the top choices for Indian students who are sold a near-ticket to residency. NZ offers one of the easiest pathways to residency via paid qualifications.
NZ is one of the top destinations/targets for Chinese looking for exit options for their money and families - after Vancouver, San Francisco, & Melbourne. Australia rules stipulate new build buys only - NZ doesn't.
So these countries are on our doorstep, if not kms equidistance-wise but by intent by the NZ Govt pouring a lot of resource into these providers of property finance, farm finance, wealthy investor categories, international student visas, immigration visas etc.
The NZ Govt is actively selling everything NZ has to offer in these specific markets. India is the number one country for Student visas. NZ has many offices in India , NZ Immigration offers sales support for visas and facilitation, every university & PTE has teams of salesmen/women on the road in India just about every week of the year It is big business hugely encouraged and supported by the NZ Govt. so these 110,000 students who study in NZ, mainly Auckland, need to live somewhere. Let alone the 1000s of nonresident foreign house buyers.
So Auckland will keep getting more expensive....

12
up

I'm glad we both agree that the current situation is almost entirely the result of current government policy. In a just world they would be hung for what they've done.

But governments change eventually. This one is is nearing the end of its third term and a growing number of kiwis are feeling very disenfranchised.

They might keep getting more expensive, but this game of jenga is already way up in the stratosphere.

I don't think Indian "students" are going to be affording a million bucks for a fibro dog kennel in Ranui. That path to residency is usually just the backdoor to Australia anyway.

Your last statement is why the Aus Govt tightened up Kiwis rights/access in Aus.

I guess every occupant living in Auckland, whether a renter, or buyer, places pressure on the housing market. Another opportunity for a landlord if more renters arrive into Auckland.

MB. I heard at the time that J Howard had Helen Clark on the mat and told her that if any NZ govt ever pulled a stunt like that (granting about 9000 criminal overstayers passports, half of whom bolted straight to OZ) again, all deals re. NZers special rights to live and work there would be stopped,wef.

talking about Oz:
http://www.abc.net.au/news/2016-01-26/superannuants-face-sequencing-risk...
I know this article is about shares and this site is not about shares, however we are talking about doomsday scenarios.
And in NZ we still have people constantly saying that we should direct our Kiwisaver into more risky funds.....

Best to move your KiwiSaver &/or Super investments to Cash funds under current global conditions and especially if over 55.

Backdoor to Australia

India does not recognise dual-citizenship.
Acquisition of land in India is restricted to citizens
When an Indian national obtains citizenship of another jurisdiction they automatically lose their Indian citizenship and also lose the right to own land in India - meaning when an Indian national applies for NZ citizenship it is unlikely they plan on returning to India permanently and re-acquiring Indian citizenship

However, under Permanent Residency status you can stay in NZ as long as you like without becoming a Citizen.

The ex-Indians who acquire NZ citizenship can apply for Overseas Citizen of India status, which would give them Permanent Residency status in India with all rights to invest in properties, stay, etc.

22
up

As you allude to Bernard, the most significant difference between the Auckland and USA is, that despite it's many faults the USA has free, open, competitive markets that ensure (as per classical economic theory) supply meets demand at the lowest and most efficient point. So when demand was cranked up by unrealisticly easy credit, prices went up a bit (I doubt anything like Auckland) and then the massively open and efficient US market pumped out lots of new houses; Correcting the bubble. It would be nice to think that we have a similarly honest and efficient market. But. Auckland and NZ are nothing like this. We have government that is hell bent on inflating demand through immigration well beyond our ability to cope. We have a totally rigged supply of land that ensures the "right" people continue to make a fortune. We have a totally rigged building material supply market. The net effect is that our land developers, property developers and the building material suppliers do not have to compete and simply raise their prices beyond peoples ability to pay and so choke off demand. The net effect is that we have ever increasing house prices and ever increasing unsatisfied demand. We therefore do not have a market that will correct our problem. This means that we will suffer the practical consequences of a high level of unsatisfied housing demand. Eg homelessness, people living in vans and cars, "Sex for Sharing a Bed" as per yesterdays Herald headline and a myriad of other undesirable outcomes that I predict will increasingly fill our headlines. Eventually the solution will be a political one that straightens out this rats nest of corruption, and the consequences of this will (I hope) be a significant increase in the supply of housing and a drop in prices.

