By David Hargreaves
With softer housing market conditions, particularly in Auckland, set to be with us into next year, the coming months will be present some new challenges for a variety of people and parties.
The proximity of the election would now seem to preclude any immediate upswing in market activity. For now, anecdotally, the tap is turned off on the flow of foreign money into the Auckland market. So, in combination, what this means is that after years of a market that only seemingly goes up, for now that's not happening.
One interesting consequence may be a period of some sorting out of investors versus speculators.
I would say it's entirely possible a fair few speculators don't know they are speculators. They think they are investors. But of course, if a property purchase doesn't make sense in terms of the rental yield you get on it, and only makes sense if you get a quick capital gain, then you are in my book a speculator.
And we can debate how many of the people who have flooded into the Auckland market in recent years fit this bill rather than the description of the yield-driven 'investor'.
A shock
Undoubtedly for some people it is going to be a shock to see prices moving sideways or down.
How many people are unprepared for such a scenario? That will be interesting to see.
If we do get substantial numbers of 'investors', (really speculators), deciding to offload properties with poor rental yields and suddenly no immediate promise of capital gains, then this could obviously put downward pressure on the market. Time will tell how many people might actually be in this category.
For the Reserve Bank this becomes an intriguing time.
A desperate measure
The RBNZ's move to clamp a 40% deposit rule on investors last year almost looked like a desperate measure in the face of a defiant market.
Now, however, the market has indeed backed off and the RBNZ's looking at a much flatter market. So, curiously, the question now becomes when and whether the RBNZ should take its foot off the brake. It certainly won't be thinking of anything like that right now, but as we head into next year, then the question will become more pertinent.
A key issue for the RBNZ to consider internally is to what extent the slower conditions in the market this year have been directly caused by its actions.
The huge fall in amount of money being borrowed by investors since last year tells you there's been some impact. But other factors are clearly involved.
Happily hiding
The major banks it seems have happily hidden behind the RBNZ measures and have undertaken their own tightening up in lending criteria. Interest rates have edged up. And then there's the unquantified impact of the turning off of the foreign investment tap.
It all becomes very relevant, because at some stage if the housing market stays flat, the RBNZ has to decide whether it is the key reason for that and therefore whether it should be packing some of its LVR weaponry away.
It in fact all potentially provides a reverse headache for the RBNZ.
Right now the central bank will clearly be very happy with the state of affairs. The lending books of banks have been rebalanced away from the growing percentage of high loan to value mortgages seen prior to the RBNZ's introduction of LVR 'speed limits' in 2013.
They are not doing it for you
Remember, the goal for the RBNZ in all this is to ensure financial stability. It's not to ensure either that you can afford a house, or that the one you've got will keep rising in value. The central bank wants to avoid a situation where a sudden downturn in the housing market causes banking stress.
The ironic thing is though, there must at least be some possibility that any sudden rush by our speculators dressed as investors to sell properties would then start to produce the sharp falls in house prices, and potential stress for banks, that the RBNZ's measures set out to avoid in the first place!
So, it's an interesting juggling act potentially ahead and I don't envy the central bank folk in their job.
The other concern I have from the quieter market and the potential reaction to it, is what this does for the appetite of housing developers (and that includes both private and state and local government developers) and also the appetite of banks to lend on housing developments.
The fruitless game of catch-up
If you go back to Auckland in the early 2000s it saw some of the most active development in its history, with about 35,000 consents for new dwellings issued in the 2002-04 period. But then there was a lull in building activity. Then there was the real house price boom. And then, just at a point when it might have been felt house building activity would crank up again, the Global Financial Crisis hit. The result was Auckland built way too few houses for several years and has since been playing a so-far fruitless game of catch-up.
The worry now would be that any rush to market by speculators will see a temporary supply glut. And that might convince developers and their backers to, well back-off. This would not be good.
Regardless of the short term performance of the housing market, Auckland is going to need substantially more houses in future.
Any backing off in building of new houses now will surely see the problems of shortages and unaffordable housing simply magnify later. There's plenty for all involved parties to think about.
60 Comments
The recent slight change in the housing market is insignificant relative to the debt that has been accumulated since 2012. LVR limits must remain in place. The magnitude of the ratio of household debt to household income, currently at 1.68, is too high for the RBNZ to allow NZ to indulge in another party fueled by easy credit. The growth in unproductive private debt since 2012 is so bad that a DTI limit should be implemented asap as well.
