Bernard Hickey challenges the knee-jerk idea that a big fall in Auckland house prices would automatically kill the economy and destroy the banks

Bernard Hickey challenges the knee-jerk idea that a big fall in Auckland house prices would automatically kill the economy and destroy the banks

By Bernard Hickey

Brace yourself, but just imagine if Auckland house prices fell 55%.

Former Reserve Bank Chairman Arthur Grimes proposed deliberately 'crashing' the Auckland housing market by 40% by building 150,000 houses over six years to actually make housing more affordable. Former Reserve Bank Governor Don Brash then said Auckland house prices needed to fall 60% to achieve affordability, given waiting for income growth to catch up with flat prices would take 50 years to restore price to income multiples to sensible levels.

The Prime Minister immediately wrote off the idea of a large fall in Auckland as "crazy" because of the effect on developers and banks and the wider economy, which tried to kill the debate stone dead. 

Everyone just seemed to accept that a fall of such a magnitude would be an immediately catastrophic and economy-killing event that could not be contemplated, let alone studied or debated. Surely, everyone thought, a fall like that would cause a crisis similar to the ones that broke the banks and forced taxpayer bailouts in the likes of the United States and Ireland?

Politicians of all colours and lobbyists for landlords may talk about the housing like some sort of bomb under the economy that cannot be dismantled, but would such a fall actually kill the economy, or the banks for that matter?

Luckily for us, we don't have to imagine. The Reserve Bank has done a test of just such an scenario, and quite recently.

The independent institution responsible for regulating banks and forecasting the economy said in its May Financial Stability Report that it ran a 'stress' test with banks late last year of what would happen to their balance sheets if house prices fell 55% in Auckland and by 40% nation-wide.

They crunched the numbers and found the world did not end at all. 

Banks would not force everyone to sell their houses. Most home owners have vast amounts of equity to fall back on. Those in negative equity would not either send their keys back to the bank in the mail or be turfed out without warning. The incentives for borrowers and banks in New Zealand are quite different to those in the United States or Ireland. Our banks do not shoot first and ask questions later, as has been seen in current dairy payout crisis. 

New Zealand's banks are very well capitalised and have not sliced and diced and sold off their mortgages into hyper-financialised markets primed to blow up 'Big Short'-style. They now mostly rely on stable long term and local term deposits for funds. They are also very profitable and the Reserve Bank found that the losses from such a big fall in house prices would eat into those profits and ultimately reduce their capital buffers from around 10.3% to 8%. But that is far from being bust. At the very worst, the Reserve Bank said it might have to stop some of them paying dividends to their parents in Australia. That is far from catastrophic.

It's also worth noting the Reserve Bank did not muck around with a simple scenario. It also assumed that the 55% fall in Auckland house prices would happen at the same time as a rise in unemployment from 5% to 13% and a recession that carved 6% off GDP. Just for good measure, it also assumed that dairy incomes remained at their currently unprofitable levels and that banks would also make losses on their business and commercial property loans. It found that losses on mortgages would only be around 1% of the bank's mortgage books. 

It's worth remembering that the bulk of borrowers are having few problems servicing their debt at current interest rates. Reserve Bank figures show total interest costs are around 9% of household disposable income, which is down from a peak of 14% in 2008 and similar to levels seen in 2003. There are plenty of buffers built into the system in terms of bank capital, interest servicing costs and home equity, except for those at the most extreme end. And the Reserve Bank pointed out that interest rates would also fall in such a scenario.

There are also fewer borrowers up to their gills in debt because the Reserve Bank has deliberately and successfully forced the banks to reduce loan to value ratios over the last three years. The proportion of mortgages with Loan to Value Ratios of over 80% has dropped from almost 21% in 2013 to closer to 12% at the end of last year, and that will have improved since then because of further house price inflation.

Yes, a few property developers might see projects fall over, although there are a lot less of them leveraged through finance companies than there were before 2008. Yes, a few highly leveraged rental property investors might lose some equity. But isn't that one of the risks of doing business?

So why are politicians of all colours so afraid? And exactly whose interests are they protecting when they say such falls are "crazy" and "unnecessary"?


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?

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Not very bright however i'll try this scenario.
BUY HOUSE $100.00
Borrow 70% $ 70.00
Prices fall 55% $ 45.00.
So I now owe $70 on a property worth $45.
I may have it wrong but it doesn't look to good for me.
I await my come uppance by more financially literate people than me.

We'll sort of. But it depends if you sell and realise that loss or hold on to your property.

If you are a speculator, then you'll likely lose out because you buy and sell more often than most and service multiple mortgages through a range of income streams and leverage. Though you wont find much sympathy anywhere when you lose - like a gambler at a casino.

If you are a true home owner, and intend to live in the property for a length of time and don't actually have to sell, then you bought the property at $100 seeing the value of it over a long period of time. A sharp drop only hurts if you want to sell up. As long as you service your mortgage it won't be an issue. Though you won't be able to borrow money against your house for that new car or boat.

Wow - take care as nothing is certain in life.
You may propose to live in the family home for some time with no intention of selling; however, that marriage could go west at short notice with one former partner forcing the sale of the home.
Then your $100 house will be only worth the $45 and you will be each starting out with loss of your $30 equity (x10,000 on the $1m house) plus a debt of $12.50 (x10,000) each.
Glad to hear that this isn't an issue with you.

Many will be prisoners in their own homes and for some, in their marriages. Or free but bankrupt and destitute.

Want to start a business using the equity in your own home as seed funds? Forget about it. Need an operation right now and want to raise your mortgage to get money to pay for it? Forget about it. Want to borrow any more money for anything? Forget about it.