16
up

It must be an absolute certainty that the lever-pullers responsible for turning-the-immigration-taps-on never-ever contemplated that a side-effect would be bed-sharing

Maintaining the delusion makes those same lever-pullers complicit - in effect, Govt run pimping

Well said Chris-M.

The most telling parts of the film are about the psychology of crowds and the human tendency to go with the crowd. The crowd in 2005 and 2006 were saying America's house prices were justified and sustainable

Not unusual .. when normally rational people are submerged in a crowd their behaviour changes

economics and collective behaviour
Supply and demand is the measurement of the economic desires of a social collective, a conceptual crowd. The result is not representative of any one individual within the social collective. is allied to .. Gustave Le Bon (1841-1931) analysis, the crowd submerges the individual character ... where ... "an agglomeration of people present very different characteristics from those of the individuals composing it". In gathering together, the crowd reach a state called the collective mind.

agree they waited too long and now they are paying the price. they could stick it out raise and let growth slow but be steady and slow, or go to QE and kick the can down the road for someone in the future to fix
my bet QE

See yesterday, US data all bad- stock markets all up.

the market are picking interest rises to stop and QE4

That's not a true statement. I was living in the US during 2005 to 2007 and the last thing I did was change my 410k from shares to bonds as in late 2007 the writing was on the wall on the radio and you could feel it was going up in smoke. However completely different in Auckland, will say it one more time, ponsonby villas are gonna keep going up or stay stable, but any post 2000 cardboard housing will feel the pinch

Yes, that film was good Bernard, but have you seen Charles Ferguson's "Inside Job"? That was fantastic. A real crime documentary/film. Slightly different focus. But so so good.

I guess the biggest question we should be really asking ourselves is why the Auckland housing market has slowed down in the last few months (Since October)? I think this is largely due to two main factors:-

1) Overseas investment mainly from China, who's economy is starting to have problems hence why they their government has tried to reduce capital from leaving the country by restricting their overseas lending on property etc.. This may have contributed to as much as 40% of Auckland's property market bloat in recent years. Shame there are no official figures available on this data.

2) Then there's the recent Tax changes here in NZ (Long over due), to try to curb Investor pricing out First Time Buyers. Such as the introduction of Capital Gains Tax and IRD requirements (How the providing an IRD number wasn't a requirement before astounds me)!

Given that we may well be looking at that 40% pressure on the housing market could be now drastically reduced.

And going back to the crowd behavior; So what we should really be asking ourselves, is how much is the Auckland property is really worth???
And who will be willing to pay for it at the current bloated prices???

And whether Auckland will stay permanently disconnected from the rest of NZ?
How much of a catch up will the rest of NZ have over the next 12 months?
Of course, banks will drop their mortgage rates if house prices dip too much, so a house price drop would need to be quite quick.

Have you seen the "Biggest Inside Job" in the world.

Movie about how the funds are spent on keeping one man alive, at the cost of many millions of lives and incomes.

Billions spent, making this one, Trillions on the sequel...to come..millions will never see again this money, probably nor the Movie, ever again as Movie rights have flown away to other places all around this great big wide world.

Apparently the incentives for Fly Buys, make it almost worthwhile.

People died making this Movie, in fact they still do, on a daily basis.

Others are fed up with it to the back teeth, but have no recourse for a refund as the funds are non negotiable for a return after a certain period. But the ongoing costs exponential.

Then strangely another gets elected to the Movie theatre Premier and around and around she goes, where it stops, everybody knows, but few can actually see this Movie Premier, even though they paid this vast entry fee, I thought it was fiction, but apparently based on a true story).

http://finance.yahoo.com/news/boeing-wins-deal-build-air-force-one-presi...

