Circle August 19 and November 30 in your 2016 calendars because decisions on those days by the Auckland Council and the Reserve Bank respectively could determine house prices, interest rates, the Kiwi dollar and mortgage lending limits for years to come

By Bernard Hickey

Home-owners, MPs, Ministers, central bankers, mortgage brokers, landlords, Auckland Councillors, business owners and everyone who cares about the future of the economy, interest rates and house prices need to circle two dates in their calendars this year.

The first is August 19. That's the  deadline for when the Auckland Council has to 'notify' or approve the Unitary Plan presented to it by the Independent Hearings Panel (IHP). This sounds like the most boring thing on the planet, but this set of zoning maps and planning rules recommended by a statutory body led by Environment Court Judge David Kirkpatrick will set up Auckland to handle (or not) it's growth for at least the next 20 years.

The Councillors, who will by then be in the final stages of elections set to finish on October 8, will have to decide whether to accept whatever is recommended by the IHP, or reject some or all of it.

Auckland and the nation got a taster of how intense that debate might be on February 24 when old homeowners from the Eastern and Northern suburbs shouted down young renters from the Southern and Western suburbs who wanted a denser set of zoning rules for the leafy suburbs that would have allowed the building of affordable three storey apartments. The grey brigade at the back of the room opposed what they said was a lack of due process, but which actually just disguised their unwillingness to accept apartments in their single-story neighbourhood, along with the people who might live in them.

Councillors voted 13-8 along with the old leafy suburbanites that night to withdraw those zoning rules because they knew home owners vote in Council elections and renters don't.

It wasn't a good omen for those aspiring home owners and the rest of the economy who are desperate for Auckland to solve its chronic and growing housing supply shortage. There is talk in Auckland planning circles that the IHP is preparing to present a massive re-write of the rules in its proposal to Council in the last week of July that would allow intensification up and expansion out. It is due to be published on the Auckland Council website on July 29. I will happily bet the Council's website crashes on that day. All hell will break loose in Auckland political and planning circles between July 29 and August 19, and all in the shadow of elections where councillors' political futures will live or die. Those six hours of shouting and sweating and standing around in the debating chamber at the Town Hall on February 24 will seem like a mere clearing of the throat before this fight.

Anyone doubting the wider significance of this decision on August 19 needed only to listen to both the Reserve Bank Governor Graeme Wheeler and Finance Minister Bill English this week. They both referenced this Auckland Council decision in their hopes, dreams and fears for Auckland housing supply and the economy's long term future.

"The issue of densification and the Unitary Plan is very important," Wheeler said. "Everyone is very interested to see what happens in August," he said just moments after announcing he was so concerned about the financial stability risks created by Auckland's housing supply-demand mismatch that he was considering introducing a third round of lending controls.

English was challenged again on whether the Government would intervene if the Auckland Council voted down a Unitary Plan that proposed zoning rules to allow the 'Super' City to grow both up and out. English was again careful not to talk specifically about appointing Commissioners to run Auckland from Wellington, but the threat hung heavy in the air above his words.

"We may have the need to do that (intervene) when the Auckland Unitary Plan comes through, because it's pretty important that plan enables enough supply to meet demand," English said this week after the Reserve Bank's latest indication of new lending controls and fresh house sales data showed Auckland prices taking off again.

"When Councils make these decisions it affects the whole country, and I think Auckland Council understand that, but there's more work to do there to get more land available and to get the infrastructure paid for and built so we can have more houses -- that's fundamentally Auckland Council's task," he said.

No pressure then...

The second date to circle is November 30. That's when the Reserve Bank's next half yearly Financial Stability Report is due to be delivered. That's when it is expected to spell out the details of new British-style Debt-To-Income (DTI) ratio limits. The Bank of England limited the amount of mortgages worth more than 4.5 times income in October 2014 and now the Reserve Bank is looking at introducing something similar here, to add to the existing Loan to Value Ratio (LVR) limits set up in November 2013 and tweaked last November.

This new DTI could have a substantial effect, depending on what level it is set at and who it applies to. The Reserve Bank's original LVR restrictions were a blunt instrument applied uniformly across the country to all borrowers, limiting the amount of lending above an LVR of 80%, regardless of whether it was to first home buyers, landlords or existing owner-occupiers. The second iteration focused on Auckland landlords, reducing their LVR threshold to 70%. The bank also eased the restriction slightly for all borrowers outside of Auckland, which has brightened the 'halo' effect now generating 20% plus house price inflation in the likes of Hamilton and and Tauranga.

Now Governor Wheeler is worried that Auckland is taking off again and he's also concerned about the inflation now spreading out into the provinces. He could choose to adopt a 'blunt' and broad DTI limit of five times income for everyone.. The Reserve Bank helpfully included a chart in this week's report that showed around 35% of owner-occupiers had borrowed more than 5 times income, while around 60% of rental property investors had borrowed more than 5 times income. A DTI that limited lending to landlords at no more than 5 times income could have quite an impact, at least in the short term. That would leave owner-occupiers, who are less risky proposition, to continue borrowing above 5 times income, as well as first home buyers and new home buyers. At least initially, the bank said it would prefer to apply such a limit broadly, but a Government worried about the politics of being seen to further knobble first home buyers may push back to ensure it is landlords who are targeted, while first home buyers and new home buyers are left alone.

