So, how is 2022 for you so far in terms of the housing market?
I'm interested in your views.
It seems to me to this point that the housing market is performing much as might have been expected.
At the moment we've got that uncomfortable 'hesitation waltz' going on as vendors, accustomed to seeing prices go up thousands in weeks are going blue in the face waiting for a 'fair price' for their property.
Buyers are playing the 'ah, but it's different now' card and waiting.
So, it's all in a bit of a holding pattern.
How does the standoff end? It really does depend on any number of factors.
At the moment there's no real reason why vendors should have to start dropping their prices.
That only becomes a real issue if they have the proverbial 'change in circumstances' - IE lose their job.
The job market is currently tighter than a tight thing with unemployment running at a barely existent 3.2% as of the December quarter.
A really big point to watch this year then is if there is a substantial reversal in employment.
Why might that happen? Well, there are suddenly a lot of what the economists like to call 'headwinds'. Omicron is a big one at the moment because people aren't spending the way they were.
Some businesses are doing it tough.
And then there's our old friend inflation, which hit an annual rate of 5.9% as of the end of last year and is likely to be heading towards or above 7% some time quite soon, even after the Government's moves to spare some of the misery at the petrol pump.
On the latter point, it's worth mentioning - as others have - that to some extent the Government action will merely 'defer' some inflation. Once the petrol tax is returned to previous levels there will be a one-off inflationary hit then, in the same way as happens when GST is increased.
Such increases are theoretically 'one-off' in nature. But we've seen in the past year what happens when one 'one-off' comes straight after another and then there's another. These are not really one-offs. And they change behaviour and expectations. We get second and third waves of inflation.
Moving to defer inflation in this manner all just leads me further and further to the view that the current inflationary pressures we are seeing will not be a short run thing at all. I think it is here now and it is already beginning the process of getting ingrained.
The Reserve Bank's February Monetary Policy Statement forecast inflation to return within the targeted band of 1% to 3% by June of next year. Admittedly those forecasts were finalised before Putin invaded Ukraine. But even without that I think the forecasts were optimistic in the extreme.
Right now, I reckon if we get inflation back under 3% within three years we will have done real well.
In reality I think it will take even longer than that. Will sub-3% inflation even be a realistic goal in future? Economists are already suggesting the costs of handling global warming will be inflationary. The free trade we've seen in which we've benefited (particularly in the west) from utilisation of cheap overseas labour (don't call it slave labour) may have already started to come to an end. Who knows how permanent the inflationary impacts could be if Russia is once again economically isolated for a long period?
What we do know is that with the current levels of inflation we have here the RBNZ is putting its foot down on the Official Cash Rate accelerator. The wholesale interest rate markets have already anticipated all this and have been driving higher, which in turn has led the banks to effectively 'front run' the RBNZ with mortgage interest rate rises.
And I truly shudder to think what sort of increases some mortgage holders are going to face as they re-fix their mortgages. There are more than a few people out there with seven figure mortgages, such has been the magnitude of the 40% house price surge since the start of the pandemic coupled with the ability of folk to secure mind meltingly large mortgages due to the then low interest rates.
And as I've also mentioned previously these mortgage holders are also now facing the return of the old foe inflation. Little luxuries - such as things like food (ahem!) - are rocketing in price along with everything else. (Food prices rose 6.8% in the year to February).
So, it's crucial that the labour market holds some sort of buoyancy. If large numbers of people do start to lose their jobs then that IS a game changer and there's no more hesitation waltz in the housing market. People would have to sell for what they could get. And that would be a huge problem. Disorder.
Pay rises are likely to become crucial. That will help the mortgage holder buy that 'fancy' loaf of sliced bread and some 'opulent' breakfast cereal - and it will help to meet the 'pass-the-smelling-salts' mortgage interest payments.
In other words if people do stay employed and they are able to get financially compensated for at least a portion of their increased costs, then mortgage holders will get by and they won't be under pressure to sell houses.
It's always seemed to me that people have a marked aversion to selling a house for less than they paid for it. People struggle to accept the concept that a house is just another tradeable asset that theoretically might go down in price. That is not the New Zealand creed. You buy a house, live in it for a while, add X amount of dollars on, sell and then buy another. Rinse and repeat.
So, hence the standoff we have at the moment.
Ah, but what if you can ultimately sell your house for more than you paid for it? Even if it's not a lot? Sounds good, yes?.
Here is a very rudimentary suggestion/calculation. Let's say for example someone bought an Auckland house for the February 2022 median price of $1.19 million and sold it in a year for $1.25 million. A gain of $60,000, or 5%. Hey, it's not a 'party like its 2020-21' kind of gain, but it's okay.
However...What if the inflation rate over the same 12 months is 7%, or even higher? Yep, you've actually LOST money on the house without really realising it. Basic example. But you get the idea. This of course was a common feature in the housing market and even with things like domestic goods purchases in the 1980s.
There was a time when people were getting 18% for term deposits and happily spending their 'gains' on things like new whitegoods (when these were expensive), without necessarily realising that the said goods had actually gone up 20% in the past year! So, yes, they were actually losing money in 'real' terms.
Inflation. It is the thief in the night.
However, it is possible that with continued inflation - providing people can get cost-of living pay increases - then affordability of houses might just start to improve much more quickly than many people were saying was possible even a few months ago.
Inflation as a friend? Not really. It's hideous and corrosive. But it could ironically be helpful in returning some sense of affordability to the New Zealand market.
And this could happen without the obvious falls in house prices that some people are anticipating. But yes, in 'real' terms house prices would fall - and possibly for several years.