Coming to a cinema near you, very very soon. We have our own version, but a very, very poor copy in deed. No fly buys with ours, but same costs.

I guess we will see over the next few months. Though all the indicators are pointing to a drop in property prices which really needs to happen, if future Kiwi's will be able to afford a home.

I would not hold yer breath on it CJ, The RBNZ has already anticipated that it's deliberately pathetic controls of last year may have some effect now and are on the main game - cut the OCR, the throats of savers to deliver up free money for the favourites.

I'm willing to hold my breath until March when hopefully the dust has settled. ;)

Dust settling?!
The Whirlwind has only just begun.

"how would it cope with 10% mortgage rates and a 10% unemployment rate. Both are unlikely right now, but are still plausible over the longer run"

Considering 9x household income, and without prices falling (eg flat lining while wages tick upward) this ratio likely to be at least 6 for next two decades, means this 'unlikely situation' only needs to occur once in next 20 years for it to have a devasting reset of auckland house prices back closer to 3x household income (as happened when US prices 'reset').

https://en.wikipedia.org/wiki/Poisson_distribution

Probability of an event occuring in a given time period, extend that time period long enough and even very unlikely events are highly probably to occur.

What aucklands prices and massive price to income multiples have done is made the time interval very large, my guess 20 years + (time before govt./council fix supply issues while prices flatline), so very likely to have a crash especially in todays voilative global economy (and disease ridden world, think foot and mouth, something tony A always went on about as the only thing that could see auck prices crash).

But hey, aucklanders thinking being is they cant remember it happening before then its never happened and will never happen, just think of their approach to volcanoes, which have a similar probability of erupting (and likely causes earthquakes when do) as a big quake in wellington ; and while wellingtonians are reminded everyday (and have been since 1855 when half the city rose from the sea), no such caution exists in auckland

The housing based shenanigans in the US, involving sub-prime loans, CDOs, Synthesised debt instruments, etc were all designed fraud committed by the bankers. Only thing was no regulator there could detect it in time and when it blew up the authorities had no choice but to rescue the whole system, again another scheme concocted by the perpetrators, through the Revolving Door Syndrome. It was all an Inside Job. And many foreign investors were screwed right royally, including many pension funds, etc. But the World did not have the guts to take America to task for the whole mess.
The conditions in NZ are vastly different. The Auckland boom is purely a demand driven, support shortage scene. Immigration and easy entry of hot money are the reasons for the demand drive and though the hot money may flow less in the future, the immigration will continue to keep the pressure on.
Fortunately Banks here still do the right credit assessment before lending, but they are also subject to risk, when the macro/micro economic scene changes. But being Aussie backed, the governments here and in Australia could come together to bail out the banks, if anything goes massively bad.
In the meantime, it is business as usual.

The NZ Herald says "Auckland house prices catapulted record 52% in four years."

It also says the median rent across the city is up 12% since 2012. That's only the median. In Manukau/Manurewa for example, rents are up 22% since 2012.

Property, conservatively financed and held for the long term, will continue to be a safe place to invest money.

If you can then take your kids or grandkids to watch the big short so they can understand and get some insight. My daughter nearly 16 hadn't heard of GFC even though my wife and I were buying properties through those years of 2009 to 2014. I guess daughter was just too young to take in what was happening but watching the movie she really enjoyed and lead to good discussion.

A reply to Uninterested(Shouldn't that be Disinterested?)

I have read the link about Superannuitants and found it to be pretty superficial.At no point does it even mention the crucial role of dividends.When long-term investors concentrate on good-quality dividend orientated companies,then short-term fluctuations in prices are of no concern.If my portfolio fell by say 10% tomorrow,then it wouldn't bother me.Indeed,I would regard it as a potential opportunity to add to some holdings.Long-term,most of the total return from equities comes from dividends,not capital growth and for most investors,that is the only sensible way to invest.
I have little doubt that there will be another market crash withing the next few years,but I have lived through lots of them and expect to do so again.