Using such a tool would give the Reserve Bank more flexibility to cut the Official Cash Rate, knowing that it would be less likely to just pour more fuel on the fire in Auckland and spreading up and down the North and South Islands. Further interest rate cuts would be a godsend to farmers and exporters who need a lower currency to cope with low commodity prices.

Governor Wheeler was careful not to link the result of the Auckland Council's August 19 decision to what he does on November 30, but it's a fair bet he will be watching his news feed that Friday night for confirmation that the good citizens of Auckland are serious about fixing a housing shortage that is now at least 30,000 and growing at a rate of 5,000 to 10,000 a year.

The rest of New Zealand will be watching closely on those dates too. The results have the potential to dampen house price inflation, cut interest rates, reduce the currency and limit mortgage lending - or vice versa.

No pressure whatsoever then.. 


A version of this article was also published 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 or click on the "Register" link below a 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.

100 Comments

Any dampening of demand from the diminishing group of NZ house buyers seeking a family home, will simply be reversed by increased immigration, increased number of international students, increased wealthy investor immigrant category, increased offshore property purchasers, increased foreign purchasers of farms, increased NZ investors with no alternative investment options.
The tide of money coming from offshore will not be stopped.

Every tide eventually goes back out.

Even a king tide....

up
12

But didn't you read the propaganda put out by the government that only 3% of buyers are foreigners.

http://www.afr.com/real-estate/residential/foreign-property-investors-tu...

How has what is a basic right, the ability to live in an affordable home in your own country, come to this? Whatever your political hue, this is plain wrong. The Uk and Australia have much tougher rules and are taking much tougher action. The UK is badly overcrowded and has limited land, but house prices are cheaper there, possibly with the exception of some parts of London.
http://www.telegraph.co.uk/news/2016/05/13/landlords-should-be-squealing...
Check the above links. Aussie has a huge problem with overseas buyers, the UK is hammering landlords. How long before our lot sits up and takes notice.

'Our lot', the NZ Govt, believe that Auckland City is 'on the market' to the world and this, in their eyes, is a good thing, & at the same time are denying the reality of who/how many are buying Auckland houses.

You know things are really bad when the UK is held up as being more affordable.

There's definitely going to be a need of leniency regarding DTI for new home and first home buyers as this will kill any attempt to get more renters into homes and more homes built. No point creating a zero sum scenario.

Why should there be exceptions? House prices lot more to do with credit availability than "supply issues".

Choke the credit and you choke the prices. Buyers are better off.

up
14

If you believe the unitary plan will make the difference you are on message with John Key that it's a supply problem. But in real life it's a demand crisis and the solution lies there

Although, the banks are getting nervous about the authenticity of many of the mortgage applications from overseas/foreign/international student/temporary visa/recent immigrants. So this itself may slow the tide of money pouring into Auckland.
Mind you, even although many of the loan applications are questionable, and use foreign documentation that your average bank worker would have no idea how to assess properly, the loans repayments are being made ( in fact overpaid), so a) no problem financially for the bank, and b) may indicate money laundering ie the 'loan' is just a cover, rather than paying cash which may arouse suspicions.

http://www.afr.com/real-estate/residential/foreign-property-investors-tu...

NINJAR loans?

No income, no job, no assets, no residency?

Not necessary, when you have a funding pipeline outside the conventional domestic system.

What you mean drugs and arms dealing... Or perhaps they found a pot of gold at the end of a rainbow.

That info on what proportion of house buyers were foreign tax residents, was that just a survey or is it a formal, (and verified?) requirement of the house buying process? If it was just a survey and was administered by real estate agents, the agents may have an incentive to falsify the info because the last thing they would want is a slowdown in foreign residents buying NZ houses.

Is this the 'sell your kidneys to buy meth' school of economics, or what?

I think TDI is a great idea. Steve Keen advocates this too. However, in the absence of any action to control the tsunami of foreign/Chinese money entering Auckland property market, then TDI’s are just a cruel perverse joke played by the government on aspiring home owner Kiwis working and living in Auckland. They’ll get smashed twice. No chance of competing with Chinese money Auckland, and they’ll have to watch their investments in the provinces decline in value.

I don't think most of the country would be affected at all by a 5:1 debt to income requirement. There are plenty of cash flow positive rentals and an $80K household income would allow you to borrow $400K to buy a $500k house. Plenty of places with median prices well below that. This is aimed fair and square at Auckland!

But Auckland is dominated by Chinese money coming from abroad, TDI’s won’t have much effect. On the street where I grew up in Tauranga Sunny Bay Road there was a house that sold a few weeks ago for 610. A phenomenal price for a house that I guessed would go for no more than 530. Unless you’re buying in Eketahuna I think prices are higher than you imagine.

Yes the DTI should have been standard year's ago. It still shocks me how lacks NZ is, like not requiring a full builders report before buying a property, again that's standard practice in the UK.