I agree, the LVRs were put in place to limit systemic risk, it makes no sense to remove those limits when that systemic risk is increasing. Removing the limits would merely allow the introduction of new mortgage credit into the Ponzi scheme. The opposite needs to happen. The thing that will most help buyers is the reduction of house prices back to more affordable nominal levels, and this process should not be impeded.
Far more can be done to stop empty Auckland houses
http://www.cbc.ca/news/canada/british-columbia/property-owners-panic-as…
Perhaps if you fill the empty ones with people there won't be a crisis
Foreigner bought my neighbours 5bdrm home in early 2015 & today sits still empty ! Nobody there to enjoy it's sea views. That property raised 2 generations and now it sits empty not utilized for its purpose in the best school zone in Auckland. No it's not DumbleDZZzzz
This article covers everything. Noting that RBNZ acts in the interest of financial stability, people should do the same for their own finances. Keep debt servicing costs to a minimum, pay down as much debt as possible and accumulate cash for opportunities or expenses. Debt consolidation is a good option for those that want to rein in their credit card debts. They should also be cautious about buying property. You never know the right property might come along at the right price but it's best not to overextend your finances to buy.
Main reason for slow down is Chinese money : China which use to allow $50000 has reduced to $10000 and that too have provide a valid reason and no more friends joining to send money.
Was speaking to a colleague who has many friends who wants to buy house but unable as not able to transfer money legally but they are hopeful and know that Chinese will find a way but still will be not as easy as it was earlier.
Basically - The tap has been shut by Chinese communist government and is the only reason
After 9 years, need fresh new approach - Wheter opposition will be able to provide or not is different issue but as of now need change from current government for number of reason that has already been discussed before.
I agree that the price falls tie in with the Chinese credit restrictions, but I do not uncritically accept that there is a causative link between them. The assessed numbers for foreign sales are small (3% or so?), and I know you can quibble with them, but they must have some value. The "97%" cause of house price increases is the banks giving ever increasing amounts of mortgage credit to NZers to spend ever larger amounts on property. There is an eventual limit to the credit that the banks can credibly create without looking totally and obviously reckless, and we are now at or well past that. So I think the more likely cause of the price falls is that the banks themselves, under pressure from regulators, funders and credit agencies, have decided they can't or won't continue to feed the Ponzi scheme and have restricted mortgage credit.
Booster me thinks you underestimate the extent of house price inflation attributable to foreigners with family members already residents on NZ. I don't know how to explain it more clearly than my own street demographic changed in 3 years to primarily foreign nationals and those ones were buying property as far north as Warkworth for family & friends back home. The 3% figure is inaccurate for precisely that reason.
Forgive me, I'm being a bit too cryptic. The 1999 movie the matrix! - you know Neo has to choose between falsehood, security and the blissful ignorance from taking the blue pill vs the knowledge, freedom and painful truth that come from taking the red pill. Seems relevant today with politics becoming ever more Orwellian with a greater divergence between mainstream propaganda and alternative media truth. I can understand why baby boomers choose the blue pill. I'm sure baby boomers are also taking lots of the other kind of blue pill though.
Vancouver market climbing up after regulation temporarily slowed market & sent it backward. Alas we are talking about Canada where for every dollar a person owns they owe at least a dollar and sixty cents. Only low interest rates can hide that sort of ponzi bubble market & guess what ? Next week The Bank of Canada decides if it will increase the OCR 0.25% after 7 long years
Wonder if they will ? Wonder if The FED will again another 0.25% too ?
The trend is up for interest rates albeit tiny increases but the sentiment is still up
Simplification of NZ's economy: sell primary products, sell education services, use underpaid labours on student or work visa to support various key sectors (agri, tourism, retail etc), import (skilled? capital rich?) new people.
Simplification of NZ's political system: bunch of guys tweaking various bits in the simplified NZ's economy. But often, their efforts do not depend on their efforts (if any), rather on where they were at in that economic cycle.
Hmm.