NZ in 'short'. The #1 problem as I see it is income to debt ratio (ability to pay back), combined with POSSIBLE recession ( an uncontrollable force with downgrade in China,commodities, dairy etc), meaning job losses, meaning banks holding massive amounts of debt unrepayable (even if debt ratios were normal), with POSSIBLE collapse of banking system (or major stress) with NO individual depositor bank account insurance. Would the Govt. come to bat with something other than a grossly pathetic OBR system (remember, they instituted this pile of junk so there was no Govt. bailout of failed banks), or just let it spiral as depositors lose massive amounts of money in their 'safe' savings accounts(I would not call 3.5% one year term deposit akin to risky investing).
Now THAT would be the time to buy NZ real estate because you'd probably be getting around NZ$2.40 (again), for US$1. :) I'm salivating. But I really hope this will not be the scenario.
Lets remember, the biggest problem in the USA pre GFC was lending to people who did not have the ability to pay it back if there was a ripple in the economy. The economy rippled and had a domino effect. What were the debt to income ratios on average then in the USA?

There is no doubt there are 'risks' in our economic system. But I wonder if we are not all focusing on the 'debt' without remembering there are 'assets' as well.

Here is some data for NZ households (all from RBNZ or StatsNZ):

Total 'assets' in 2015 = $1,105.4 bln, vs $964.0 bln in 2014, up +14.7%
made up of:
Residential real estate = $862.3 bln up from $745.0 bln, up +15.7%
Bank accounts = $151.8 bln up from $136.6 bln, up +11.1%
KiwiSaver and Funds = $93.3 bln, up from $82.4 bln, up +13.2%

Total household 'debt' in 2015 = $160.3 bln, vs $150.8 bln in 2014, up +6.3%
made up of:
mortgages on houses = $130.2 bln up from $121.8 bln, up +6.9%
consumer debt = $15.3 bln vs $14.7 bln in 2014, up +4.1%
student loans = $14.8 bln vs $14.3 bln in 2014, up +3.5%.

So you can see that total 2015 household debt of $160.3 bln is almost 'covered' by total household bank accounts of $151.8 bln. Of course, they are not held by the same households (they never are) but the overall 'system' has far more in 'assets' than 'debt' - even if you exclude all the residential real estate.

(For the data wonks, the 'debt' above includes all debt, not just debt owed to banks.)

Isnt the fatal flaw in the valuation of the asset. When things go bad.

plus leverage.

The problem I have with this thought process is it assumes all is well, ie everything is valued on a going concern basis. So netting off assets against liabilities makes sense.

In a bankruptcy situation the rules are totally different, assets cannot be netted off against liabilities, so the assets become the property of the most senior creditors and the debts are enforcable through the courts.

In your example above, in a financial crisis, the bank deposits become the property of Goldman Sachs (presumably) and the value of kiwisaver falls dramatically, leaving NZ Inc with a $400,000,000,000 debt.
http://www.rbnz.govt.nz/statistics/tables/s7/

Go on realestate.co.nz rural and check out the latest listings each day. Its mind boggling. Watch asset value drop this year. Umm but debt wont.

Hi AJ,

What would it take investment wise to own both these farms collectively, via a Joint venture of Interest.co affluent investors.

Would it be viable with little debt....in a drought situation??

Just asking.!

I am happy to organise it for reasonable management fees and a kickback. Please send money by Western Union.

As CFO, I was going to say..pay-pal.

All go this end, found a suitable office, looks sharp.

http://www.sothebysrealty.com/eng/sales/detail/180-l-912-tj37fg/cayman-c...

Cheap at half the price. What are the hidden caches.? Is that how you would spell it.? I know every man's home is his castle, but are you not getting ideas, above your 'station'

By the way...IS the safe haven big enough, I thought you would want beach front, not one on the rocks.

Or is the tidal wave of money gonna flow out from the Caymans soon as hot money is just about all we have left, not fully invested in property in NZ.