Though I do very much agree with you that there is a large amount of criminal activity going on that's led to this housing mess. How the NZ powers that be can just let this continue, when other world leaders and bank are able to take a stand, will become more obvious in the next few months.

In terms of debt to income controls on investors. Would it look at their rental income or only salary income? If the former then it won't have any effect on the big professional inestors will it? Ie. Joe has 5 investment properties returning 150k income per annum. If debt to income ratio is 5:1 then he could buy yet another property with a 750k mortgage

Bingo. The clarity around this is very vague indeed. But if Jonny and Billy are open to the idea then one can imagine a Swiss cheese of holes to still exploit

Even without holes, fraud can happen. Who would have the time and energy to properly verify income statements?

Umm, IRD? Yes fraud can happen, but a law must be put in place first to define any activity fraudulent or not

Fair enough but would depend on how much Joe owes already. Borrowing $750K to buy a rental in Auckland would lower your net annual income by about $10K so harder to get under a 5:1 threshold.
I don't think that anyone would give a rats if Joe lost the lot and it seems more and more likely that the negative gearing rorters will be the target by the RB and possibly (hopefully) government.

Good points. My gut feeling is that it feels like it could be a good initiative that could take a bit of heat out of the market, if not really kick it in the guts...

Hypothetical scenario. Family trust owns 2 houses with 50K of debt.

Total rent: $47,580
Total debt: $50,000
Settlors income: $90,000
Total income = settlors income + rent = $137,580
TDI = 137580 : 47580 = 1 : 0.35
-------------------------------------------------
I think the hypothetical debt loading is way light, so the trust is in better shape than most. Imagine the trust wants to buy a house in Tauranga. Because they sure as heck don’t have a chance of buying a house in Auckland.
House in Tauranga 650K with a gross rent of 410 p/w

New total rent: $68,900
New total debt: $700,000
Settlors income: $90,000
Total income = settlors income + rent = $158,900
-------------------------------------------------
TDI = 158900 : 700000 = 1: 4.40

I think this policy would do nothing to Auckland but smash the provinces.

You forgot to adjust the total income for interest payments, rates and insurance. The income in the Tauranga example should be reduced by about $30K. The point is that buying in the Auckland market would be far worse since the properties are cashflow negative with an 80% mortgage.
Try Whangarei; $350K purchase price, $280K mortgage, interest and outgoings $16K rent $18K=$2000 net income.
Can you explain properly how a 5:1 TDI would impact more in an area with 4:1 price to income ratio than one with a 10:1 ratio?

I was referring to gross not net income. You're right, if you're talking net income then the TDI would obviously be substantially higher meaning you can borrow less money.

Can you explain properly how a 5:1 TDI would impact more in an area with 4:1 price to income ratio than one with a 10:1 ratio?

Yes I can explain that. It's because in the area with nose bleed 10:1 price/income ratios (Kohimarama, St Heliers, Glendowie, Remuera, North Shore, etc) the vast majority of houses are being purchased by the Chinese or other foreigners. TDI's would do nothing to the price appreciation in these areas. Perhaps just knock out the piss-ant New Zealanders who are trying to compete. Remember the price is set at the margin.

Joe is unlikely to have five properties mortgage free though and is most likely already beyond the 5:1 ratio already so no new loan would be approved.

I am pretty sure they talk about Net income, that's the income that the banks use for their calculations when handing out a mortgage. Basing it on Gross income would be silly.

"English was again careful not to talk specifically about appointing Commissioners to run Auckland from Wellington, but the threat hung heavy in the air above his words."
If the govt was to do this then it would make the next govt election more direct: unconsulted densification against the property owners wishes vs the govt's desire for this open door immigration policy.
I think National would lose the next election if it came to that.
And with the council elections, those who originally voted for the unconsulted densification and extension of the mixed urban zoning can be voted out.

But national would pick up the youth vote.

Unfortunately the demographics are against them - the property owning boomers outnumber the younger generations looking for a home.

The youth, of course, can and are voting with their feet.

Yes though the Boomers with grown up children are now feeling the housing pinch and are now starting to realise that their children and future Kiwis won't have a hope in hell of owning their own home. That's what will kill the National vote.

I look at it a bit differently. I think they could intervene in the Unitary Plan without it becoming 'political suicide'.
The areas of density are typically in lower-mid value areas anyway, rather than in the Nats heartland.They could keep going hard in those areas or harder, then look at more greenfield stuff 'out there' which generally avoids political fall out.
Having said that, I do think they genuinely want to avoid intervention! There IS only downside for them in that, although they have a bit of fat in the popularity stakes.
I tell you what though, I think the Council will not make the 'right' decision. And I think the govt WILL intervene. And then what? I reckon they won't get too much fall out, because they will promote more greenfield housing and they will legislate for Municipal Utility Districts ('MUDS') for the funding and provision of infrastructure to those places (rather than relying on drawn out, long term Council funding and delivery). That would also deal to the Council debt issue which has been raised in the media over the past few days.