Well no sh*t anything can happen in life and change your circumstances. The point was if you are in it for the long haul you will generally be able to come through a fall in prices because you don't need to sell. If you cannot, then perhaps you should be reevaluating your ability to borrow so much money on a presumption that prices will go up or at best stay level. If you are that naive, then you are in for a bloody shock throughout your life.

If we're in it for the long haul it doesn't mean that the prices have to drop by 55% because that is very scary for the people that I know who have bought in the last 6 months. They have young families and have been struggling to find something decent to accommodate themselves especially the babies. I'm sure they're happy for the prices to drop slightly even 20% as they are, like you said, in it for the long haul, but a 55% drop is too scary for them. They have done nothing wrong, they're hard working Kiwis who spend many many hours working to try to make life easier for their families.

No one has done anything wrong. I'm in the same boat. My family and I are only just buying a house now and spending an exorbitant amount to do so, considering. If the price falls out of the market it doesn't hurt me though, it would make me regret buying when I did, sure. But at the same time, I'm not going to be selling in a hurry and I'm prepared to service my mortgage regardless of what my house is worth.

The only authoritative answer you will get is from the market and it doesn't care what looks good for you or otherwise.

You forget to add that the house you wanted to move up to was worth say $130 now worth $58.5. So even if you broke even on the sale with no money left over, you'd still have to borrow less to get into the better house. Lower prices all around is much better.

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Interesting that only 9% of household income goes towards interest repayments. I thought it would be higher.
The only way to get house prices down now would be to put up interest rates but that isn't going to happen as the RBNZ have said the currency is too strong.
As the other article in the Herald says there is a chronic shortage of property coming onto the market. Until there is oversupply I can't see prices falling much.

Thanks Penguin. I agree with your view.

Presumably its only the servicing cost. Mortgage repayments would normally also include principal repayments.

Agreed! Bernard you have written two articles now about Aurther Grimes idea of building 150,000 new homes ( one third the size of Auckland ) in six years to crash the market by 40%. You owe it to your readers to outline a plan as to how this could be achievable in reality.

Maybe cold turkey is needed.

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So why are politicians of all colours so afraid? And exactly whose interests are they protecting when they say such falls are "crazy" and "unnecessary"?

Those that pay for the best democracy money can buy.

This is a bit like saying If you lost your house tomorrow it wouldn't be so bad because you could still live in your tent. Or if you lost your children tomorrow it wouldn't be so bad because you can still make more. Or if you lost your high income job tomorrow you could always work at McDonalds and live on instant noodles....
Yeah, right...smh.

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Zac what a rubbish go at persuasion. If you're going to study it, at least bend your back. Its painful. This floundering around pains people to see. You gotta look after yourself - its body and mind stuff. No pain.

As for price drop. Price is not value. Think for yourself.
There is that story about the guy that knew the price of everything but the value of nothing.
Imagine doing what the banks do.
Because using accrual accounting, rather than mark to market works.
No pain. Simple.

I firmly believe the price I get for my house when I sell it will be approximately equal to the current value. This is a core "value" of our society.

Also it is exactly like I say it is. I have often thought to myself, if I lost my job I could always scrape by working at a menial job...it "wouldn't be the end of the world".

Personally I know of a few people in my friend circle who have bought since Dec-2015. They are all 1st or 2nd home buyers, and they're hard-working young Kiwis between 25 and 35 born and bred in Auckland. If the house prices fall by 55%, trust me they (and their families) will be in BIG trouble.

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Why will they be in BIG trouble -they can afford the mortgage payments now so why not in the future? What you mean is they will be Pissed Off they wasted money on a poor investment.......Should we be governing in a way that guarantees kiwis private investments are always positive?

We shouldn't be encouraging people to invest and take care of their own families and retirement and then deliberately crushing their investment gains when they are deemed too successful. Seems like a recipe for disaster.

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But why should property investment get special protections?

P.S Housing isn't even a proper investment good -even Adam Smith 250 years ago called it a consumptive good.

But who is doing the encouraging? Only our Dear Leader is on record as saying that residential housing is a valid investment vehicle. You may remember Don Brash during his Reserve Bank days railing against this mentality, Sure there are lots of good reasons to buy a house and build equity in it. But not the entire nest egg, surely.

Not only is residential housing a consumption good not an investment but any excess funds diverted into that asset class deprive the wider economy of funds to enhance our productive activity.

Side Street is robbing Main Street.

In trouble when 55% of their equity is wiped off and they're making their mortgage payment only for their losses. They're hardworking Kiwis who aren't investors/speculators, who are just trying to bring up their young families. The one who bought in Papakura had 90% of the deposit from both parents, the one who bought in Massey probably will be working his entire life just to pay off the losses. The couple who bought in Adison development in Takanini can barely make their mortgage repayment let alone having their equity wiped off for both their houses. They all have mortgages between 600k and 800k...this is more than just pissed-off. They all have families and they have to bring them up in their own homes now...they have waited long enough for a property crash since 5 years ago.

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It ends up that buying during a bubble isn't always the best move. If you think they're unlucky just imagine the coming generations who don't have any chance of owning a property at all (ever) if the status quo continues.

While I sympathize with those who have recently purchased, there is a whole generation coming behind them who are 'locked out' unless things change. We should be thinking about the 'greater good' here and trying to put personal interest aside (for once).

We should be thinking in a more positive way. Crashing and burning something is pretty negative especially if done artificially and deliberately. We don't just have two choices, status quo or crash. Why not develop a new city somewhere south of the Bombay Hills as a competitor to Auckland? We should be pioneers not vandals.

Can barely keep a public transport system running, and take 2 years to sort out housing supply but we could build an entire city? By when - 2100? Be realistic.