I hear money laundering is the next big ticket item...for Govt.intervention. Hypocrites.!

I also hear that Russia, may be the best place to dip ones toe in...next.

Putin needs a few returns on investments, other than oil.

We can do Dairy in Russia, that would be easy. Personally I'd rather keep my toes though.

Returns look good, all on the upside, risk manageable. Thinking Caymans would let the risk free capital gains, profits flow in and only the one way.
I think we are building a pretty good business model here, borrow and spend like there is no tomorrow and then socialise the losses, not that there will be any losses, well not for you and me.

Did I mention overcapitalised. What a tragedy

An assets price however is based on a) the buyers ability to pay, b) the return on the capital. Residential real estate is for instance probably over-valued by 50% and this is only in a BAU scenario.

On top of this as you say the assets and debt are not evenly distributed. This with leverage means only a % of ppl need to foreclose and that is enough to take the banks out. Currently my wild guess is no better than 20%? and might be as low as 10%? So how many dairy farmers are there with huge debt that cannot survive on the current milk price? is it really less than 10%? less than 20%?

The claimed asset values are as yet unfunded and until they are remain a fiction.

There never was a bailout by the Govn, it is a bailout by the tax payer. So the Q is why is it tax payers have to bailout the saved? As depositors the saved can withdraw their money at any time so simple withdraw it.

In terms of buying "cheap" you also have to consider ppls ability to pay, eg if you get a property 1/3rd of the current price but the tenant can only pay 1/10th you are still onto a loser.

"the biggest problem" no, not dodgy lending by itself but actually peak oil and the resulting price spike.

Personally I would not want the Govt.(Taxpayers) to bail out a failed bank. That is why deposit insurance makes so much sense ( paid for by ALL banks and financial institutuions and simply added on as a minute cost to the BORROWER).
Putting money in a bank at a measly 3.5% is not meant to be a risky investment. If I thought I would not get a portion of my money back, if a bank failed by not adhering to fiscal responsibility, I would think twice (no, three times) about putting money in NZ banks.
The health of a country is equivalent to the health of its banking and financial system. With no bank deposit insurance and no assurances of all deposits back in a property collapse, it would not be wise to invest in that bank. And where does that leave us. If there are no depositors in a country there is no money to loan, so no growth, no job growth, economic collapse etc, etc.
Protecting depositors is not only smart, but has been adopted by all the economically savvy countries in the developed world..even Australia ha ha.
If there comes to be a major banking/financial problem caused by property devaluation in Auckland due to outrageous debt to income ratios and peoples deposits are not fully repaid, then, whoo hoo, watch the NZ $ collapse back to $2.50 or so. I would again be salivating as that would be the time to buy property in NZ.
To say to term deposit or call account people that they can just pull their money out any time they like is not understanding how the whole financial world works.

I take it you are one of the saved then?

Um yes and no. I agree on a private solution, ie an insurance policy. I do not agree on the borrower paying it however. The borrower often pays a huge interest markup already to cover the risk he/she may default or even a specific fee for insurance as well. The borrower in this case gets no benefit from the premium on the deposit but the lender does, ergo the lender should pay the fee or choose not to.

If you do not like the 3.5% paid for the risk (and I agree), simple, move your money elsewhere.

"no depositors in a country" no it doesn't matter, the banks borrow from overseas or large investors to loan out.

Protecting depositors isnt "smart" its seen as a political action fraught with moral hazard and passes the costs on to the tax payer for the depositors incompetence.

"term deposit or call account people" no actually it is they who do not understand how the world / finance works so hide their money in dodgy banks hoping some innocents will carry their losses, that is morally wrong to me.

.

.

Once depositors no longer believe the bank is safe ' its all over rover'.
Insurance is an attempt by governments to install confidence in the banking system, the OBR does the opposite. If the banks are not safe why use them?
If one of the big four rolls, they will all roll.