Very nice uninterested; And so we get down to the casual issues. NZ home owners just want what they want and they will do what they need to do to get it. This is why politics has always been the art of the possible.

up
13

What scares me is the number of investors that are interest only - they are not investing they are speculating. While orthodox economics would dictate that a lower OCR should lead to a lower exchange rate - that mechanism seems to be broken. The exchange rate in the recent weeks has been volatile and has been pushed around by events outside the control of the government - which is a bit player in this game . With such a large number of investors in the interest only category (which is an admission in itself that the investment property is a myth for over 50% of so called investors) no wonder people are demanding ( and I use that word on purpose) lower interest rates - pure self interest - makes me wonder how many are having to "support" their so called investment.

The comment is made about helping farmers and exporters via lower exchange rate. Why? Many exporters have adjusted to the higher exchange rate and are thriving. The government has said that the dairy industry is not the entire economy. Back to question why?

A recent comment was made that 90% of New Zealanders financial assets are in housing and that their are few other opportunities for investment - bollocks - its just that New Zealanders lack the financial skills and the intelligence to look for other opportunities. There is nothing stopping New Zealanders investing in the Australian or the US or the UK share markets - there will be tax considerations and exchange rate risks - but you are investing for the long term. Even if you invest in an index linked type investment you would still be ahead.

up
15

watching Q & A this morning and Richard pebble former leader of ACT said over and over Auckland house prices are a asset bubble and like all bubbles it will crash. He also said the government will do nothing as its not in their interests to do things that would correct it like reform the RMA, and open Auckland borders up for building houses.
if it does crash like he says there will be carnage much much greater than 2008 or the CHC earthquake

up
10

Prebble was a disgrace, only interested in protecting the already privileged. However he is not the problem, he is yesterdays man. Nick Smith is the problem. I wont repeat the rant I had about him on the other thread but this emergency (and it is an emergency when you have New Zealand kids being raised in cars and garages) requires the man directly responsible to not be in denial of all the issues, INCLUDING demand.

Did anyone believe Nick Smith on Q & A this morning?
He had obviously been prepped by the spin doctors and Consultants to aggressively deny reality and front foot any questions on house buyers. Perhaps the National Party don't realise that a wider group of NZers than the Labour Party are realising that their children will not be able to own their own home in their own country.

http://www.crosbytextor.com/strategic-partnerships/

Exactly right MB. Smith made the comment "we need to moderate the percentage price increases to single figures". In that statement alone he should be stripped of his warrant. He clearly is not interested in fixing the problem, merely moderating it to keep comfortably off National voting home owners content while pretending to take action. In doing so I think he underestimates the underlying egalitarian streak in New Zealanders for whom anyone with an ounce of compassion can see a major structural imbalance take hold that is unfair to too many.

Wow incredible. So he's very happy with increases of say 8-9% per year.
As you say, sweet spot for the Nats. Not so large as to throw out major financial risk but large enough to keep
'Middle NZ' feeling everything is on the right track....

a lot of middle NZ especially in Auckland are slowly waking up to the fact their children and grandchildren will never own a home.
this will hurt national eventually, and if there is a housing crash don't expect them to get elected again for quite a few terms

Interesting dynamic is Aussie at present where their Labour have put out a policy of eliminating negative gearing. The Libs initially were gleeful believing it was akin to taking a political suicide pill but a funny thing happened in that Shorten appears to be taking the people with him. It seems that even the advantaged recognised that there is now serious inequality in the system that starts to affect their offspring. I think this is also starting to happen here as people know in their heart that this has gone too far.

Yes, Every middle class baby boomer is discussing their kids home-buying prospects in the workplace.
That's a good sign.

Yes, going to "interest only" used to be the fallback position, last resort option. With that almost becoming the norm these days, when things turn down, the banks aren't going to look very viable at all.

Matters could come to a head very quickly if liquidity issues force creative deposit taking alternatives.

Deutsche Bank Offers 5% Yields If Depositors Lock Up Their Money For Three Months

Its a good concept - If all mortgages for property that was not owner occupied were maximum 15 years repayment - not only would it promote reducing housing debt - it would also limit the ability to overleverage -

this might be the best policy instrument available

up
13

All about what governments chose to incentivise through our tax system. People thus invest their time and energy where they see the easy money. It's the very foundation of NZs problem. Solutions are many and varied. Willingness however to solve these issues is absent in the halls of parliament because they themselves are up to their eyeballs in this pyramid scheme

really, invest in the stock markets maybe 5 or 10% max....the thing you are missing is the 90% you mention are workers and savers not business owners or investors thats why they lack the skills you mention. you are asking them to put their money into complex markets that they have no understanding or little control over, when they can see the appreciation that has happened in real estate that has gone mad over the last 5yrs or so, which the 90% easily understand as most will be homeowners and have recently figured out what equity is, it is relatively easy to get into (well it use to be) and that people feel they have a bit more control over their asset/s...and many of the mums and dads of these young house hunters have not forgotten 87...

Problem is 90% of people have no idea how money comes into existence via new debt creation. That fraudulent activity is the very heart of our monetary and banking system! But try explaining that to some let alone our OWN media and dare I say our own joke of a Finance Minister! An infinite money supply is a total crock of shite that will fail. I don't even think the creators of this site really get that fact. Happy to carry on facilitating ignorance of though it would seem sometimes. There's a huge elephant in the room we all know is there but everyone tries to ignore it out of what I can only guess is personal interest.