The comments that are so adverse to a crash don't seem adverse to rises that out strip wages and income. Are you so happy to see prices rise 20% YoY but not happy to see them pull back? I'd question your point of view and motives.

We have the core of a new super city in Hamilton. It wouldn't be too monumental to expand it into Auckland's rival or a sister city. Property price declines are never a good thing for anyone in the long term.

You are correct Zac. Balanced Government regulation is required. Not being able to address the failings of the "free market" economy is causing too much chaos, and waiting for the re-adjustment to occur naturally is effectively taking ones hands off the wheel, covering your eyes and hoping for the best. that kind of crash will be ugly and it will be the ordinary people who pay the most.

Plutocracy you are absolutely right. But most kiwis have no idea what a good investment is. A kiwi love affair with a non productive asset. And most people dont even factor in a 10% mortgage rate. Its pure madness. There will be alot of tears i can tell you that.

A house is a very productive asset, especially a happy one lived in by liberal free thinking families, who are positive and wish to remain productive constructive members of NZ society, who bring up happy and we'll balanced future productive children, or else people would just rent or move to Wellington and pour misery on people's lives

I believe you may have described a home there, rather than a house. It is very difficult to make a home of a house where most of your money goes into paying the rent and are subject at any time, for any reason, to be given notice to vacate within 90 days. A home is where your children might have a pet, where the walls are the color of your choosing and there may even be a bit of a vege garden out back, something that is unwise to do, given the 90 day thing.

Who do you think that they should blame?

They should blame no-one if there is no 40-55% crash. I think they are quite happy for it to drop slightly say 8-12% (if it was going to drop) but definitely not 55% coz that's just crazy.

As I said above. The market will deliver the final answer and it doesn't have ears to listen to argument or what people think is fair or crazy.

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How Correct Bernard H.

Only investor who are indulging in speculation will be affected as do not have holding capacity.

Mum and dad who are buying for themselves and famail to live for a long time will not be affected except on paper. Also genuine investor will not be affected but in today's market rental returns are is so low that most investors buying in todays market specially in Auckland are speculators and is for fast capital gain as they too do not want to hold long for fear of market falling.

Now as your aticle, we all knows whom the politicans are out to protect in the name of ecenomy.

Strong media is needed much more in NZ than ever before. Keep it up. Though people know but the same by experts in media helps.

The independent institution responsible for regulating banks and forecasting the economy said in its May Financial Stability Report that it ran a 'stress' test with banks late last year of what would happen to their balance sheets if house prices fell 55% in Auckland and by 40% nation-wide.

They crunched the numbers and found the world did not end at all.

Hmmmm.."

Based on the Japanese' first experiment with QE starting in 2001,along with the unusually weak recovery in the US after the dot-com recession despite his "ultra-low" rate stewardship, then-Chairman Greenspan expressed in words what should have been widespread and lasting reservation.

What is useful, as has been discussed, is to build up our general knowledge so that when we are confronted with the need to respond with a twenty-minute lead time-which may be all the time we will have-we have enough background understanding to enable us to make informed decisions. We need to know how the system tends to work to be able to make the necessary judgments without asking one of our skilled technical practitioners to go off and run three correlations between X, Y, and Z. So I think the notion of building up our knowledge generally as a basis for functioning effectively is exceptionally important...Even if we never have to use the knowledge for the purpose of fighting deflation, I will bet that we will find it useful for other purposes.

The Fed never did what Greenspan proposed, leaving Bernanke's FOMC to exactly the fate as Greenspan described; starting in August 2007, the Fed's staff were left running X, Y, and Z correlations to try to forecast world conditions without precedent to the narrow orthodox paradigm. It was left to the fiscal side, as well, to craft "stimulus" measures similarly in the dark. The "maestro" was saying that policymakers better be sure they can actually do what they say they can do long before they ever have to do it. They didn't and forever proved they couldn't. Read more

Furthermore, the bank crisis trigger may lie elsewhere.

.China has threatened "retaliatory measures" against New Zealand trade, warning it will slow the flow of dairy, wool and kiwifruit imports.

The world's biggest trading nation is angry at New Zealand inquiries into a glut of Chinese steel imports flooding the market; the Chinese believe New Zealand is part of a US-led alliance to target Chinese national interests. Read more

Surely not another greater fool?

NZ Super Fund announced earlier this month it bought seven Southland farms, which would be managed by farm management organisation FarmRight. Read more

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Jeepers, that last link should be compulsory reading for every New Zealander. That's a pretty unveiled veiled threat from the Chinese government, particularly in light of record June steel output from Chinese mills (http://www.afr.com/business/mining/iron-ore/china-rolls-out-record-steel...), meaning that it's only going to get worse.

Unfortunately, I know what will happen. MBIE will let the dumping investigation die a quiet death, and hope that nobody notices.

Maybe that's why the Granny Herald has not a single damn mention of what could be incredibly important for our trading future. The top five articles on the Herald today are about rugby, TV hosts, and Lotto!

Its a real kick in the policital policy. And they're up for that

The meeting also saw the formal approval of a new target to raise two-way trade between New Zealand and China to $30 billion by 2020, although the release announcing the target was accidentally distributed to the media almost an hour before the meeting took place.
"I think that's eminently achievable," Key said after the dinner.
"But as President Xi said when we were having the discussion, that just means China's got to drink a lot more milk, and they're up for that."

http://i.stuff.co.nz/national/politics/9847806/Chinese-leader-to-visit-NZ

Maybe that's why the Granny Herald has not a single damn mention of what could be incredibly important for our trading future.

Good old impartial NZ Herald. Just goes to show how light-weight they are when they selectively publish news like this and highlights our own country's propaganda mill in action.