When someone borrows for a farm or house the banks create the money, say 1 million, you buy the farm and the seller deposits the million, both sides of the deal require the farm or house to be a good safe investment, if it's not the the RB is not doing it's job and nor is the bank. If the farm of house drops by as much as half or even if the risk exists that they will, putting that risk onto depositors will destroy the whole system as confidence will be lost and depositors won't hang around. Treating depositors as investors will not be without consequences.

With Rod Oran telling us %44 of dairy loans are at risk if the payout stays where is is, I think there is justification for concern.

So we trust the bank's officers to be competent and safe. Yet we also expect them to make un-reaslitic profits which entails risk. We then reward them with fat bonuses on an annual basis and sack them if they do not perform, bound to end well.

"If one of the big four rolls, they will all roll." yes I agree, I would suspect that kiwibank and TSB would also be close to rolling as well.

" 44% " given the leverage involved that 44% seems double if not treble what I would consider a worry, maybe then more like "petrified".

"confidence" it is indeed a game of confidence as we have a fiat currency, I pass you a worthless piece of paper with the promise on it its worth something and you trust it is.

I would suggest the last 30~40 years has been one huge short sighted disaster which is only now coming to a head.

so it's not the poor depositors fault. It's the model of risk and reward, reward not going to the right people, speculation vs investment, the government is more than happy to tax the inflation component of a deposit which is ridiculous.
A rotten system about to deliver a rotten result for all.

That worthless bit of paper is as good as the asset that created it and it's the RB's job to make sure it is, that asset has to earn interest and that's got a lot tougher for many.
I don't think we would like a world without a fait currency, we just lost the discipline required, the discipline you need if you want a successful economy that can deliver a prosperous result for many, we let the wrong people get first go at the trough.

WOW scary.

I think our banks are exposed to funding issues and if we start to see losses like we are in dairy, then there could be a rush for the exit. Are those assets in bank accounts, actually bank liabilities?
My farm in 2000 had a GV of 600k today it's 2mill or 40x earning and if beef prices keep wobbling, it could be 60x earning. So I could see a lot of my asset value disappear, or I could call it my wealth although it was unearned I still enjoy having it.
Thanks for the info, I appreciate it. Andrew

Dairy farming changed the provinces enormously. The last 15 to 18 years have seen a shock wave go through rural nz. Mostly for the better. If you ignore the environment argument. The provinces became rich. This is the rebuild of christchurch x 100 I should think. Houses for staff were built. Million dollar cowsheds built. Fences were ripped out. Land was cropped. Water reticulation put in. Huges holes were dug for effluent. Giant pumps were purchased. Factories and dryers built. Milkers electricians plumbers builders earthmovers vets accountants lawyers bankers real estate agents were employed. Many of the latter spent some of the money getting into equity partnerships so they also became owners in dairying. Now its made losses for 18 months...looking to go maybe 3 years minimum. We gladly sent our heifers overseas. We taught the world how to rotationally graze. We sold them our electric fence technology. They bred cows and built big cowsheds.
What happens now. As the asset deflates. The debt doesnt. What happens to rural NewZealand. Are Key and English going to allow it to be sold off to overseas corporates? Will this debacle hit Auckland city? Will our uptick in tourism and immigration keep NZ solvent?
Our countryside is dotted with overcapitalised land now. The stuff is built and we are probably better off to utilise it. But the great dairy build I should think is well over. The chch rebuild is over. These milk factories are loss makers for the near future. That will impact all of rural NewZealand. What happens now? And will Auckland feel this rural megaquake.

Alter ego. Whether you jest or not the problem is the world is now awash with milk. Many debt free farmers are saying they cant make money at 4 bux. So it would be fine to take a loss for a year or two if you bought well. But honestly why do investors think dairy farming is a good investment??? Its nothing short of a massive headache. Take out the current return. You have large environment concerns and getting larger which will impact your business. An infrastructure built in the wops to service. Livestock which like to get things like thileria, or just sore feet....you would be amazed how good ol rain ie a good thing can turn a nasty percentage of the herd into limping sad mommas. Then there is the rising nonpregnant rates, the delightful facial exzema...ever seen all the skin peel off an udder back and legs of a cow? I could go on and on. Leave dairy farmers to dairy farmers, they are generally good at it, but they need to be owners to do it justice. Buy yourself a farm, call yourself a dairy farmer, then employ staff to do it all, you get what you deserve.