While I understand that many people do not have the ability or the education to understand or invest in the share market - but even investing in a passive fund that just mimics the market is a good place to start. Years ago I was told a story from a finance lecturer at Canterbury that one of his colleagues (in another discipline) had shares in a company. The lecturer told him that that wasn't a diversified portfolio - so he bought shares in another company - then he thought he was "diversified". What I am trying to get is that even people who do have a very high degree of eduction ( I think the colleague was in engineering) - they do not understand the concept of risk and diversification ( or perhaps they didn't care). The story is that you don't put Myron Scholes and Nassim Taleb in the same room - as sparks fly.

Myron Scholes (the Nobel prize winning theorist, and co-developer of the Black-Scholes theory for pricing risk) was one of the key people in Long Term Capital Management. This company self-destructed in the late 90s and was eventually bailed out by the Fed. This was purely down to misunderstanding risk.

The problem is that property investors have little control over the property market, the exit costs are relatively high and the exit window is small if the property market "crashes" and then there is the risk of all your eggs in one basket. While investors may have equity in their own home - investing in another property (and especially multiple proprieties) - places all your property at risk if there is a downturn. While those with shares in a company only risk the capital that they have contributed (it assumes that they are a limited liability company - unlimited liability companies do exist but are rare). An index fund would be a good place to start.

Diversification is not really possible these days. If property tanks, the sharemarket will be hit hard too - possibly even harder.

Housing collapses = banks in trouble/possibly collapsing = very little money = no consumer spending = shares tanking.

The GFC in 2008 showed this link quite clearly. Do not think because you own shares and property you are any safer.

I don't want the housing market to collapse just for that reason. Having said that you can always invest outside New Zealand.

And asset bubbles with debt lead to deeper recessions that are longer lasting. That's why the dot com bust was relatively mild compared to the GFC.

EDIT

You seem to be using the to big to fail argument to avoid the issue of New Zealanders putting all their eggs in one basket.

Not at all. What I am saying is that money is money no matter what form you store it in. You can "diversify" as much as you want, but in the end everything is linked in the economy.

Best analogy I can think of is that instead of a dollar on a win, you are putting a dollar each way. You have made your probability of getting something back better, but if the horse (Economy) loses, you don't win.

Yes but housing has been a safe bet for the last 40 years. Shares are paper money, if things go bad your left with nothing at least with a house its a physical asset. Besides you have to live somewhere so I just made my house my savings scheme and it appears looking at my neighbors valuation two weeks ago its now worth $1M. Somehow I don't think I would have got here on "Other Investments". Shares are for people that can afford to loose it all.

How do you know? While company's do fail - most involve a degree of poor management or outright fraud (Enron). Your house may be worth $1M today but what will it be worth tomorrow - $1.1m or $900K or $200K - who knows. While house prices have been a sure bet for the past 40 years it does not mean they will be a sure bet for the next 40 years - it is an unknown. So I assume you have no other forms of saving - no money in the bank , no KiwiSaver - how are you going to pay your rates, eat, own a car when your retire - the pension - only if you want to sit in front of the TV and watch "Days of our Lives" ( I assume it is till running) - because you can't afford to go out. If you loose your job or can't pay the mortgage for some reason - the bank will repossess your house and sell it. If you have investment properties and you default you risk loosing the lot - while debt can magnify your gains, debt can also magnify losses.

With shares you are limited to the money you have paid for those shares (this assumes you haven't borrowed to invest in shares). With a diversified portfolio of shares - risk is reduced (but not eliminated).

I agree wholeheartedly. I am not opposed to the sharemarket, but when there is a great deal of uncertainty like at the moment, property is good (I am assuming this is why the whole world is plunging into it)

Even if your property value hits zero, you still have shelter and possibly some land to grow food. Two basic needs for survival. A share hits zero you have nothing.

I used a racehorse analogy above and will use a similar one here. Shares are like a betting slip - they can win or lose, but the slips themselves are of no value. Property is the horse, own the horse and you can afford to lose a bet or two as you still have the horse and it could still win future races. Or you could sell it, heck you could eat it if times get that hard. Best bet though is to be a betting agency that owns horses, and wins lots of bets - I believe everyone else knows them as banks.

I disagree with this idea that "shares are only paper but a house is a physical asset therefore 'safer' ". The reason being that your house is actually only a paper asset too, a paper asset actually owned by the bank (unless you are mortgage free). And its terribly illiquid. If something bad happens in the economy my share portfolio is diversified so I can sell bits, buy others and act as I see opportunities very quickly and I'm not in debt to anyone (i.e. a bank) for their ownership. Yes we all have to live somewhere but the banks will eventually take your house if you find yourself unemployed and/or unable to service your debt to them. It also takes a longer time to sell, which in a difficult market when you need the money is not a fun situation. And in reference to Noncents' comment, you can eat a horse true, but you can't eat a house.

You disagree yet none of your points really hit the mark.

Paper asset -
Yes - if the bank owns most of it and you have negative equity. So at worst you are equal with a shareholder.
Kind of - if the banks owns most of it and you still have positive equity.
No - if you own it.

