John Bolton sees much tighter monetary conditions than the RBNZ is expecting, banks maximising margin rather than market share & a riskier landscape for borrowers

John Bolton sees much tighter monetary conditions than the RBNZ is expecting, banks maximising margin rather than market share & a riskier landscape for borrowers

By John Bolton*

Commentators continue to talk up the property market and increasing prices almost at the chagrin of the RBNZ.

Tony Alexander in particular loves talking up property and is pointing to the Chinese market as being a major catalyst for ongoing price appreciation.

In contrast I think that property prices will stabilise.

There is an extreme tightening of credit conditions going on that is being ignored by commentators.

It is typical for Reserve Banks and governments to under and over steer an economy, usually with interest rates. Keeping them too low for too long, or too high for too long. It’s a constant task to keep an economy pointing in the right direction especially when you overlay our limited statistics, politics, and our New Zealand tendency to avoid conflict or have an opinion.

My concern is that the latest 40% deposit requirement for investors is a knee-jerk reaction from the RBNZ. After two years of tinkering with the market and not understanding the problem, they’ve desperately applied a sledge hammer. I’m confident it will smash the issue but I also think there will be significant collateral damage and I’m starting to see evidence of that already.

The issue that the RBNZ has under-estimated has been immigration, but more specifically, foreign capital. Unfortunately, when you apply a sledge hammer everyone gets hurt.

The initial LVR restrictions did absolutely nothing to solve the problem other than make it more difficult for first home buyers who got caught up in the craziness. It also restricted young Kiwis from diving into property investing. For a short while it slowed things down as the ‘market’ waited to understand the impact. That wasn’t just a function of the restrictions, but more importantly the prospect of higher interest rates.

It was never going to work. Low stock levels and low turnover meant that excess demand would kick-off another round of price appreciation and that’s what we saw.

In October 2015 we saw a more coordinated approach from the Government and the RBNZ. The RBNZ put a 70% restriction in place for Auckland investors and the Government put IRD numbers in for foreign investors. The latter was politically driven by growing public discontent. It was around the same time that Barfoot & Thompson sales statistics were leaked and then publicly dismissed as racist even though they hinted at the underlying issue.

As expected, the 70% restriction simply pushed the problem into Hamilton and Tauranga. The IRD requirement temporarily slowed down the market, but it then kicked back into gear after Chinese New Year.

The problem has never been foreign buyers. I get so annoyed whenever the Prime Minister dismisses the issue on the basis of “foreign buyers are not significant.” With Asia it’s almost irrelevant who the owner on the title is. It’s where the money is coming from that matters. Sure enough the market really kicked into gear again around April and house price inflation took off again.

In June the Reserve Bank quietly went about changing the rules. Banks were told to not allow foreign income for servicing calculations and the banks effectively stopped lending to non-residents. Whilst the focus was on the non-resident rule, it was the subtle change around foreign income and enforcing anti-money laundering (AML) laws that were the biggest changes. These were very smart and targeted changes that would in themselves have worked to slow the market along with some subtle changes around debt/income rules.

The issue with the lending market is that bank approvals last up to six months. Whenever the rules change we’ll have a surge of activity by buyers before we get the induced slow down.

The AML and foreign income rules were only made in June. Clients impacted have rushed into the market to buy and we saw the impact of that in July and continued to see it in August.

Separate from the doings of the Reserve Bank, the major banks have been tightening policy. Interest-only terms have been reduced for investors to a maximum of five years, new revolving credit limits are being wound back, and banks are generally showing less flexibility around credit rules, especially servicing rules.

I think the RBNZ has under-estimated the impact of these changes, particularly with the spill-over to the provinces and have now gone to a new level with a blanket 60% LVR restriction.

When you look at the credit rule changes in totality it becomes clearer just how much the Reserve Bank has tightened monetary conditions.

Even with OCR cuts, those are not getting passed on to borrowers and banks have moved away from growth to maximising margin and profit.

It’s a new world out there that is decidedly riskier.


John Bolton is the "Chief Squirrel" and CEO at Squirrel Financial Services. This article was first posted on the Squirrel Mortgages blog, and is here with permission. A Minsky moment is a sudden major collapse of asset values which is part of the credit cycle or business cycle.

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13
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So is the argument here is that we should continue to push easy credit into tight markets in order to avoid the bursting of a bubble caused by easy credit?
The answer is clearly no, the RBNZ should continue to tighten LVR limits and put in place DTI limits.
What the RBNZ has done so far is insufficient, particularly given they are not proposing to raise interest rates.

I'm all for the RBNZ slowing things down and have been on that page for a long time. Some stability would be great.

I'm simply saying they may over tighten and inadvertently create wider economic issues outside of anything happening elsewhere in the world.

We want to stop house price appreciation but do we really want all of the liquidity to come out of the market and prices to fall? Bear in mind that most businesses run with skinny balance sheets and that banks lose confidence very fast.

That would hit far wider than the housing market.

I also think we grossly under-estimate how many SME businesses leverage equity in property to fund working capital.

Bear in mind that most businesses run with skinny balance sheets and that banks lose confidence very fast.

And unsecured bank creditors soon lose confidence in banks for the same reasons.

Do banks have enough capital set aside to cover rising price risk associated with residential property assets?

ANZ, like ASB, BNZ and Westpac, is allowed to use the Internal Ratings Based (IRB) regulatory capital approach. This means they develop their own models to calculate their regulatory capital requirements and must then get them approved by the Reserve Bank. All other banks, including Kiwibank, run what's known as the standardised approach where the Reserve Bank prescribes their requirements.

Just to reiterate for ANZ that's about $1.2 billion of capital held against total mortgages of $57.5 billion.