If you go back to Auckland in the early 2000s it saw some of the most active development in its history, with about 35,000 consents for new dwellings issued in the 2002-04 period. But then there was a [blink and you missed it , completely minor] lull in building activity. Then there was the real house price boom. And then, just at a point when [] house building activity [] cranked up again, the Global Financial Crisis hit [and the Super City was formed]. The result was Auckland built way [faster] for [those] several years [preceding the GFC than it] has since. [Auckland has been unable to match that 00s level, even whilst prices soared massively higher].
There was no lull in the 00s. The supply crash has been post GFC.
The Auckland Super City Council took away land supply from Auckland City and drove up the cost of building. The Auckland Super City Council priced up vast new sprawling infrastructure around small exurban towns and drove up the cost of building.
Auckland has not been "playing catch up" since the GFC, Auckland has been shooting itself in the foot since the GFC.
There was a brief lull in Auckland house prices August 2006 but that was indeed only a small lull if you check the chart. I know because I bought a house In that brief lull.
It was basically hell with prices climbing on the NShore for years until that brief lull. Then she took off again but nothing like Chinese money flood starting in the second half of 2013
A better question is where would the Auckland property market be today without the minimum 40% deposit on investment properties ? I think like others here that it was the Chinese govt clamping down hard on all those finance companies used to evade Chinese regulations that has truly caused a reduction of capital flooding into Auckland property .
I also agree this may change once Chinese figure out another way which I bet they will.
So is the NZ govt prepared for another injection of house price inflation ? Heck no!
But of course, if a property purchase doesn't make sense in terms of the rental yield you get on it, and only makes sense if you get a quick capital gain, then you are in my book a speculator.
Harsh.
Regardless of the short term performance of the housing market, Auckland is going to need substantially more houses in future.
People ignoring current returns based on perceived future price increases, are called what?
Hi Hardly,
Exactly. And it's just what you'd expect.
Plenty of homeowners/investors (including those from abroad) won't sell - simply because there's a reduced incentive to go to market right now.
However, some speculators (and so-called "specuvestors") who are donkey-deep in debt might have to sell. And some of them may take a loss. Tough luck for them - but every so often a market needs to purge itself of incompetent players. That's a standard market process, which is sometimes referred to as "market discipline".
Nobody should overstate the extent of price drops in the Auckland housing market. So far they're pretty small relative to the 2014-2016 boom. There may be further falls - but they're likely to be short-term and limited.
The great majority of people will simply hold on. The reality is that NZers are very reluctant to surrender their hard-fought-for property. Owning property goes to the basis of the human psyche - security, stability, status, sense-of-achievement, self-esteem and so forth. These things are highly valued in our society. Further, we know that if we get out of property then it can be damned hard to get back in!
In the medium/long term, Auckland's property market will be underpinned by demographics - and the huge unmet demand for accommodation.
Certainly, I'm not expecting to buy at bargain-basement prices in Auckland (or Wellington). But if I'm wrong, I'll be elated! And no doubt you will be too!
The huge unmet demand for accomodation in Auckland....that has resulted in rental prices being static or dropping? I mean, if there really was this big shortfall of houses as a commodity that provides accomodation, wouldn't you expect rents to be rising rapidly? But they aren't, and the rises we have had have been v modest (rate of inflation)? It seems to me the demand for houses for as a commodity that provides accommodation in Auckland at least is quite well balanced between supply and demand. The price (rents) tells us that.
From memory current prices are 100% overvalued vs historical rental yields (?), so to rely solely on house values to return yields to that historic level you would need a 50% drop in prices. Wow. Even a 6% yield in Auckland sounds to be pretty modest if retail mortgage rates go to 6-7%. Rental increases and related wage increases could help with that mix, but I strugggle to see what will increase wages beyond their current growth of 2ish%. And even in the midst of our "housing crisis" we aren't getting big Auckland rent increases beyond wage growth. So you do the maths....the numbers are just frightening.
See interest.co.nz 2003 - present chart series here;
http://www.interest.co.nz/charts/interest-rates/mortgage-rates
Thank you for your graph Kate, have another look at it, slide the time cursor back as far as you can to 2003. What I see is long term (min 14 years) trend of declining interest rates. Like all charts, it has some ups and some downs but the long term is very clearly down
Yes normal is what I said. I get that interest rates have been low for longer than people thought and that this might lead you to think they will be low forever but consider how likely that is to be true. Rates have been moving up in the states and Europe and Japan are starting to reach the end of their quantitative easing. It wouldn't take much for rates to start moving up across the board and then I think you'll see rates move pretty quickly in little old New Zealand. Granted this might not happen for two years, it might not happen for five years, but when it does this housing market is screwed because there is no way aucklanders can service their mortgages at 8%+.