My security system has tagged the above link posted by Henry_Tull as a malicious website. Readers beware.

Contact Brian Edwards immediately.
Providing full session details, browsing history and security application details.
For the link is his commercial web site URL
http://brianedwardsmedia.co.nz

Brian Edwards and Judy Callingham offer professional and effective media training for people in both the private and public sectors.

Their website is likely to have some intrusive advertising, tracking software, or something on it. He should be informed about it as it will be stopping well protected visitors - an email address would be good. I highly recommend malwarebytes premium as it is reasonably priced and effective.
Also readers be very careful about any emails purporting to come from Australia Post. I heard someone last week had all their files deleted by clicking on one of the links in an email.

The independent institution responsible for regulating banks and forecasting the economy said in its May Financial Stability Report that it ran a 'stress' test with banks late last year of what would happen to their balance sheets if house prices fell 55% in Auckland and by 40% nation-wide.

They crunched the numbers and found the world did not end at all

I find this highly unlikely. Do we know how they formulate their "stress tests". Such a severe drop would vey likely cause a bank run and deep recession as fear gripped the whole country. Couldn't see overseas investors rushing in to prop up the banks and therefore they would need to increase interest rates to attract capital. This feedback loop to mortgage rates would exasperate the problem surely.

Wonder if their "model-makers" were the same geniuses who securitised mortgage backed securities or risk managed LTCM?

..exacerbate...
Hey, thats the first thing I thought of: a run on the bank. Especially the ones which have more lending in Ak.
The other thing is that the foreigners who have mortgages with the banks WILL be able to just send back the keys in the mail!!!!!!!!!! So to say that we have full recourse loans is bullcrappo.
Sure, they have stopped making loans to these unverified people, but they will have made many loans to these sorts before they had the brainwave to stop the stupidity.

I agree tom toad. A run on funds would test the resolve of the rbnz big time. The reserve bank would need to prop up the banking sector by essentially buying "good security". The risk of the private sector would again be moved onto the crown books. Last time (gfc) house prices fell say 10%, and the crown borrowed say $100b. If prices fell 40% - would this equate to $400b? I think the rbnz is being very selective in the way it released this data. It is also disingenuous.

Is Bernard Hickey so bereft of ideas that all he can ever write about is houses and their prices. Has he no other talents to write about?
It's always the same-houses, house prices, what if, doom and gloom.
I thought he was an expert on economics. Apparently not. This article hits bottom for shallowness and dare I say it, laziness.
Even some of the one sided dumbest posters on this site come up with more originality.

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Given he's an expert in economics (as you put it), wouldn't it be wise to sit up and pay attention? Or do you know more than an expert?

We have not overthrown the divine right of kings to fall down for the divine right of experts.
Harold Macmillan

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BigDaddy knows the accommodation supplement actually makes rents go down. That's pretty impressive stuff don't you think!

Ever heard of the Law of Unintended Consequences ?

..of becoming the Switzerland of the South?!

http://www.globalpropertyguide.com/Europe/Switzerland/Price-History
http://www.globalpropertyguide.com/Pacific/New-Zealand/Rental-Yields

Our rental yields are being advertised as "good value" overseas!

http://www.globalpropertyguide.com/Pacific/New-Zealand/square-meter-prices
Looks like a 120 sqm apt would cost more now, nearly 600/650k in CBD, reducing rental yield substantially.

Well, something has to be done.

Yes, increase inflation so wages can go up. Pretty simple.

So this is the example.
Bought a house today $1mil
Over six years the capital gain increase by 50%
Somehow RBNZ and the government build 150000 homes and the market price fall by 50%
So after six years my house is still $1mil.

Second case.
The rate of capital gain increase is stalled by the supply of houses. So the house is till sitting at $1mil.

Back to maths class! Your house is only worth 750k.

I think this is like some sort of opening negotiation gambit. 55%? No? how about 40%?

May be a conspiracy by developers/property investors to be able to buy on the cheap when prices are forced to fall ? (Sarcasm much).

How about 10%

Well the Auckland market did drop by -8% to -10% early this year whilst the new IRD numbers were being processed for the Non-resident Investors. First time that I've seen Estate Agents actually scared about their sales drop.

If Non-residents were to be restricted from our property market, I think you would see a least 20% drop in Auckland house prices. Guess that's why our Government doesn't want to do anything about them.

Dumb or dumber?

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Bernard, when ever anyone speak truth and in public interest, their would always be people who will be affected by that truth and will criticize but is important to expose government and elite few.

Loooking forward for an indepth article about non resident buyer for many feel that the main cause of such high jump in house price is non resident buyer.

Currently saw in news that a house in Raglan has been sold for 4 milion, would'nt be surprised who the buyer is.

Why is everyone so scared of a thought exercise.....

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Because they know if we had enough houses to satisfy all the demand and we did something about foreign buyers (because I believe they are in such great numbers we could not hope to build enough to satisfy that) then prices will inevitably come down.
Both making sure we have enough houses for our people and not allowing foreigners to skew the markets (plus tweak the settings for speculators and investors) are the right things to do, if we put the needs of our people first.

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The article heading reflects the sentiment of people of NZ.

My friend recently bought a house for himself for $800000 and he is not worried about fall in house for even if it falls to $650000 or below as he intends to stay in the house and in long run if it falls will come back back up or more but that is for is not into it for quick buck but to live.

So government is totaly wrong as is protecting speculators ONLY who are very close to them as a result are able to lobby and is the only voice that National party hears but now with exposures in public domain on a daily basis will be interesting to see how they defend - am sure will find some excuse and cover up being master in it.