Illiquid
- not an issue if you own it as you just keep living it in, you have no need to sell. Need cash - rent out a spare room to a shareholder just make sure they pay cash :-)
- if you still have a mortgage, the banks may kick you out, but if the banks go into a full collapse they are not going to kick everyone out and sell every house at the same time. That would only lose them money. Some people will be foreclosed on, but the majority will just be issued new repayment terms - as per the 2008 GFC.

Debt
- Yes, but as above, the banks aren't going to kick everyone else out at once.
- Also, who says people with mortgages aren't using that money to buy shares anyway? Do you really want to lose your house because you put more money in shares instead of paying off the mortgage?

As for not eating a house, that is true. But I wager I can grow more food/crops/animals on my small suburban block than on a paper share.

Some of these take balance. Sometimes the question comes up; is it better to pay off the mortgage or to invest the money. For me the answer is somewhere in between.

If there's no credit you can't borrow against your house, if potential boarders can't pay enough board you might end up short on cash. If your money is in shares even if you are forced to sell low there's usually some buyers there (not always but most times).

You can call shares paper money but a house is not money (unless it generates income somehow).

All valid points.

At the end of it all Money is merely faith in a system. It's really no different to any religion. It works because you believe it works.

That belief is taking a beating at the moment. Will there be a financial reformation?

Some time in the next decade there may be an event that reshapes part of the financial system. Perhaps it will be the ECB where they are fiddling the books hoping for a near future recovery. Things are more dire in the EU than what I ever realised. Or an event could happen in South Africa, Canada, Australia, etc that could transform those countries and trigger global financial issues.

You never know.

A one percent increase in housing interest rates would kill off most so called investors.

If you look at the statistics for interest rates they have been declining for years to accommodate them and their cohorts in Parliament and the banks.

They think growth in houses, will fix almost everything.

Fiat Money has to be borrowed into use...period. At a ratio determined by BANKS and they dictate that to the lying Politicians that you all voted for..

Otherwise there is only debt, built upon debt...No profit.

So the bigger mug relies on interest rates declining, houses always going up in price.

Until rates hit rock bottom...then there is no room to maneuver, panics the banks and the so-called investor no end as they rely on growth, ad infinitum.

Tis why we have Bankers running our tiny World...uneconomically. NIRP/QE1/2/3/4/5/6/7/8/9...etc.

Now most depend on Taxpayers to pay their ..effortless..effrontery. And the taxes are declining. So someone has to borrow more...etc.

Just look at the panic when Yellen called for reversing the engines and raising interest rates by a fraction. Mayhem.

I could depress you even more....But what the heck....Economics, is not what it used to be.. Now money is manipulated into being.....just like debt, is now everyone's God.

God save the Queen. May she be on our coin for evermore, otherwise we will have a bigger Charlie...to scrape a living with....at different exchange rates, yet to be determined.

Hence why we import our esteemed BFF money from serious graft.

That was skimmed off the top...from borrowing money into existence and Yanking the Yanks chain and spoiling their own country for the spoils.

Would they not just all try and pass that 1% onto tenants? I can just hear that clown from the property investors association now. And unless we add house price inflation back into the CPI then I don't really see enough inflation from other areas to bring about a 1% increase. This will only be solved by a real mandatory willingness or a natural crash in my opinion. I agree with everything else you have said though

New Zealanders aren't willing to take a bite of that shit sandwich - to much nanny state has made us soft.

I always agree with me...I am old, sick and tired of all this fraud.......But fraud-u-lent is all we have. Money for jam and your cheques for free.

If you know how to work to system, fine......but no one has ever been fined enough for this gigantic fraud.

They talk about it a lot....Money Laundering is now on the agenda. Borrowing into creation, not so much.

Believe me I'm hearing ya

One percent increase would barely have any effect at all. Most are probably already paying more than one percent of what you can get now anyway. Three percent would see belt tightening and more than that would see some selling.

The problem is we just don't know how precarious investors positions are - if they are at interest only things may not be that "peachy".

what a rant. well obviously you have position yourself to benefit from the coming doom. because as you no doubt are aware Alter-Ego, wealth never goes away, it simple transfers from one set of hands to another...oh and if your going to rant please use the correct terms. no one is printing money, central banks are printing currency (digitally these days). thats why you need so much of it to buy a house that was half the price a year ago, house is the same its just you currency is being watered down in purchasing power. There is only one form of money, but i know you know that....

Thanks for the vote of confidence.

But I am not a confidence trickster, like those I disparage...hence why I rant, as you call it.

So please do not blame me, whatever terminology I use.

Knowing what is wrong, does not make me the problem. I use my terms, because my school of thought is ancient, not modern.

But thanks for the rant in return. There is a term for learning the basics of digital currency as you call it...Fraud is what I call it, when it is either printed into position or digitally enhanced via a computer. When I worked in computing, we never issued owt, but a balance sheet, that had to balance the books, not cook em. Otherwise it would have been illegal.

Please do not read my comments in isolation. I believe a little education goes a long way and I use simple terms, because I am a simple man, trying to come to terms, with what is a rort and a fiasco, rolled into one and called...finance...today. Simple it ain't.