H Hardly, you say "Rates have been moving up in the States and Europe and Japan" how much higher are these rates in these countries than in NZ ? They're not, are they? NZ's rates are in fact MUCH higher than US Euro & Japan rates.
Also I very much agree with you that if NZ rates (or actually most interest rates around the world) were 8% many, many people (and governments) will be broke. This would lead to a proper (unlike the GFC) recession.
So, do you still think that interest rates will rise back to previous levels ? I certainly don't : )
Kate, I totally agree. If we assume continuing modest wage growth (which seems a fair assumption) in my view it is inevitable we will have a full blown banking crisis sooner or later. People cannot pay their debts when rates go back to more customary levels. I am also very concerned about our exposure to the Australian property market via our common banks. I have read no credible commentator who has anything good to say about that market, and when the Aussie banks come under pressure mortgage credit here will dry up.
Yes, Aus is a basket case and where they go we go. I really don't know where it will all end up - unimaginable, I suspect given the world just simply has never been here before.
http://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=118…
Wow a husband and wife from China - $50M fraud - 76 properties over 5 years - it's sickening that good decent kiwis wanting homes are fighting against this sort of behavior..............TIP OF THE ICEBERG
http://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=118…
I find it extremely difficult to believe that the Incumbent Govt has not know how much of this had been going on but were happy to pump the economy short-term and pull the wool over the simpletons eyes (look how much RICHER you are coz your house is now worth X) with quick and ill gotten gains from China....
This will come home to roost- its a matter of when.
I will never ever forgive them (or vote for them again) the cost on so many levels to Aucklander's especially will last for generations
National have been pulling the ponytails of Kiwis for too long. For me the alleged right wing parties are all worthless and that doesn't give me a lot of options as a swing voter (there's nothing to swing to). I'll never vote for National again after the stunt they've pulled over the last 9 years. As you've pointed out the damage will be long lasting.
Agree with you both. People sometimes mistake me for a Labour voter, but I never have voted for them, and I'm in fact a long-time National voter. But not anymore. Their mismanagement over the last nine years coupled with their cynical denials any housing crisis exists after having campaigned on the housing crisis disgusts me.
Still thinking about who I will vote for.
I'm with you Rick and Dictator - I'm a long time National voter and I initially enjoyed John Key. When he was first elected I thought that he was innocent and just a bit of fun. But after a couple of years in office I realised the guy was an absolute BS artist - and narcissistic (to the extreme). What scared me though, was how your average kiwi couldn't see that - or either they could, but didn't want to acknowledge it.
I subsequently spent the last 5 years waiting for John Key to stand down or step aside because I quite liked Bill English - thought he was more trust worthy and balanced. But it appears he's been influenced waay too much by JK - he's now cut from the same cloth. Absolute shame.
One feels that we need a massive clear out - get rid of all this old and stale corruption that resides in parliament at present.
"I would say it's entirely possible a fair few speculators don't know they are speculators. They think they are investors. But of course, if a property purchase doesn't make sense in terms of the rental yield you get on it, and only makes sense if you get a quick capital gain, then you are in my book a speculator"
Thank you David, very well said
It's the "quick capital gain" that makes the statement kind of right. There's nothing wrong with a negative yield for the first few years while you build up equity in the property. If you have a long term view a negative yield can make sense if the property has potential. It may be that the property is in an area ripe for gentrification or will soon have improved transport links or something like that. Many businesses make losses in the first years of operation. Speculator is a pejorative term actually and now I have thought about it a bit more, it's not well said, it's actually kind of dumb.
I disagree. The fundamental of an investment property is the rental yield. The only justification for a negative yield would be development potential or if you believed rents were going to rise at a rate in the future to turn the yield positive.
I don't see how rents can rise significantly given their link to incomes and the stagnant nature of those.
Now you might say what about capital gain. This should be irrelevant. Since the value of an investment should be the function of the return (both present and future) the capital value should be linked to rent such that it only changes with rental expectations.