ANZ has an exposure-weighted risk weight on residential mortgages of 24%. Read more

stephen... R u sure about the ANZ... surely, they would never be allowed that kind of leverage..??

from what I've read , just its retained earnings comes to $2.7 billion..??
Total equity is 10.8 billion..

https://www.anz.co.nz/resources/e/6/e65a2e00-82fe-408d-83f7-bae47ebba032...

The discussion revolves around the risk weighted capital that applies to residential mortgages, hence 24% of 8.00% tier one capital represents $1.92 of capital retained for every $100 of such assets, which ~equates to Gareth Vaughan's original assertion linked in my comment.

I agree stability would be great, but that is a luxury we have lost by the banks having chosen to lend to investors at high LVRs unsupported by rental yields. At current rental yields, it seems LVRs more than 40% are excessive. The current LVR limit on investors at 60% should not matter, but that fact that it does means the system is at risk.

"I also think we grossly under-estimate how many SME businesses leverage equity in property to fund working capital."
God forbid any situation where individuals have to realise their risk positions.

A reliable perspective in the article, though.
However, how much is personal/professional bias is hard to tell..

17
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You try getting a bank loan without using property as equity for a SME. It took me 6 years to achieve this.

Exactly.

Australia’s banks turned into giant building societies, lending almost exclusively against residential property and rarely, if ever, making unsecured loans to businesses or people any more.

If someone asks for a business or personal loan these days, the banker asks for the house. Read more

I was surprised when I talked to a number of business owners that do leverage house equity. There are a lot that do. I believe there is plenty of liquidity around at the moment so tightening isn't an issue right now.

What we do want to stop is the crazy appreciation that's going on right now, not to halt it completely.

Ive seen quite a few SME's that I deal with on a B2B basis change hands over the last 12 months. People using equity to "escape" the daily drudgery of corporate nonsensicalness. Good on them, but I do question the funding technique.

11
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JB: I have followed your articles over time and I think you are very often on the money, including today's views. I don't think you are overly biaised by your profession and I appreciate you are close to the banks and their rules. I for one think that DTI would collapse the property market because most property owners are asset rich but cash poor

What John means, and I know exactly where he is coming from as I have the same problems and risks myself.
Is that you don't want to get half way through your developments and find that prices have crashed so much that they are uneconomic, or banks tighten up so hard you get your finance to them.
Proving once again its a lot simpler to just buy as many houses as you can instead of trying to actually help the situation and build them.
Because if its not council causing road blocks its banks pulling the handbrake.
These new finance rules are great when no one thinks about where funds actually come from to build houses.

18
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It’s a new world out there that is decidedly riskier.

Certainly is for those in receipt of recently fabricated bank liabilities (aka deposits) in exchange for a completed residential property sale. Bank credit masquerading as money should have a huge public risk notice attached for all to see.

10
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Forget about those who have sold , the worst is to come from those Auckland homeowners living in fairyland where the tooth -fairy has overnight left a million or so in their slipper , and they believe they are now wealthy and are ransacking their "equity " through second third and fourth mortgages .

This debt fueled extravaganza is a dangerous undertaking by the delusional

That million or so they woke up to find under the bed is as miraculous as fairy-dust , it can evaporate and or disappear just as quickly as it appeared .

Problem is there are those who have not sold anything and their savings are just that. And yet they are still pre-positioned under OBR to endure a capital haircut if residential property market instability causes the banks to write down their Kitchen ATM or otherwise generated mortgage asset ledgers.

I think that there are a hell of a lot of people who do not appreciate the risk of an OBR

If there is ever an OBR , I will be in big trouble .

Maybe its time to find another home for my cash deposits

It is clearer how RBNZ have tightened monetary conditions; that is not enough. The amount of new money created still greatly exceeds GDP growth. "Printing" lots of new money does not create growth or productivity, it is just supposed to be a function to avoid people feeling that money is scarce.

The risk has always been there, just not understood. Now there is more risk management both by banks and RBNZ. Perhaps the associated change in perception will make people consider starting a business and contributing to the productive economy, instead of misallocating capital.

"Perhaps the associated change in perception will make people consider starting a business and contributing to the productive economy, instead of misallocating capital."

'People' are not misallocating capital in the current market. The one argument we can make is that capital definitely is being optimally allocated by individuals.

11
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Transferring wealth from one cohort of society to enrich another is not a policy that should be delegated to an unelected, but supposedly independent, state entity minus a political mandate to undertake such duties.

But how about asset price inflation and Bubbles? Well, there is a powerful proclivity for letting asset prices run. An inflationary bias in asset markets certainly “makes it more profitable to speculate than to produce.” And the larger the speculative Bubble the more powerful the constituencies that arise to demand government involvement, intervention and manipulation to sustain Bubble Dynamics. Misguided policymakers will endorse destabilizing asset inflation as confirmation of sound policies (Greenspan, Bernanke, Draghi, Kuroda…). In one of financial history’s most misconceived policy blunders, central bankers specifically targeted asset price inflation as the primary mechanism for post-crisis system reflation. Read more

Exactly.
There is no misallocation of capital on an individual level. The individuals are highly incentivised to pursue this line of investment and, as such, are undertaking it.

In an aggregate sense, there is a sub optimal allocation of resource.

In an aggregate sense, there is a sub optimal allocation of resource.

Under priced debt masquerading as a resource is a dubious concept.

I have participated in over capitalising debt for a significant part of my life - not so rewarding for those charged with the underwriting costs of such endeavour.

Australia’s new long bond could provide investors with a gain of more than 24 percent within its first six months if a prediction by Japan’s Asset Management One Co. proves correct. Read more

Who would be silly enough to commit time for paid work or money to business endeavours when government mandated central bank interest rate cuts offer such fantastic unearned income returns funded and underwritten by the taxpayer?