On a serious note, we do need leader with a vision and not just businessmen to run the country as they forget that the role of government is welfare of all to creare just and equiatable society.

Good sign is tgat now peopke are aware and able to see through government denials and lie. No government in NZ would have had such a low trust in public and trust deficit is growing by the day.

Maths again. 55% of 800k is not 650k but 440k.

No maths but ecenomy for he feels that house price may and will fall by atleast 20% and if it feels much more is not worried as need and will be staying in the house and also know that over 15 years will come back as is not into house for fast money. For long term will not be a loser. For now is enjoying his house.

Be careful what you wish for BH....

You are all dreaming.
If your house falls in value to below its mortgage value the bank will sell you up in a heart beat.
That's exactly what happened in the U.S. when values fell and the mortgages became "sub prime "
I have seen it before in the 1980's when values dropped and the papers were full of mortgage sales.
Is that what Hickey wants?

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Bollocks. They won't do a thing unless one of two things happen. You lose your employment or you start defaulting on regular repayments. They don't care otherwise as the debt being paid back is their only interest. What your house is worth on paper is not their concern. Just the mortgage contract.

They can ask for a payment to reduce your mortgage to a level that makes it come within their requirements but common sense tells us that if prices dropped to the level BH suggests the Banks would not put all those houses on the market especially if the people are still making their interest payments. That would cause a further drop in prices.

Yes they can. Puts a whole new perspective on the term "home owner " doesn't it Patricia. People hate being reminded they really rent from a bank! In reality

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BigDaddy you are addicted to the housing boom. You want the continued fix of demand stoking measures from drug supplier government's -mortgage subsidies, rental subsidies, the immigration tap turned up full bore..... Big Daddy you have a huge fear and anxiety about a govt which supplies the good stuff instead -competitive land supply and a building programme of actual affordable housing. What's the problem? Why do you have no hope for a 'going clean' future? Why the fear mongering?

His debts won't be so easily financed by other people who actually have real jobs

In the US you can walk away from the house and the mortgage doesn't follow you - the bank owns it, you just lose what ever you put int it. Like renting but you can have a dog if you want. Vastly different to our system

Whats the point of the OCR when so much money can flow in from outside the RBNZ's control. If 100% of lending was from other NZders, then there wouldn't be unlimited amounts of money to lend, driving up the price of houses. The problem is much more fundamental; If not houses, then I'm sure cars and so on, until people are just as indebted and with most of the interest and profit disappearing from our loop.

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Great article Benard !!!

Prices have risen 85% in 4 years.... wages prob up 8% and GDP per capita changing by a few percent.

Not sure how you will achieve that. Would need to clear the decks of the investors buying existing properties from 45%. Stamp Duty on Investors and foreign persons (offshore and temp workers & student) if high enough (10/15%) would probably go a long way in achieving that.

Trying to reduce it by increasing supply would take years and years at the rate kiwis are able to build homes so it has to be done by targeting Demand and the largest segment of demand by far is Investors.

HOWEVER, nothing will happen this year or next especially as it is an election year next year and the powers at be are happy with the status quo.

My take on all this is a bit more cynical I guess. It seems like the above mentioned 40% or 55% possible drops in house 'values' was immediately taken over by the vested interests in fanning the housing crisis. Investors and (many) politicians are using this as a straw man argument to inhibit any rational approach to moderate the unsustainable yearly increases in house prices.

It is extraordinarily unlikely that a 40% or 55% decrease in house prices will occur - and the possibility should not be used to feed the fear and greed industry.

My brain is hurting a little bit thinking about this. Just between us, don't mention it to anyone else, but could it be that the people on the "yes crash the market by 55%" bandwagon are actually property spruikers putting it out there as a sort of false flag attack meme? Something so ridiculous and destructive that it will be stillborn and rejected? Notice how the figure goes up? First 40% then 50% and now 55%. Why not suggest 90% or better yet 100% - full strength Bolshevism. Yeah that worked really well last time. People will totally buy that...not.

Let's make it 100% so that all the houses are free. How's that for generosity?

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It's really this simple BH. "Politicians" of all colours are afraid of losing votes if such a scenario takes place. Pure self interest along with their own private portfolios.
I will reiterate again: economics and the very principles of Fiat Currency and Fractional Reserve Banking are anything but natural. These principles serve to create purposely specific 'winners' and 'losers' in society based entirely on people's financial behaviour. Borrowers are now the too big to fail winners in the politicians mind, along with banks and the institutions that control the banking regs. Manipulation, distortion, and all manner of decisions will be made to keep that status quo......until they can't due to the total negative ramifications it has on everything. We are at that point now, so "denial" is the mantra of the day until the thing implodes. Even then, the choosing of winners and losers will be decided by politicians.

A property is only worth what someone is prepared to pay.

A person can only be prepared to "pay" if they have, or can borrow, the money.

As long as banks are prepared to keep creating money and lending on houses people can keep buying.

As soon as banks stop lending money on houses then people stop buying because they do not have the ready cash.

Its a vicious cycle.

But notice what the Reserve Bank said about banks

It's also worth noting the Reserve Bank did not muck around with a simple scenario. It also assumed that the 55% fall in Auckland house prices would happen at the same time as a rise in unemployment from 5% to 13% and a recession that carved 6% off GDP. Just for good measure, it also assumed that dairy incomes remained at their currently unprofitable levels and that banks would also make losses on their business and commercial property loans. It found that losses on mortgages would only be around 1% of the bank's mortgage books.

In other words the banks are rolling in profits from New Zealanders (ripping us off)

So they are not going to stop lending, and as long as they keep pumping money into houses, prices will keep rising.