Nobody would buy a stock at a price with expectations that the earnings would remain constant but expecting the share price to rise. That would be dumb. But we seem to expect property investors to buy real estate at continually higher prices while the incomes from those assets lag. Sounds dumb to me.
How about gambler?
Where you and I would probably agree is someone who buys and holds a property with a large amount of equity is at little risk. If they intend to hold the property for 10+ years I can't see them making a loss. They may not make a gain as big as they could have from another investment strategy but I expect after say 15 years they would sell the property for significantly more than they paid for it.
So who are the gamblers? They have multiple properties with low equity. They are dependent on capital gains to keep them afloat and they have low to negative cash returns. These people could be wiped out by a decrease. Their banks will foreclose on them at the first sight of adversity.
If you use leverage to invest you are gambling. If someone borrowed money to invest in shares I would say they are nuts. I'd say what is the rush? Just take it slow, buy hold, buy hold, buy hold. So I say the same to property investors with $10m in equity and $50m in property - your gambling. Yes your return is 5x in the upwards direction but it's 5x in the downwards direction too. These people will not be able to ride out a downturn because the bank won't let them.
I agree with what you have written Hardly. I have around 60% equity if I include my own home. My rental properties by themselves are insignificantly negative however if I think like GM I should factor in that I get a return on my mortgage free home thus making my entire property holdings positive. Am I fiddling the books thinking like this? There could be better ways to "invest" but it has worked out pretty well for me so far. The best investments we have made are probably our careers actually. Two good incomes coming in has made buying multiple properties possible. Maybe investments shouldn't be viewed in isolation? Maybe one's entire money making abilities are symbiotic with property investments relying on incomes from other sources but everything works together for a good outcome.
I'm interested in what you think about this scenario:
• house prices are flat over the next five years so you realise no additional capital gains
• you have to divert some of your personal income to debt reduction and maintenance.
How do you feel about that? I don't think that is the worst case scenario.
The reason I ask, is negative gearing might seem great during the bull market but how will it feel during the bear market? When your property portfolio takes from you for years will you be ok with that?
Just to be clear though, I think most asset classes are at or close to peak right now do to all the cheap money about. So I wouldn't be jumping in shares in a big way either.
Diversify out of Auckland, now?
NZ should be still gaining with today's low interest rates (Auckland/Christchurch have their own problems). We are close to, but not at the end of the boom, 2019-2022. Australia (with the exception of Perth which has it's own problems) is still gaining, as is Canada.
If the thing is to buy for expected capital gain the possibilities in NZ are not bad. In some ways New Zealand's unique problems are beneficial to NZ investors. Auckland Council induced land price inflation so stupendously good that for a long time Auckland sucked in a disproportionately large amount of NZ investment capital. Christchurch rebuild in the same period drove up building costs, so property investment in other parts of the country remained flat. It might be that now absent Auckland land price inflation and Christchurch rebuilding, the rest of the country will surge on the back of low interest rates. The rest of the country may have 1.5 - 4 years of capital gains left in it.
Hardly, I very much agree with you again. I bought my 1st investment property 23 years ago and of course, over many years, houses do increase in values and the mortgages reduce. I don't care if values go down over the next couple of years, actually I'll start looking to buy some more if I can sense some forced sales (not yet). Also I have never bought a negatively geared property and I sleep really well at night (in Bali right now actually)
Nice piece, David.
The collapse in consenting rates after 2004 was to a large extent the collapse in the apartment market. In 2004 apartment consents made up some 35% of all dwellings consented in AKL. By 2009/10 they made up 0% of consents.
It is no coincidence that the collapse in building in AKL followed the introduction of development contributions on July 1 2004. The new Local Government Act came into force late in 2002 and developers got a window of a couple of years to avoid these contributions.
Adjusting for population tells an even starker tale. Consents issued for dwellings of all types sat at about 10 per 1000 population in 2004. In 2005 that rate just plummeted and kept falling. By 2010 that rate had fallen to just 2.0.
I haven't got it in front of me but when I collated the Demographia data for Auckland the price inflection began around 2011 about the time the Aus mining boom collapsed. Although building rates had fallen considerably the affordability wasn't too bad by recent historical standards in 2007.
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