There is a fundamental question about work there. I work because not only does it contribute to the economy but I enjoy the work from the design and creativity perspective along with the regulatory fights. Of course investing and buying a house makes ridiculous net worth gains for the "effort".

People do need to think about what they want to do with their life. Getting rich and being lazy doesn't sound very satisfying. Although that's probably the NZ dream.

Probably the most perceptive comment here.

and actually very boring after a while even with lots of money.

The straw that breaks the camel's back:
In June the Reserve Bank quietly went about changing the rules. Banks were told to not allow foreign income for servicing calculations and the banks effectively stopped lending to non-residents.

Mortgage approvals are now less than a year ago:
http://www.interest.co.nz/charts/credit/mortgage-approvals
choose the change in value tab.

Lady Gaga had that song about Bluffin with whatever ........ We are bluffin ourselves if we think that we are getting miraculously wealthy by simply watching our Auckland house values skyrocket , getting unearned money from nowhere .

Things are going to change .

Bob Dylan sang " For the loser now will be later to win............ the times they are a - changin ", and those who feel left out , will have their time , because things will change

As an older person / ageing hippy / Baby Boomer / call -me -whatever -you -want- to- call- me ..... I can assure you I have bumped my head often enough to know the world does give you a free ride, and we are kidding ourselves if we think we have won the Lotto by just owning a home in Auckland , and we can ransack it like a piggy-bank without consequence .

There is never a free ride , and someone is going to have to pay the ferryman when he gets you to the other side .

There is never a free ride.

Sure there is. Millions upon millions of people have made money in real estate and other things. Getting stuff for free or minimal effort has been a human pastime for thousands of years. Do you really think ruling families earned all their stuff? Do those born into affluent countries earn all that infrastructure? Sure someone may have worked for it but they are often not the ones that get to enjoy it. What planet are you living on?

Okay , so you believe there is a free ride to be had for Auckland homeowners ?

I dont.

There are too many "What if's............."

I see it like Bulls vs Bears in a stock market , some see the price going up and some see it coming down and both try to maximize the outcome based on their view .

In the long run those who get out in time are the only real winners

Property is not like shares though. You don't see people getting all emotional about shares like they just must have them, particular ones. People can't live in shares either. Big and important cities rarely crash and burn over night like shares do. Especially cities like Auckland and Sydney that are the business and transport hubs of their respective countries.

I have lived in Auckland practically my entire life and my housing here has been largely free, even earning me money really. I buy multiple houses and use them to pay off each other. Now NZ has gone global I have a much bigger pool of buyers. Foreigners are keen to buy into the infrastructure of NZ that has been built up over a few generations. My property is valuable because it is in a great location within a British heritage zone. I read once that there is a lot of ruin in a country which means that countries can be very robust and it takes generations to bankrupt them. Our countries are the result of thousands of years of development and people are keen to buy into it.

[ Sorry, but that is a personal insult. Not allowed. Argue the point. Ed ]

Well years ago I openly stated that we should jealously guard what we have here in NZ and severely restrict access to outsiders. They didn't listen so now I ride the tiger or play the game if you like. You should be thankful that some of us are keeping hold of NZ property rather than selling it all to foreigners.

PS - Interestingly all my rental properties are tenanted by people not born in NZ.

Disagree strongly - here is the definition and its bang on for the behaviour we are seeing - create nothing and live off the host.

"Parasite" - Noun
1. An organism which lives in or on another organism (its host) and benefits by deriving nutrients at the other's expense

Parasites don't provide houses for people to live in. As I stated above all my properties are let to foreigners anyway so that's me off the hook.

Zachary - you're entitled to make money, its a free world (sort of) but don't kid yourself you are creating anything for the greater good for any other reason than lining your own pockets. (which you're entitled to do)

When you start adding to the rental stock with new builds you can trumpet your achievements as "providing houses for people to live in"....

I agree and I largely got into this accidentally. I didn't take offence at the deleted comment. I see the situation as a case of if you don't do it someone else is going to anyway. In biological terms Auckland has provided a niche for the organism you speak of to flourish.

You wouldn't be trolling by any chance?

Me, troll?
I'll tell you this though, a while ago, during the flag debate, a Chinese lady told me she was voting to keep the flag because, after all, that's why she chose to come to NZ, for that little Union Jack in the corner.

Zach shares do not crash and burn overnight. You constantly exaggerate how risky they are. They might dip as they did in 2009 and now they are back at record highs. I retired at 58 with only my home and the townhouse in Wellington used for our childrens university years. My retirement is based on a very solid dividend stream flowing from good shares bought over a reasonable period of time. If any shares dip to a certain level I just buy more and get their dividends also. Unlike you I have no costs and no tenants.

Remember the last time people got all emotional about shares? In 1987. Emotion in investing is a bad sign.

People seem a little emotional about housing as well.....

Precisely.

Emotional is probably the wrong word when it comes to property. Existential crisis is perhaps more accurate. No one mentioned revolution and violence in 87.

Now we're splitting hairs......

Zachary,

You seem to know the property market pretty well,but your ignorance of the equity market is profound. I have 1 rental property,but I have a portfolio of over 30 good quality dividend paying shares. I have been involved with stockmarkets for over 30 years and have lived through numerous corrections/crashes.
My portfolio is almost entirely cost-free,while I have to pay rates,insurance and maintenance costs on my property.
However,I recognise that I will not persuade you of my case and you will certainly not persuade me of yours.