So building 150,000 houses to crash house prices does not hurt the banks because the banks will be lending money to buy those 150,000 houses. It is a win win win for the banks

Bit more complicated than that. You also have many foreigners investing here to hide/ protect their cash and many of whom are 100% cash buyers so our mortgage rates etc have no bearing. Any that are investing with a mortgage are using their foreign bank to capitalise on far lower interest rates.

A drop of 55% would be terrifying to our nation of landlords, they would have to stop gloating about their large portfolios.

Yes it would destroy the landlord class. We would look back in the years to come and call it the New Zealand Cultural Revolution.

Dont be so dramatic, the point of the article is that only a few overgeared speculators would be burned.

I'm not being overly dramatic. A 55% drop is huge. Nearly all landlords would lose all their equity along with a vast amount of homeowners as well. Remember that 55% won't affect the banks as they still want all their mortgage back. This is just an attack on people's equity. That's why the banks can weather this storm folks.

Banks will be rescued by the government anyway..has happened in the past, will happen again.

Equity largely paid for by the tenants. Didn't come out of your pocket, so who cares l if you don't get to keep it?

And shouldn't these 'investors' have thought of this before stupidly and recklessly maxing out the borrowing to buy into a debt and mania-fuelled bubble? Risk assessment and learning from history fail. I expect that they'll take full responsibility for their actions like adults without whining for a bail-out. No, not really.

Everyone has the right to sell any asset they have. If it does crash I know Id have to let employees go, maybe you'd have to let some houses go. Such is life.

Actually we would look back and call it another classic example of Reverting to the Mean - something foolish investors alway forget.

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Well lets look at the alternative here and what appears to be our current Governments way of doing things - Do nothing. If we continue on as we are, house prices will rise, the NZD will remain strong and our young Kiwi population will be squeezed out.

Predicting the long term effect:-

* Quality migrants will not want to come here as the cost of living will be far too high.

* Young Kiwis and quality migrants will leave NZ due to being forced out of the property market in the city areas.

* Export industry will continue to decline due to high NZD pushed up by the illusion of GDP growth from increased house prices.

* General business growth will decline due to lack of younger generation and quality migrants particularly for the IT and innovations sectors.

* City crime rates will increase.

* And you'll probably get quite a surprise later this year when you find tourism takes a hit due to high NZD and consequences of the Britexit affecting the UK and Europe.
BBC article: http://www.bbc.com/news/business-36810558

The thing that makes me laugh is to fix our housing crisis actually quite easy and shouldn't cause too much risk to our future economy. Building new homes will certainly help but there are vital areas to tackle for a long term solution to restore balance.

* Stop speculative lending and reduce negative gearing.

* Massively restrict the 39% of Non-resident Investors in Auckland and stop hiding behind the trade agreement, I'm sure we could sort something out. Australia is already doing this so why can't we.

* Do something about the empty 33,000 homes across Auckland. Yes, some may be holiday homes but then they should be taxed at a far higher rate as a deterrent. And it is fairly simple to identify the empty homes by checking their electricity usage over say six months.

These above points would be enough to correct the market without a property crash drama.

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Citizens and PR holders only should be allowed to buy/rent out homes. Simple rule to dampen the market in a controlled way.
Start compiling a comprehensive register of house ownership accessible to public. There are enough IT firms around to get the job done within 3 months.
Also, family trusts should not be allowed to have more than one rental. All trustees/beneficiaries of such Trust landlords to be citizens/residents in future.
Give a good grant/subsidy to first home buyers.

50% drop would take us back to prices last seen 5 years ago. Seeing as prices have increased by 100% approx over the last 5 years.

Only investors and home buyers that have bought in the last 5 years would be impacted. Plenty investors have owned properties for 10 years plus. There will still be lots of equity. Just like there was lots of equity in 2011.

Regardless it wont be happening.

Yes, won't happen in a hurry. Only a Big Black Swan can crash the values massively. Brexit is not one, Trump may not get elected, there is enough cheap money floating around the world thanks to QE. Hillary becoming POTUS will boost sentiments. Oil is not going up in a hurry. No major wars are likely to happen. So values are safe for another couple of years, I think.

CJ099 good post. I liked the fact you mentioned the 39% foreign persons.

NZ media and govt focuses on non resident buyers ( 4% in nz case)
Australia media and govt focuses on foreign persons buyers (non resident + temp workers + students) in nz case 39%

Thanks Joe, and yes I'm still aghast that our Government would try to put forward a figure of 4% for Non-resident Investors and then also casually mention that actually 35% of property investment came from Student and those on temp visas, which basically means that they're buying on the behalf of Non-resident Investors.

And then to see the Auckland housing market drop when Non-resident Investors were temporarily locked out for a few months (From Oct to Jan) only goes to prove that they have a huge influence on our housing market and are helping to fuel the housing bubble.

I really hope that the Government has sorted out the purchasing questionnaire to help clarify who is buying what and where? The NZ public have a right to know what is going on.

And even if you look at it purley from a business perspective; As resident investors we also have a right to know, who we're up against competition wise in our property market. So we can make an informed choice about whether we invest in property or give up and invest in something else.

Chances are young kiwis will get better access to the UK in years to come following brexit. Now days its tough to get a visa for more than 2 years. They will need that access in order to save the 100/200k deposits they require. Lets hope the situation doesnt get worse for them.

I should imagine that the UK will want to embrace NZ Citizens with open arms, especially now with them moving out of the EU. There maybe a little bit of a recession over their but that should open up more opportunities for business. Basically they see Kiwi's gernerally as quality migrants.

Well the situation will get better one way or the other eventually. Mr Market will have his way and/or all BB's will be dead in the next 20-30 years and with them I hope this extreme fear/greed mentality will depart with them.