Yes, you can see where this is going

I fully understand all to well.

I used to be affiliated with both LIC and Fonterror. It is no laughing matter, what is going on. I washed my hands of them, many years ago.

It is not normal farmers who are the problem, as such. Our customers, perhaps.

But humour is all we may have left. I never expected things to get so dire.

We all have our man made problems today. Also natures...as you rightly point out.
.

I heard this morning that a farmer I know of has been asked by his Bank to sell his Fonterra shares, pay off some debt and go to Open Country. What concerns me is the fact it is a third generation farm, it is being run well and the wife works full time off site to supplement income. If the Bank wants to force the issue with this kind of farmer what are they going to do with the sharemilkers and newbies on the scene. Watch this space.

Good luck getting in to Open Country. Large waiting list.

Inexplicable
Explain how a farm that has been in the hands of one family for 3 generations is not freehold and carries enough debt to cause the bank to step in - what have they been doing?

Firstly they probably added to the land. Farm sizes were pretty small 3 generations ago. In that time there would have been a couple of new houses. Mebe two new cowsheds. Several attempts at effluent ponds. And possibly irrigation,tractors feedout wagons pumps and bores and troughs. Then there were the families to bring up. Sons and daughters to help getting into farms. Retirement for the older generations. House in town for nana. And dairying has had some mean years. Not making excuses. Just giving the reality of farming. It all breaks down and needs replacing. Keep that in mnd Alter ego when purchasing the Putaruru farm ;-)

Belle Madame...

I would not even buy a 'Life-sentence Block' there, no matter how cheap it is in certain areas. And that is as mean as I get. I will not elaborate more

And as for Putaruru, being a saving Grace...someone I used to know very well, over extended himself there and went bust, just putting up a big shed a few years back, also bought several shonkey houses to help him along quicker into the bankruptcy court. He lost the plot...and all.

All because he believed a land Agent, aided by a Bank Manager, who sold him a heap of...over leveraged ...Merde.

A purchase is not yours unless you own it, out right, eventually, many a mistake made between here and there, interestingly enough, until debt cleared.

Purchase can also mean, "get a grip" too ...please do not forget.

So I shall not be proceeding along those lines suggested, maybe "Belle France", where my money goes a lot further, Belle Madame.

There you can actually buy a simple Chateau for the price of an Awklander's dung heap.

But then I would not do that either...

But that is another story.

Ahh yes property never devalues eh Alter Ego. Unless of course you shop in Rotovegas Putaruru Te kuiti Tokoroa as a suggested few. I think most of these fell 40% post 2008. And are still to return to those heady highs. Good luck with that. I flinch at the losses paper or otherwise in these towns. Would love to see Govt yes taxpayer organising some sort of refurbishment available to the owner occupiers in these towns. Set up the local schools to teach the kids plumbing building wiring etc. Work with council to get through consent process. The longer we leave these dungholes the little that will be left to fix. I have just spent 120k on my house. Hard to see it really. Govt bullshit and bureaucracy is pricing people out of doing anything to their homes. A paintjob starts at 3k for scaffold. You dont paint these timber houses they die. Govt watches and does nothing to get people cracking. I have turned socialist in my old age. Mon dieu

Socialist....?depends on your definition. Mon dieu.

New Zealand once had a lot going for it, but selling it out, really takes the cake.

Quasi Socialist clap trap, for the 1 %. Almost a Tui.

Reverse Socialism, here already..

Personally I think the French had the right idea with scaffold requirements.

Pre elf n safety, I think it was.

It changed the Heads of States thinking quite markedly. Maybe we should employ the same rate of change .

Not that the French have used that recourse, since joining the so called..Common Market.

But TPP will kill all hope of change here. Plus a few laws for the Heads to keep theirs.