Fair enough. I got put off shares when a company I did some work for practically demanded that their employees buy shares at $2 each as a show of loyalty. Those shares eventually went down to 5 cents. At the time I thought it might be good to buy at that price but then I heard they just kind of vaporized and all was lost...for ever. Seemed a strange game to me.
It would be nice to have no tenants and no maintenance so I am open to the idea it's just that banks are cagey about lending money to buy shares and I would be extremely uncomfortable to have no control over an entity I borrowed money to purchase shares in. Property feels like you are in control like your own small business.
Property returns over many years are generally, roughly guessing, only about 9% yet people are always going on about this unearned wealth and how unfair it is. Why are they not complaining bitterly about people with shares?
Its great that you are happy with the equity market (+ a rental) and it is great that pure property investors are happy too.

You put money in a tin pot company, lost it and now avoid the share market. My goodness you have missed out on some gains made by quality shares. Sheer ignorance. I thought you had money Zach. Why would you borrow to buy shares. I presume you have had an average income like so many property investors.

It was one of the TV stations. I don't have much money and my personal car is twenty years old. If you borrowed to buy property and then put cash into shares you are effectively borrowing to buy shares. Your comment surprises me as I didn't think I was being hostile or adamant about anything, just telling my story, explaining my motivation. Good on those who purchase shares I say.

Zachary,

Thanks for the response. I have never borrowed to invest in the stockmarket and would not advise anyone else to do so. Of course,that means that when the market is buoyant,I do not have the benefits of gearing,as most property investors do.
I have had my small rental property for many years and it is debt free. I have an excellent long-term tenant in a decent area(Mt Maunganui),but my net yield is well below my net dividend yield.. As I live off income,that is what is important to me,not capital growth.
Your point about being put off the stockmarket by one bad experience reminds me of coming here from Scotland to live in 2003 and being astonished to find people still talking about the '87 crash. It has obviously put many Kiwis off the stockmarket for life and I think that is unfortunate for several reasons.One is that NZ companies offer a higher dividend yield that any other developed country and secondly,the country would benefit from having a deeper pool of capital.

Maybe if the journey across the river takes a very long time, the price of the fare relative to what it was when you boarded will have dropped. Life is short, why not take a punt ....

Good point , life is short , maybe I have been conditioned to not gamble things like my home

We are not gambling our homes. We are gambling our investment properties.

Okay , that's different , but are you not creating an inverse pyramid of debt , that could become unsustainable /

If you have access to your wife's income it all seems fairly sustainable and painless. Currently rental returns cover most of the outgoings and property appreciation has occurred over decades building up substantial equity. A big increase in mortgage interest rates would be the worst scenario. Losses, even eye watering ones, can be contemplated without losing too much sleep.

Gambling is gambling. There are support groups, government funded and otherwise to help you with your addiction.
Meanwhile JK is still cooking up out the back.

Support groups are for losers.

Rehab is for quitters

If it's worth doing it's worth doing to excess.

Ha ha your a classic zac.welcome back!!!

thus effectively gambling your home - if you leverage the equity in it to buy investments properties.

That is true. The bank will sell everything if they need their money. I keep the family home mortgage free as a strategic reserve.

you've obviously been in the game for quite a while and can do that but plenty haven't ..... they ARE gambling

Zac is still gambling.... just that he doesn't know the odds.

Your house is not your strategic reserve it is the banks if you owe any money....

I guess you could say I have a partnership with the bank.
Talking about odds, yes I don't know the odds, but it is actually not possible to know them. If you ever played Blackjack seriously you would know that even playing perfectly the casino has something like a 51% chance of winning while you have a 49% chance - eventually you will lose everything. But property has seen me winning every year for over thirty years however this is a game where the odds can never be known. You can make an educated assessment about whether or not a property has potential based largely on location and livability. My assessment of the Auckland market is that 99% of players win to some degree even the leaky home owners if they hold on long enough.
If the casino had a game where, historically, 99% of players won but the odds were unknown I'd be down there right now but you'd have the wibber gibbers about the fact that 1% lose.

Morgage free and no security on it

Narrabeen Boy.

Personally believe that you shouldn't have a mortgage free home.
Anyone with equity in their own home that aren't using it for investment purposes, that is borrowing against it to provide an income off a postively geared rental is not investing as well as they can be.
Not talking negatively geared Auckland property which nowadays is relying on capital gains which is gambling.

Narrabeen Boy;
Don't ever take financial advice from THE MAN.

There are plenty of reasons as to why NB is investing optimally without leveraging his home equity.
He may have a low propensity for risk, for one. Another is that his opportunity cost of capital is substantially different. Another being the arbitrage positions he is able to realise.

Judging by the returns you outlined last week, THE MAN, your portfolio didn't seem like anything too much better than govt. bonds without factoring capital gains..

Thanks for both pieces of advice guy's but I've a young family and don't want to include the family house with my other investments.

I doubt you will be able to borrow anything substantial without the bank demanding that you offer your home as security.

Two bocks of flats and a house

Nymad.
If that is your take on it?
If returns of Approx 10 per cent average from rents and capital gains of 7 Per cent p.a. Plus without putting any money in is as good as Govt. Bonds then so be it, but I think you are dreaming.

he is probably looking at yield based on the current capital value but omitting capital appreciation from your profit.
I reckon that if you are looking to omit capital fluctuations then the current rental yield should be calculated against the purchase price.
Alternatively an accurate picture could also be obtained by including capital fluctuations in your profit calculations.

You are saying that your expected return on rental property is 17%?
...And I am the one dreaming?

If you compare it to Govt. bonds, if you had the cash!
Yes! On my purchase prices.

He's buying as is where is houses. Capital appreciation may be another matter.

Not just "As is" .
As is are giving 14 to 15 per cent.

So, you are saying that your net return is 17%?
I just need to get this straight. Because if you are expecting a long term return of 17% p.a. you really need to talk to a fiance professional.

Nymad.
No use talking to a fiancé professional as I am already married!
Our returns for rents will remain pretty much the same and as rents increase over time then per centage will increase.
Capital gain is only obtained if you sell, and we don't do that as we are long term professional investors and not speculators.
Do I believe that the Chch market will continue to increase, then yes I do!
Chch is still very cheap when you compare with other Australasian cities and a very easy lifestyle unlike Auckland.