The FHB's will become BB equivalent themselves in 20-30 years time. Do you think they'll wait?

Haha no I don't think so - I'm sitting back watching this play out and learning from you how not to be a responsible adult/society...

In fact - I'm not sure if you could be much less functional if you tried. But please feel free to try to work together for the greater good sometime - rather than just being fearful about missing out on capital gains when the next REINZ data comes out - because yes that is certainly the most important thing in life...

And I know we've been asked to avoid generalisations about generations on here - but I think back to my grandparents and they were both incredibly kind and generous people who never wanted more than they needed to be content (1 house, basic income to pay for food power, birthday and xmas presents). My parents generation - well they seem to be the complete opposite. They feel the need to buy/own and control everything they possible can, then be in complete denial about it if you hit them up on the issue. WTH team?! A little generosity would go a hell of a long way. And to blame our generation - we'll you're the grown ups - you're supposed to be setting the example for us. Pricing us out of a basic necessity then calling us spoilt little brats when we call you out on your greed and corruption? Bollocks to you all. I hope you all go bankrupt...

but I think back to my my grandparents and they were both incredibly kind and generous people

That's generally the nature of most grandparents as seen through the eyes of young children. Are you sure you're not idealizing things? For instance our grandparents did seem to have a lot of awful wars where they forced young people to fight each other. My grandfather was involved in three wars.
Every generation tends to have its own challenges and cross to bear except maybe the BBs who appear to have had a charmed life however the game's not over yet. Any easier than the BBs and we're getting into lotus eater territory. Maybe we can blame your grandparents for that? Of course I'm generalizing again.
Estonia still looks like a good option for a young man about town though. If you really are independent the world is your oyster.

Your guide to living and working in Estonia:
http://www.workinestonia.com/living-in-estonia/

What is incredible is despite the high kiwi and low dairy prices the economy is still doing ok. In the past that wouldnt have been rhe case. See immigration is keeping things going. Is it the sustainable growth NZ needs ?

Growth is not sustainable, well not in any way that matters, but aside from that, have you ever heard of smoke and mirrors.

I personally think this is an area to be considered:

Pro-tenant laws
Switzerland has one of the lowest owner-occupancy rates in Europe. However, there has been a trend to greater home ownership, which increased from 31% of the total in 1990, to about 44% recently, according to figures from the Eurostat and the Freddie Mac. Changes in pension laws helped - funds can now be withdrawn for house purchases from all pension accounts, both mandatory and voluntary. However, the proportion of renters remains high at around 56.2%.

One reason is extremely pro-tenant laws. Rent increases must be justified by the landlord’s cost increases. Tenants are also protected against eviction.

Owner-occupancy is also discouraged by taxation; property is treated as an asset subject to both wealth tax, and to income tax for imputed rental income. Income tax rates in Switzerland can easily exceed 50%, among the highest in the world. Capital gains are also taxed at cantonal level, with rates differing by duration of ownership.

Those price gains in two of the country’s biggest cities are likely unsustainable, the Bank of Canada warned in June. Yet even as Bank of Canada Gov. Stephen Poloz worries about a potential bust, he said in an interview earlier this week that rising home prices wouldn’t prevent him from driving rates even lower if he believed that was needed to stimulate the economy.

But Mr. Poloz, whose bank has cut interest rates twice since January 2015, also acknowledged that Canada’s current ultralow rate environment is “absolutely” helping to fuel rising house prices and household debt.

“The risks are clearly rising,” Mr. Poloz said, when asked if Vancouver’s and Toronto’s housing markets are in a bubble. “I just don’t know how big the risks are.” Read more

Say it ain't so.

Economists will tell us it wasn't big enough, or that the size of the problem they were facing was inestimable. Those are, however, not excuses, as they actually further disqualify the whole idea. If you can't even measure the problem, then you can't claim to know how to solve it. To the unbiased, the Great Recession and really the degree of eurodollar constraint were all a foregone conclusion. All "stimulus" failed in 2008, monetary as well as fiscal, because they were inappropriate responses to the true problem. The fact that they couldn't measure it was actually the least of their concerns. That is why "stimulus" has left the global economy facing (at best) stagnation seven years later despite the constant, insistent intrusion of especially central banks. Read more

I hate this trying to talk down the market. A fall of 40-50% in property prices nationwide would probably put everyone who has bought in the last 5 years in negative equity. What would this do for the economy if people were unable to sell their houses to move with their jobs or for new jobs? We could always fill the job vacancies with immigrants.

There will be plenty of cash rich buyers ready if any property drops 40%+ and people decide to sell. But you see they won't sell! Unless they really have too. You're ok with "talking up" the market though right? Regardless of the consequences?

Not ok with talking up the market. We need a soft landing.

The time for needing a soft landing was many years ago. I'd say a hard landing is now well and truly baked into the cake. It's just a matter of time.

this is fantasy unless we hit GFC2 will never happen
second housing and immigration are starting to bite in the polls,
I have seen a right wing blog that has 70% want immigration levels reduced
I see more policy changes from national in regards to both, and every chance the money being put aside for tax cuts now going to housing
The latest UMR internal Polling
National – 41%
Labour/Greens – 45%
NZ First – 10%
The Labour Green split is Labour 33% and Greens 12%.

So just how do you tank the property market by building 150000 houses? This will be great for GDP and the building industry, will push unemployment down (if you can hold a hammer you be needed).