Each country is trying to stiff the other anyway it can. Passing the buck, is not my forte.

I do not approve of what is now fraud on a grand scale. You can call it what you like.

But a global economy, it ain't. Economy does not even come close.

AlterEgo, I doubt that any investor is dumb enough to stretch themselves so thin that a one percent rise will kill them! I am sure many of them can handle higher interest rates. The bank wouldn't lend them the money in the first place if it saw that a 1% rise would kill them, I'd imagine. Also there are many investors who are still paying over 5 and 6% interests rates today because they fixed a couple of years ago at a higher rate. When their interest rates come off and they will start paying 4% then they will have absolutely no fears of having their interest go back up to 6% , which is twice the amount which you say will kill them off.
Rising rents will help too. Rents have gone up 2.4% in NZ on average. in many regions rents have gone up in double digits year on year, according to the Trademe Rents index http://www.trademe.co.nz/property/price-index/for-rent/

....it's not the rate rise its the ability to pay. Diary farmers prime example. Job losses the equivalent for the wage earners.

While I admire your optimism and confidence in the property investing public - the problem is we just don't know. Today I was at an open home - I assume it was a rental - it was empty for starters and while looking around I could see from one the bedrooms into the next door neighbours house - it was empty as well. I am making a lot of assumptions but I suspect both houses were / are rentals. Rents in Christchurch are actually declining according to your link - down 15.2%. That is a big drop in rental and considering that house prices in Christchurch aren't really going anywhere seems like a lot of investors are selling their rental ( according to TradeMe 1805 homes are for rent in Christchurch at the moment).

I am looking at the market in which I am living.

EDIT

As the saying goes when the tide goes out you see who's swimming naked

Do you have any concept as to why interest rates were forced down over the past few years.

2008 was such a success, they decided to replicate it time and time again.

Stimulating, was it not. In theory.

No it was not ..................actually, in practice. Just more and more debt.

There are very few problems that cannot be solved through a suitable application of high explosives.

Perhaps Auckland nimbism qualifies.

You'd probably get caught because someone in the "leafy suburbs" is bound to have a security camera. What about suffering a "medical event" while operating an excavator. I believe they can be found lying around on motorways in the area.

They reckon that the only person who ever entered Parliament with honest intentions was Guy Fawkes

Don't give people ideas....

It would be useful if the RBNZ provided the same information on high DTI and interest-only lending for each of the major banks operating in NZ - rather than aggregate figures. Then depositors at these banks could better evaluate the (lack of prudent) lending by their bank.

At the moment NZ depositors take virtually all the risk of the bank's lending to the investors - at an ever decreasing return on their deposits - with no transparent information available to evaluate the risky lending practices of their bank.

up
11

I suspect the RBNZ already know exactly what effect DTI restrictions would have but are reluctant to apply such a big blow to the housing market - not to mention getting Bill and John to agree.

November is far too late, if they were serious they should have announced it this month. If they believe DTI is a good tool they should have been progressing it last year instead of sitting around crossing their fingers the 30% LVR rule would work.

DTI restrictions are the best thing a FHB could wish for - say a couple earn $50k each ($100k household), at 5x that is a $500k loan - remember this couple has about $80k after tax. That is plenty of leverage! Enough leverage that neither could afford to lose their job let alone think about having children. And IF the foreign buyer data was correct, DTI restrictions would cause Auckland house prices to fall, improving FHB affordability. Of course, if foreign buying is more like 30%, then a ban/land tax/stamp duty/whatever will be needed as well.

May as well grab the popcorn and settle in to enjoy the show - I have no doubt it will be a spectacular screw up by all parties in any case.

Why don't we get a collaboration of media groups to investigate the housing problem.
I can think of TVNZ,Radio NZ and Hagar the horrible.
They usually get to the bottom of any problems and lets face it they need something to get the stench of egg off their faces.

Really NG? Are you saying it isn't in the public interest to have journalists examine the connection of NZ to a major international news story. I would have thought they are doing fine work highlighting how NZs opaque foreign trust industry operates and exposing to us the potential for our good name to be used as a front by all manner of shady customers to launder money and evade tax. That there hasn't been any sensational findings of wrongdoing by prominent New Zealanders to date is not the point. It is almost certain the govt will end up making changes to disclosure obligations as a direct result of the pressure this story has brought to bear.

I find the idea that TVNZ or Radio NZ would carry out any proper investigative journalism and honestly report their findings to the public utterly hilarious.

Both are very much 'business-as-usual, nothing to see here, tow the line' organisations -essential components of 'The Matrix', in which censorship and manipulation reign supreme in order that the dumbed-down masses are kept in the dark and believing in a 'better, brighter future'.

Maybe 'tow the line' is as descriptive as 'toe'. I.e. Towed by corporate advertisers affecting editorial content.