If you don't understand that an investor is a speculator then you are more stupid than you have already made yourself appear to be in these pages.

You really have no concept of a credit bubble do you?

I think The Man is saying he is not a flipper. If rent yields cover outgoings, meaning that the fundamentals are sound, then he could claim to be an investor, no?

Yes. True.
His other comments tend to preclude this, though, as why would he even consider capital gains in his annual roi mentioned above if he wasn't intending on selling the property.

He also seems to forget to factor any costs into his net return figures. We know he has capital costs, because he implied so, earlier. We know he has utility costs, R&M costs, and insurance costs. We also know he has tax liabilities because he has mentioned he doesn't negative gear anything.

If he thinks that his annualised net return p.a. after all of that is 17%, I'm sorry but he is dreaming.

If 17% p.a. was attainable, there would be no market for him to rent to. Everyone would simply take the arbitrage.

yeah of coarse hes a property investor. For some reason people get emotional and jealous when someone admits to being a successful landlord.
Perhaps they tried and failed or are themselves still paying rent and begrudge the transaction.
For most people starting out in property investment they do take a gamble, some win, some lose. Some study the market and time it right, some just jump in with no strategy and expect to be winners. God willing.

All forms of unearned income are equal. The issue isn't jealousy, it is morality. But I do accept that sometimes basic principles, basic as they are, are too difficult for some to grasp. It is also normal for people to try to justify or excuse their own little bit of unearned income, just as the thief normally justifies their actions. There are no excuses. Speculator or investor, it is all the same.

I paid rent until I was 28. I rented a room from a friend who had the mortgage, I soon realized one of us was a looser but I didn't begrudge the transaction. I copied the formula.
Its a lot harder to do now due to population growth, that will change with it becoming the major election issue. So this is where investors and first home buyers need to study the market fundamentals and have a strategy. God Willing isn't a strategy. The big fella is busy elsewhere.

Now come on Scarfie, if you didn't have landlords there would be a lot of people sleeping rough. Or do you think it should be the governments job to provide every one with a house?

Wrong.
I don't see much productive development to increase supply coming from landlords..So, how are they mitigating the issue now?

In the long term the economic cost of renting and cost of home ownership should converge. So, to say that renters are losing out is wrong also.
You can do the calculations yourself; long term, if you allocate the same total amount of capital to personal housing period on period you will effectively come out with the same asset position after 20, 25 years.

It is not economically viable for a landlord to do a new build and then rent it out.
The government can do that with our tax money and take the losses as a social benefit to society.

Okay so how are they productively contributing, then?
If this is your argument, landlords indeed perpetuate the issue of homelessness and inequality.
Not, as you say, "if you didn't have landlords there would be a lot of people sleeping rough."

Precisely why foreign buyers and non-residents should only be permitted to commission new builds - which might lead to new rentals

It is you that needs to come on. That is a pretty low order discussion that has been had here before, and is quite frankly nonsense. Just as I said though, trying to justify immorality because of your own narrow set of experiences. Morality my friend, that is the discussion. There is simply no logical or philosophical argument that justifies immorality because of a perceived service.

This is the wrong forum to discuss such things scarfie.

JB thanks for letting me know about the foreign income shadow as that hit me pretty hard this year as the bank wont lend me anything now. I am at 50% equity but my foreign income is now worthless. I agree with your points and 40% lending ratio mixed future LTI's will spell a collapse. Just this week I had a major issue with some plumping that will cost thousands, now with tight lending will I fix it up as best as I can? Probably not. Credit is what makes the world go round. The only losers in this game are tenants. Screw with the landlords and the tenants will suffer.

So keywest, you are at 50% equity and can't afford basic repairs on your property, and are happy to make your tenants suffer because you cannot access additional credit..
This is a prime example how property investors add nothing of value when they are overleveraged.
I am sure a FHB that you displaced with your credit-fueled purchase would love to have the opportunity to properly maintain the property.
LVRs limits to investors should be lowered further until they can properly maintain the property out of rental income, and where FHBs can compete on a level playing field. To do that, LVR limits need to be less than 40%, perhaps a lot less.

I dont think an FHB could afford my inner city villa! Sure,I will do basic repairs, but while credit is tight i wont be doing anything special...like repainting or repiling or rewiring. Don't look at everything to literally and take a chill pill and from high above and take a look down at what is slowly unfolding to NZ landlords...they are getting squashed into the corner and the tenants will be the ones to suffer.

But surely you must realise that tenants also have choice, and that by not maintaining your property and trying to ping you tenants for rent increases you will ultimately have to either wear the cost yourself (through costs for lost tenants), offer a lower rent to attract tenants to your unmaintained property, or accept a lower standard of tenant. Also, how will you maintain this position with regulatory mandated improvements (insulation etc). Its a two way street.

in my NZ properties i have not had 1 day un-rented...i do what it takes to have them rented...however my tenants probably don''t live as well as they would if i could get a spare $100k to upscale....the government and RB are now messing with landlords...sort of a bit like being a baker in Russia in the 1980's where you have queues out the street but you only have a dozen buns because you can t get anything....2-5 years NZ will be like that with our renal stock, wait until they introduce DTI....will be a total disaster...we are now installing Venezuelan typish policies...

Oh well, we need to get back to being principally a home owner/occupier nation anyway, so anything to stem the tide of the rentier class sounds good to me

silly term rentier class....have rented for 27 years

John not only you but many people are annoyed when they says that foreign buyers are not signigicant. Annoyed not with forign buyers but the lie as everyone hate obvious lies.