National thinking...no Global reality. Socialism, ain't working. Cronyism is.

Do your own thing. Well as long as one is content,and not putting loved ones at risk,..go .. the pointy heads don't know a lot of practical things. Sends me a bit nuts. Dealing with them is a whole other game.
Back to the future?

Sorry to hear your friend believed an agent and a banker. :(

The old saying 'the first generation makes it, the second generation spends it, and the third generation blows it.'

With high land values now, family succession can be a curse.

70% of wealthy families lose their wealth by the second generation, and a stunning 90% by the third, according to the Williams Group wealth consultancy.
http://time.com/money/3925308/rich-families-lose-wealth/

"A US study by Merrill Lynch’s private banking arm this year found that, in two out of three cases, family wealth did not outlive the generation following the one that created it. In 90 per cent of cases, it was exhausted by the end of the third generation – illustrating the “clogs to clogs” adage.
But the research also found people were unrealistic about the level of spending adequate to allow them to sustain their wealth. Some 39 per cent believed their money would last for ever with an annual distribution rate of 6 per cent; in reality the richest families should spend no more than 2 per cent a year, the data suggests."

This is only a gentle suggestion by the Bank at present. When you consider the position of this farming family you can only imagine just how tough they are going to be with those customers who the Banks consider are a higher risk. So many people do not realise that all loans are "repayable upon demand." Even if all payments are up to date the Banks have the right to call up the debt owed. As I said watch this space. The Banks are getting nervous. This dairy downturn is going on for longer than many thought. There will be no mercy shown by the Banks, especially towards those who they think are carrying too much debt. When farmers are selling their batches and town houses you know things are not great for them.

Still lots of rural bank mangers running around in 4x4's. When I was young we had to front up to the office and wait in line with cap in hand.

It is not unknown for banks to pick off the easy ones. These may not be that bad debt wise. But when banks want some funds back it can be easier to go for easy meat. They dont want to fight. Thats costly. So any show of vulnerability can mean you are next.

Unless the bank has an agreement with OCD - moving to them may be harder than they think - they are pretty much a closed shop for new supply.

We are currently interviewing new 50/50 sharemilkers. Those who have made it to the final cut are doing budgets on $4-$4.20 and have a surplus, so it is very much about individual circumstances. Their banks are working on $5 - says something about how much to trust your banker? ;-)

My bank manger talks to your bank manager, da de da de da

CO what are they living on?

This is structural, is this?

Rod O in good form this morning
http://www.radionz.co.nz/national/programmes/ninetonoon/audio/201787734/...

Might I also add if JK and BE had come down hard on the likes of shanghai Pengxin and all other foreign corporates who went on a buying spree of nz farms from 2009 on, things could look way different. By saving the banks arses, they encouraged NewZealand farmers to double down. They sort of had to to compete with overseas buyers. Now look at the mess. Check out Ajs link. A 400 ha massively overcapitalised 24 million dollar white elephant in Putaruru. As one of 1000s of examples. I imagine china said to JK and BE, dont let us buy your land we wont buy your powder. A false market has been worse than no market is my guess. What chance is there for Auckland to get it right?

Auckland's market is vulnerable as shown in 1977 (oil shocks) 1987 (share market crash) 1997 (Asian Crisis) 2007 (GFC) 2017 (China?)

Note those who went to jail after '87 and 07 for poor corporate governance. Note the increasing number of new real estate offers, real estate agents and mortgage brokers as greed sets in. Note falling commodity prices. When we had 6M sheep it was the price of oily wool, now we have 6M cows its the price of milk. Our market is no more sophisticated now than in history crowd mentality wins. Even on a low interest rates if you don't have a job you can't pay the mortgage! Although the banks may have more equity for new mortgages it doesn't mean to say that they aren't issuing more credit through cards and loans. what about a simple overnight change in migration policy?

Your access to our unique content is free - always has been. But ad revenues are diving so we need your direct support.

Become a supporter

Thanks, I'm already a supporter.