My poll of people I know,
National 50%
Nz First 30%
Labour 10%
Greens 10%

I havent read all 100 posts before me but i think this article and the rbnz stress tests fail on one major point. They assume interest rates will fall. A more likely scenario caused by a world debt crisis like the one which is coming is that interest rates will rise significantly to reflect the true market risk in a post world debt crisis event. There is also a strong probability of a big drop in gdp - circa 20% not 6%. And then there is govt finances which would take a hit. The last gfc saw $20billion hole (reduced tax revenue, increased transfer payments). So you could assume a $30billion hole in this stress test.

I would love to see the results of this scenario. Oh and what about the drop in immigrants and drop in foreigners buying houses that would also result in such a scenario?

I think the rbnz stress test and this article as a whole should be read with extreme caution. Obviously the policy division in rbnz who made the stress test need to rerun their tests. And to think people actually believe it.

If interest rates rise drastically then that might be the thing that brings the house price drop. Then not only are you ünderwater capital wise, but your interest bill might be greater than your income. Double Whammy.

Apparently listening to some common taters above, house purchasers in Auckland over the past few years have been all first home buyers, every single one. Who wudda thought. Up to now I thought there were a few speculators and ïnvestors"

Joe Public states tge following: Prices have risen 85% in 4 years.... wages prob up 8% and GDP per capita changing by a few percent.

Well Joe, google this and you will see i am correct. Every economy where asset prices have increased by more than 20% above Gdp growth rates over a 5year period has historically faced a FINANCIAL CRISIS. so whats our figure 65% increase? Wow that is staggering. No wonder bernard is concerned. Hmmmmm

Interesting to note this article states china is no1 risk of a debt crisis, followed by Australia at no2 risk of a debt crisis. So doesnt quite a bit if our exports go to china and Australia? 50% exports? Interesting. So if the chinese think a debt crisis is imminent doesnt that explain why their rich citizens are getting their money out of china and buying up properties in usa, nz, aus, uk? So, how long will this capital outfliw continue?

http://www.forbes.com/sites/stevekeen/2016/03/27/the-seven-countries-mos...

Yes but eve if Chinese park their money here in property, that doesn't mean our property is immune to a crash up there. Plenty of Chinese investors would need to dump NZ property to compensate for damage that occurs up there.
I'm certainly no Nostradamus, but must be a chance of this in the next 2-3 years?

Fritz you assume the chinese will not reverse the capital flows that we are currently experiencing. Its an interesting world we live in. Nothing is what it seems.

I guess builders will charge 40-50% less for new builds then. Oh no wait. They won't because they will be out of business because why build a new house when you can get a 4 bedroom home in Auckland for $400K. Pfffft. Keep dreaming Bernard (or should i say Bernie)

The key point is that the current houses are massively above the replacement value of a new house. That a $1.5m Parnell bungalow would be $300,000 new - and that is with double glazing and low maintenance construction. What would happen is the land prices would drop. This is the fundamental problem with the current prices - they are well over the replacement cost, if you freed up land the cost of providing a house in Auckland would be $400k including services. That means the average price will fall at some point in the future

Put it this way, 400k in auckland is a long run average. The world debt crisis is coming. Any day now...

Yes - its called reverting to the mean - something the "sophisticated" investors of NZ are always forgetting. Its going to be '87 all over again - timing is the only unknown.

http://www.stuff.co.nz/business/26474/Remembering-Black-Tuesday

"Looking back, the feverish investing seems farcical, the stocks inflated to extreme proportions."

"They had credit cards, mortgages _ you name it. I got quite worried about the amount of money the banks were lending. You could just go in there and get as much as you like. It just wasn't on."

This is so much bigger and more terrifying than 1987. At least for that interlude of crazy there was the option of sitting it out. This time, you're in it whether you chose to buy into the bubble or not.

Bernhard is still sore his 30% prediction from the GFC never arrived. Looks a bit like click bait to me.

Mum and Dad bought a house in AK in 1990, right at the bottom of the house price crash after 87.
Very few people had any money then as they had borrowed money on their houses for SHARES...
Point is this housing market is very different as long as people see scarcity they see value in housing.
THERE WILL BE NO MAJOR CORRECTION.This story has been going on for so long its starting to get boring...
Months are turning into years...More houses bring more people, just like roads and cars.
Open immigration, long term low interest rates. Yes regression analysis points to a mean reversion...
Until it doesnt which happens every 50 years.....The goal posts do change.....

Were you not wearing a helmet when you fell off your bike and hit your head?

The scarcity you talk of isn't real though. Heaps of ghost housing in Auckland and growing , multiple properties in single ownership have increased substantially over the last 15 years. Plenty of homes for everyone, just in too fewer hands is all fuelled by tax incentives and the 'perception' of a safe no work required investment by making others pay your mortgage by taking away their chance at affordable ownership

Sorry I don't get your logic, there are ghost houses so there is no scarcity ? Err all those houses are owned by someone so they are not for sale and you cannot just move into them legally ! The situation is simple, its supply and demand. As long as we keep the immigration numbers high and the dodgy money coming into the country THERE WILL BE NO CRASH. The problem is that this is not sustainable forever so at some point it has to all slow down, the real question is when ? With current house price rises a "Crash" in 5 to 7 years will bring prices back to where they are right now. Really I get tired of those predicting a crash and keep banging on about it. Put a date on it, go stand up on top of a hill and wait for the stroke of midnight and when it doesn't happen go away and stop posting here.

Interesting read from Robert Shiller around land/property as an investment class. Look forward to the 'but NZ is different' and 'but this time it's different' comments.

http://mobile.nytimes.com/2016/07/17/upshot/why-land-may-not-be-the-smar...

Good article about land supply by Robert Shiller.

I have written an article about NIMBYism in Christchurch CBD where this supply trend is being obstructed.

https://makingchristchurch.com/what-does-nimby-ism-say-about-cantabrians...