Not wanting to act on foreign/ non resident buyer is up to them being in government (For whatever vested / hidden interest/agenda that government supports) but for god sake do not justify your act by manipulation and lie - that is irritating and annoying and is possible as media too play up to them instead of exposing the truth. (Talk to any estate agent and go to any auction in Auckland and can see as one does not havev to be an economist or so called experts that we see in media - who yoo have their own agenda as a result mum on the subject).

Legacy of National government : Deny, lie, Manipulate and if nothing works pass the blame on other agencies and people.

Scarfie, if I appear stupid to you then I will take that as a compliment!
It just shows you that stupid people can be extremely successful if they are prepared to work rather than sit on
your butt and just complain about everything!

Yes quite right, it doesn't take any brains at all to gamble/speculate. Even legitimate productive enterprise doesn't require any real brains. Step changes in technology however does. I several patents granted and have my own enterprise based around that. The trouble you are not seeing is that the unearned income in the economy is crowding out productive business. You won't really find this out until the parasite kills the host.

Scarfie, not sure why you think renting property out is unearned income?
We earn what we get.
It is not just about getting tenants and forgetting about them until they leave.

What part of unearned income don't you understand?

noun: unearned income

income derived from private means rather than from work.

Such as patents & copyright royalties?

Royalties on patented inventions would be unearned income too wouldn't it?
Ahh, sadr001 beat me to it.

No.
You see, someone has to commit resource to develop the good.
Productive enterprise, if you may.
Productive value-add enterprise.

Quite different to buying and selling property to each other where there exists no value-add.

Buying and selling patents for profit is the equivalent of housing investment. Creating a patent is similar to building new houses.

By classifying property such as patents (intellectual property) & houses (real property) as producers of "unearned" income you would run the risk of no one being willing to develop new pharmaceuticals for the treatment of various conditions such as cancer because the result of doing that development would be property (or intellectual property) which they couldn't sell to someone willing to monetize it, due to the monetization of the property (including intellectual property / patents) resulting in unearned income.

Bank interest would be another form of unearned income by the definition above, I suppose that you are a fan of 0% interest rates?

A feeling of abhorrence toward unearned income is a trait of the socialists and religious fanatics. For everyone else it is the Holy Grail.

The inability to accept the simple logic of unearned income is the territory of the perpetually stupid and/or greedy. Nothing "feeling" about it, it is a simple matter of logic that was first documented by one of the founding fathers of western democracy, Aristotle. Funny how people love the platform the early great minds laid down for us, but want to discard the bits that don't suit them.

My statement is still true though.
Anyway I accept the logic of unearned income, whatever the hell that means, as something that is very good.
Honestly I don't think you belong here with this view.

I would suggest this abhorrence you refer to is equally felt by the extreme right wing towards the unemployed, or otherwise less fortunate in society. The (extreme?) expressions from both side of the political spectrum are equally of little value.

How does risk get accounted for in the absence of "unearned" income? Why would anyone invest in a startup such as Uber if doing so would mean that they risk losing all their money but can't get any "unearned" dividends / capital appreciation out of it? What would the models used to fund innovation look like in the absence of unearned income?

If you want risk take up parachuting, don't socialise the cost of your behaviour. Opportunity cost is really just a fallacy. Models that don't use unearned income might actually start to look like a community worth living in. The world has at times existing without financialisation of the economy.

I put it in the necessary evil bucket to facilitate the working of capitalism. I fully intend to earn enough unearned income to not have to work for money again. This will allow me to put my work into other projects of value.

Interesting video here on this message: https://vimeo.com/183016901

Entertaining video for sure. What you have to be careful of is causing harm on the way to financial independence doesn't destroy the values of the community you wish to live in while you enjoy it.

Was just reading an old post by Chris Martensen earlier today and he talked about the reasons kids at secondary school are apathetic about being involved in the world. That is the sort of effect I am talking about, taking away the hope of a whole generation.

Note he talks about meaningful work, if you have followed my posts you will know I comment on that from time to time. There is a lot in that and I am fortunate to have it. By some of the language around here it would seem absent from a lot of folk. Often people project or allege that which they themselves suffer from.

good video...am glad i run a bunch of rentals ensuring people stay happy while they work and raise families, being a landlord is satisfying...

No income is unearned, someone, somewhere has to earn it, so that someone else can "unearn" it off them.

Ideally you want a lot of people earning money for you while you live a life of leisure, travelling and patronizing the arts.

Yes, bank interest is unearned, as is any return on investment where the investment is purchased rather than created. Inheritance is another area of unearned money. All unearned income distorts the equality in society.

Note that a return on capital is necessary to allow correct pricing of risk. In the long-term, the risk price is arbitraged out to the right level of return. This includes property - https://financialinsights.wordpress.com/2011/03/28/house-prices-examinin...

What about someone (such as Fonterra) purchasing milk from farmers for $1 and on selling it to supermarkets for $2? A capital gain is realized upon the sale of the asset to the supermarket, does that count as unearned the same way that capital gains on real estate or patents are unearned? (in the case of patents the physical patent document may often be moved from 1 location to another. In real estate the title document may be moved.)

Ahh, what?
You do know that the milk we buy from the supermarket isn't exactly what comes out of the cow, right?
Cue productive value add.
A productive method has been undertaken to transform a raw good into a marketable good.
Very different to capital appreciation on assets.

Value added, or work done, is perfectly acceptable, merchanting is unearned income though.

Replace milk with eggs. Is buying eggs at $0.10 and selling them to a supermarket for $0.20 without altering the egg unearned income?

As per Scarfie above; yes.
Merchanting.

Feel free to drive to the egg farm and buy them from there. Then drive to all the other farms to get meat, veggies, fruit etc. There is value add in aggregating goods together to reduce the time spent acquiring them.