They are all too busy obsessing over more important things, like The Bachelor and his sleepovers

up
17

Notice that the Panama Papers disappeared pretty quick. Nothing of interest. While there was a meeting in London of people that matter. We sent our tainted corruption expert as an observer while many sent their heads of state. Our tainted expert said "we will" merely "look at it". Our media nabobs dropped it PDQ

she was cleared which should give you some idea of where we place insider dealing, conflict of interest, in NZ
here now we call it doing business

Yes Icon, the Panama papers did disappear, but then they also punched a hole in the wall of denial that the John Key government holds to. The Panama papers related to just one bunch of sleaze in one city, and a small part of a very big picture. The next thing that comes along John Key will find it much harder to brush off.
And I think it will be part of the picture the public holds when we think about things that are only slightly related such as taxing google and the other ripoff corporations

Zombie Ponizi - I wish i could give that 30 likes. Great Post !!!

Let us remind ourselves of the mess we have got into because of having all our eggs in one basket with little incentives to invest elsewhere and housing being so profitable for investors. We need Loan to Income and Stamp Duty to cut out the investors bidding up existing homes and let them focus on building/paying for NEW HOMES. Thats the only way we will get FHBs into homes. Also diverting money into businesses instead of housing will help increase our GDP per capita and productivity something housing will not.

From a recent TOP 10 on this site :

2. Learning to be a more productive nation

Labour productivity grew just 0.3 percent in the year since March 2015 and the Productivity Commission found that in the 2000s New Zealand had "one of the lowest growth rates in GDP per hour worked among OECD countries”. These results seem at odds with a nation that prides itself on ingenuity and a strong work ethic.

World Bank consultant, Kinley Salmon, suggests that a focus on learning by individuals and firms as the primary objective of policy making would help to create sustained productivity growth. This could be achieved by increasing R&D spend (currently 1.17% of GDP), challenging tax policies which incentivise investment in ‘minimal learning sectors’ and ensuring there is adequate support for those launching new start ups. He says:

Take tax policy for example. Returns on housing in New Zealand are taxed more lightly than returns on financial assets. This contributes to the fact that our savings go overwhelmingly into the overheated housing market. According to Treasury, as much as 90 percent of household wealth is held in the form of housing in New Zealand, compared to 50 to 75 percent in other OECD countries. Yet real estate is a classic learning-free cul-de-sac. Taking learning seriously would mean asking how tax and financial policy can channel savings to productive sectors with higher learning potential.

NSW cracking down on foreign buyers, collecting a lot better data than our government
Buyers and sellers of real estate will have to prove their residency and citizenship status to the NSW government before a sale is completed, under new rules targeting foreign buyers that will apply from July.

The Baird government will collect the first comprehensive data about the real level of foreign ownership of NSW houses and apartments, and whether restrictions on foreigners buying established dwellings are being complied with.

For the first time, a land tax certificate showing whether any money is owed must be supplied to a home buyer by a vendor before settlement. The vendor must disclose their residency status and nationality when applying for the certificate.

Foreign buyers will have to provide citizenship and visa details, as well as Foreign Investment Review Board clearance, through the stamp duty process.
http://www.smh.com.au/nsw/foreign-buyer-crackdown-as-new-identity-rules-...

They're serious - how it's done

The law will improve transparency and "is directed at maximising the supply of housing for locals"

But it hasn't worked in Australia! Blah blah blah.

But at least NSW is trying to do something to tackle the foreign ownership problem and is able to recognise it rather than just fudge the figures and pretend that there's no issue.

Just annouced it not sure you can judge if it has worked yet lol

Nobody has a right to anything, young people have as much right to a first home as they would a honeymoon on the tax payer. No wonder we have so many people not getting on the property ladder, the attitude is pathetically whimsical. When I bought my first house in Wellington back in 2002 at age 28 it was for $220,000. But I was only earning $30,000 per year. I worked 2 other jobs to get it, got flat mates, didn’t whinge, saved hard and hardly went out for a year. The same applies now but most simply listen to journalists and their own problems which they mistakenly assume are theirs!

The property owning democracy was a way of getting people to buy into society. In the current environment people are struggling to get a deposit together when property prices are growing faster than they can save. Auckland is obviously bad and it's not so bad elsewhere, but the low interest rates are really pumping up house prices.

It's not a right but a lot of people are finding themselves shut out completely. It's serves to destabilise society which concerns me.

Property King - are you aware of how fortunate you were in your timing when buying a house? Or do you just think you're are very clever like the other home owners and landlords in this country? How about a story....If I just happened to buy stocks in 1925 and it was now 1929, I would also think I was very clever and would lecture other people that they should have purchased stocks years ago. I mean, what the hell you were thinking? Are you stupid? You should have bought stocks way back in 1925! But its 1929 now, jump on the bandwagon and buy up large on stocks and stop complaining. Unfortunately we're not all that stupid Property King.

And can we please stop using the term property ladder on this site. It's ridiculous. Property ponzi is a much better fit given the current situ. And if we do use the term property ladder, then in this game there are also snakes that counter the ladders (I take it most people will have played this game). So when are we going to hit a snake in this game of property ladders? Can't be far away....

If you are talking about Auckland, then yes. However, I’m in Wellington and prices have been flat for 8 years bar this year, 500k in Wellington is not much to pay for a property if both you and your partner earn 80k (Wgtn city average). If you know what you are doing you can make money out of property in any market, perhaps you should read more sensibly and stop believing Bernard’s nonsense. He’s always negative.