Bring a basket to carry them in, because you're not getting a carton.

Actually, bring two baskets. You know what they say about eggs in baskets.

.

not a good argument, property forms the ecosystem that allows pharmaceutical development, without rental houses then you wont have junior r scientists researching in the comfort of a rented home..

Technically they are unearned income, I have always accepted and that cognisance is the difference. However I am not yet at that stage, so I am not yet in a moral dilemma.

But a good point in the fact it is productive, the increases in efficiency derived from my technology will one day save billions of calories (man hours of labour).

There is also the right for me to recoup the unpaid portion of my work to date.

Royalties are also a way of keeping me paid for the continuing development work required, work that has become my area of expertise and that few others are capable of.

Patents are also antisocial, but that is countered by point sadr makes, it takes resources to undertake R&D. If all of society were to contribute to the development then you might have the making of a better system.

This site's raison d'être is unearned income.

interest could also refer to the content (or more frequently the comments) being interesting :P

Coming to interest.co.nz and raving about the immorality of "unearned income" is like handing out speeding tickets in the Indy 500.

Should finally get comment of the day...

Paying royalties generally doesn't include access to new developments by the original developer, a new separate fee is usually charged for the new upgrades/modules.

Gordon, NZ sharemarket going great at the moment!
Only lost 8 per cent in a month and heading downwards, and you have no control over it!

God your'e awful..

He doesn't know up from down.
Short from long, if you may..

You really don't understand equities at all do you? You should probably stop embarrassing yourself.

Sweet, shares are on sale again and yield just increased. Time to buy some more.

You could say the same for property if it'd ever go down

Indeed, that would be a better time to buy

You could say the same for property if it'd ever go down

And you control the value of your so called houses.

And it's still up 18% in the last year. This is the beauty of the share market, you know the value of your investment to the minute, with a truly liquid market. With houses you don't really know until you sell, and you pay handsomely whenever you want to make a trade.

Anyone seen the bays weekly snapshot. 12 passed in or no bids and 9 sold. The houses that sold are waaaaay out of reach for average upper middle class kiwis. Most well over 1 million. I angrily commented a while ago that New Zealanders should be banned from buying property in Auckland. Looks like its happened! The government should just formalise it. Make it mandatory to show a Chinese or other foreign passport when purchasing a house.

Rmnz.
Bit defensive.
Yes I understand equities
1987

Go here http://thume.ca/indexView/ and select Real S&P 500 (with Dividends) and change the start year to 1980. Then have a look at the effect of the 1987 crash (if you can find it).

The market has turned $1 into $9 since 1987 (after inflation).

I heard of someone getting knocked down by a car, now I never leave the house just to be sure. Too dangerous out there.

That's almost 30 years ago.... I think you are being disingenuous...

No, point being that shares can be wiped off the face of the earth and shareholders have no control over it.
Had shares over the years and now just toilet paper.
Can I control the price of houses? NO of course I can't but can we be guaranteed that our asset is still standing
Providing it is insured then at least I still have an asset.
Turkies that talk about unearned income are in cuckoo land. What makes buying equities or term deposits any Flippen different? If anything it is a lot worse as professional landlords don't just buy and reap the rewards.
3 monthly property inspections, maintenance and improvements etc. etc.
Jealousy is rampant on this site and it isn't a very becoming trait.
I like to help people with investment but there are so many big knockers on here!

Most research suggests the best way to invest in the stock market is with index funds, investing a tiny amount in virtually every listed company in the world for a small charge. Could you give me some idea of what you think the probability of all those thousands of companies failing at once is?

Even if a percentage fail each year, the index fund rebalances your money into the companies that step over their corpses. Just because you failed to diversify your portfolio adequately does not mean that my risk investing in index funds is larger than yours leveraging into a single asset class.

Your asset may remain standing, but there is no guarantee of it being tenanted, rent increasing faster than costs, or capital gains being made. Diversification is absolutely essential if you want to reduce the role of luck in your success.

MFD, Different strokes for different folks, as they say.
If you are happy with your decisions for investment that is great and your perogative.
Great that you have taken an investment decision rather than just blowing all your money like many do.
All I try to do is put my investment point of view across that works very well for me and not trying to blow my trumpet at all.
All I am saying is that anyone with half intelligence and prepared to get off their butt can prosper in NZ and if you don't know how to go about it, then get advice from successful investors.
Doomsayers will always be that way!

"if you don't know how to go about it, then get advice from successful investors."

And this is exactly what you SHOULD have done with your unsuccessful forays into shares. Like most people who got burned 30 years ago you jumped in without doing your homework and you paid the price. So your continued insistence now that shares are not a good investment is utterly ridiculous and based on your own previous ill informed behaviour.

Fair enough.
The truth is that everyone got burnt in 1987 whether they were clued up or not as you have no control of a
sharemarket crash!
Personally knew several people who,had been into shares for along time and ready to retire, and had to go back to working rather than retiring.

People lost hundreds of thousands.

Would I today have my own money in property or shares, the answer is property every time.

If they had diversified widely and not over-leveraged then their shares would have been ahead of their pre-crash highs by 1989. Housing crashes last much longer - the matching UK one from the same period took 15 years to get the gain back.

Kiwimm, There were so many companies wiped of the face of the earth.
Know heaps of people that won't touch the sharemarket ever again!
Turned to property and none regret it.
Not talking about Auckland property though.

Investing in shares requires some intelligence. If you buy quality shares paying good dividends the returns are considerable. Investing in property is low risk as a rule hence low returns. Anyone can do it. People like "The Boy2" who hark back to the 1987 crash show their ignorance,lack of intelligence and therefore go for low risk low return bricks and morter. Horses for courses.

Gordon, that's fine if you think people that invest in shares and equities make more money than rental property owners.

What I will say is that my son had 1140 in An Australian Superannuation scheme in 2007.
Hasn't made anymore contributions to it since that date and is living in NZ?
The most recent balance of that scheme is now only just over $600 and it invests in the sharemarkets and no property.
So a loss of nearly 50 per cent cent with fees out.
Brilliant Gordon isn't it?
You like shares and the property lovers will stick to property, end of story.

Then why do you need to go on about how good you are....

Bad robot, never once blown my trumpet!
Just explained that there is investment opportunities apart from Auckland and share market
Must go can't be bothered anymore talking to tunnel visioned people.

Kettle pot black

It's very tiring debating with badrobot. I've never noticed anything wrong with The Man 2 comments. It's all been good advice from what I have seen.

Why is it very tiring - just because I think your pseudo-science is wrong. Other peolpe may disagree about his and your advice / views... everyone is entitled to their own opinion.

An apple does not fall far from the tree as they say "The Boy 2." Shares in Australia have had a major increase in value since the GFC. He should have kept an eye on things and questioned the fees taken out which I presume are considerable over that time. You only need to see what the kiwi saver providers are making in NZ to realise they are all making a fortune as they clip the ticket on the billions they manage. I have a modest kiwisaver account with Milford that started three years ago. It is high risk and invests in shares in Australasia. It has had amazing growth.

Gordon, with Sun Super in Oz.
Don't care what you say the performance is pathetic.
Kiwi Saver accounts are increasing due to contributions from employees and employers.
He hasn't worried about it as he is not reliant on it in the future and so hasn't bothered bringing it over.
There has been negative returns plus the fees.

Other than the kiwi saver account I look after my equities myself. I would spend at least 20 hours a week keeping an eye on financial news and markets, in NZ and overseas.I only have one share in NZ and one in Australia. The share I own in NZ is in a public company that has a monopoly and it is tightly held. It pays six monthly dividends and if it ever has a quiet period where the shares fall back a bit I buy more as the dividends make it worthwhile. You need to keep an eye on equities and if you get it right the returns are considerable and the expenses are virtually nil.

The only people that don't like unearned income and capital gains are those not getting them. They will drone on about the good of society etc, but this is to mask simple jealously. If you offered them some unearned income, they would bite your hand off and if they deny this they are either lying or kidding themselves.I own multiple rental properties and trade shares US and Aus energy/ resources. Have always been suspect of NZX thin volume, and long-term under performance. Note the NZ50 share index is now a gross index (includes dividends as well as changes in underlying stock values in calculating index value). I can't think of any other significant index that does this in the world. As a child mid to late 80s when the NZ index number would come up I would try and think of something that happened in that year, I can remember disappointment when the index went above 2000 as I could no longer do this. So the capital index would have only gone up 3 fold in 30 years, also inflated by survivorship bias as companies heading to oblivion drop out of the index and more recently the inclusion of dividends paid in the index value.

No. It is simply a political view.
One that everybody is entitled to.

We should all meet up for a Barbie one day. Jeez it'd be a blood bath!!!

I have no issue with people making money through any means.

I do have a problem with people misrepresenting their positions, though - this is how it all started.
Especially when they seek to impart their 'wisdom' on others.

I'll concede, I could be entirely wrong about you. However upon review of all of your posts on this thread, to be in the position you claim to be, you must be the luckiest investor to ever exist.

Nymad, if you are referring to me, I take offence if you are insinuating that I tell porkies.

The same offer applies to you that I made Gordon a couple of weeks ago!

I don't agree that all unearned income is immoral. But in the current poo storm brewing in the NZ economy centred around housing, I do believe that allowing landlords or flippers to buy existing houses is a both an immoral act on the part of the investor, and a gross betrayal by the NZ government towards their electorate.

NZ needs new homes and investment funding to provide those homes would really begin to solve some of NZ's problems. In addition, the cost of building a home and the cost of land is an issue that needs urgent attention. Perhaps a scheme where potential or existing landlords can invest in massive house building scheme? The united capital funds would help bring economies of scale to bear on the building costs. Negotiate with overseas suppliers rather than buy into the monopolised and inflated market that supplies house building materials in NZ and help create more competition and market conditions that would also help to bring house building costs down?

This problem has been developing over many years, it's not going to be solved by RBNZ tweaking alone. There needs to be a combined effort between government, local government and private enterprise. Until the incentive to profit from the housing ponzy is removed and house building incentivised for a few years, I can't see this ending well for anyone.

What do people think of the idea of trying to start abolishing unearned income by at least getting the government to not give any away. We could do this by removing the dole in all it's forms including the accommodation supplement?

This way at least the government won't be directly responsible for causing hundreds of thousands of people to get this immoral unearned income.

I hear that about a third of our taxes go towards funding the unearned income of others. This means that abolishing the dole would allow those earning their income to have to give up 1/3 less of their hard earned income.

Sign of the times. Zero social responsibility in your comment. If you had said - Get rid of Social welfare and invest it in education, healthcare, you would be showing that you have some empathy. But No !! I want a tax cut, sign of these selfish times.

I don't think sadr001 was being entirely serious.

"entirely" being the operative word here. Lower taxes allows individuals to invest in health insurance and better education without being limited by what the government decides to offer.

no such thing as unearned income....you either earn something or you don't....how do you unearn? the actual term is passive income....you can win or lose, have a profit or loss, shares are passive income also...

no such thing as unearned income

Yet everyone knows what the term means. Comes down to semantics.
It has its own Wiki article - Unearned Income

Of course it means different things to different folks. Excessive salaries of CEOs could be reagarded as "unearned"
The purist concept is that it refers to all money not obtained through personal labour at a reasonable hourly rate.

Your refusal to believe in unearned income simply reflects your allegiance to the capitalist running dogs and exploiters of the working class!