As I said in the heading though, there's a lot of 'ifs and buts' with that.
And if we do have a serious rise in unemployment, then forget everything I just said, because that would get ugly. Housinggedon could be upon us.
That 40% house price bender over the past two years left us horribly exposed. We may yet pay for it.
*This article was first published in our email for paying subscribers. See here for more details and how to subscribe.
156 Comments
Yes I agree David - its quite possible we see 5-10% inflation over the next 5-10 years with flat or falling house prices.
In real terms, that is a significant decline in the value of our housing market (call it a crash or whatever term you wish to use). If you are an investor, it is something that should be seriously thought about - although nearly every property investor I talk to, they have no idea why I look at this from a real, not nominal perspective (usually get laughed at or looked at with a blank stare). Its because if the scenario above plays out, you are getting poorer, not wealthier because you are losing buying power with your invested capital...even though the nominal price of your investment might be flat.
Its quite possible we had peak real house prices late last year and that price, if inflation remains high in the years/decades ahead, may not be reached again for a very long time....nominal prices might move higher...but the real price might take a very long time to recapture that high.
Residential Property investment is a mug's game from here. I'm not talking about people who bought years ago. I'm talking about people looking to buy investment property from hereon in. They are mugs.
Read a good piece by Martin Hawes the other day, he rates certain types of commercial property as a good investment, but not residential property.
Yes I've met and talked with Martin a few times in the past. From memory he was a big fan of the likes of property for industry (PFI).
Which if you look at now, even it looks like the share price might be about to fall off the edge of a cliff. So again, investing right now might be a risky proposition (but dollar cost averaging into the investment would likely work out for you...which you can't do as a FHB into the residential market...its all in with your money and leveraged with a bunch of the banks money).
Yield at 3% looks attractive although perhaps not if prices have peaked and we're going into 5-10% inflation for a sustained period...
Do you want a technical analysis answer to this or simply that it is down 12% since December and the trend looks very bearish? (with the likelihood of rising interest rates/discount rates applied to future cash flows, and an economy that appears to have a very high risk of recession this year).
Buying and holding to expect gains is a lazy mugs game yes.
Buying and refresh / renovating, gains will depend on the site but still will be opportunities.
Buying and developing sites will always produce gains for those talented / crazy / cashed up enough to risk it.
"I'm not talking about people who bought years ago": are you sure? It doesn't matter whether you bought it yesterday or last century, if it doesn't make a decent profit now or in the future then you are a mug to hold it. Holding on to it because it used to make a good profit is foolish, kind of like holding on to Kodak shares or something.
There are a few points missing from David's thesis. In an inflationary enviornment if house prices are static, or falling, then it is the land value that is falling and not the cost of building the shelter on the property which will be rising as fast, if not faster, than inflation.
This thesis does not consider the alternative to buying, which is renting. If rents are rising rapidly this may skew the pay-off back in favour of buying. If there is a housing shortage, it's very unlikely inflation is going to make either renters or buyers better off.
Good points.
One has to hope that wages start rising soon if rents are also going to go up as the same rate as general consumer inflation. Otherwise raising rents (yes part of CPI so part of measured inflation) will be like trying to get blood from a stone. Does one spend their $$ to put food on the table or a roof over their heads?
I guess poor renters hope that more people keep leaving the country and we keep going with this massive building program so that rental supply clearly outstrips demand.
Although not sure who would want to buy all these new builds if they either don't want to live in them themselves or the are no tenants to put in them without reducing rent below the current market rate because renters have more houses to chose from than they need.
As I've been told by property investors, its all about supply and demand.
I wouldn't take any notice of property investors. There is nothing particularly sophisticated or value-add by 90% of them. It's a simple formula relying on tax incentives and leverage and that door is closing in my opinion.
Having said that, if there is an excess of supply in rentals then yes prices will fall. We aren't there yet though and the borders are re-opening.
Yvil - having lived through the GFC in America and witnessed a property bubble burst first hand...one lesson from experience is that the people you will consider experts while property prices are going crazy on the way up are probably the last people you would refer to as experts when the dust settles on the other side.
But over to you - if I'm the one you are referring to as having only 'read about it' and have no real world experience then good for you.
Yvil - you consider yourself a property investment expert, although you don't own any investment properties now - but have done so in the past: according to what you have said previously.
Given your expertise (and apparent wealth), I'm very interested to know whether YOU will be looking to buy an investment property over the next 1-2 years. After all, you have always been very bullish on the prospects of residential property, especially over the medium - long term.
I back 95% of Yvil's comments. His comments that are contentious to others are usually on personal responsibility and attitude and he frequently makes points that appear arrogant but are truth-based. What we need to hear isn't always what we want to hear.
The comments section would be a hell of a lot better if we took some of the emotion out of it, listened to each others point of view and were respectful.
Fair enough. But he talks of himself as a bit of a property guru, yet sold his house just before the boom and doesn't own any residential property investments. And then calls out others for not having relevant experience.
He also used to dig at us 'DGMs', yet now says property prices could fall 20%.
So frankly, I am quite confused on his position.
He's always been bullish on residential property mid-long term, so I don't think it is unreasonable to ask if he is going to walk the talk? It sounds like he is very well off, so lack of capital is surely not an issue.
HM, I never said I was a guru but I have been involved in both commercial and residential property for over 25 years so yes I think I know more about it than average Joe. I don't know what you do 5 days a week for years but I would expect you to be far better at it than me and I wouldn't judge you as arrogant if you stated that you're knowledgable about your profession.
Im not great at anything, but property looks really easy, other then development, where you have large outlay of cash and get investors involved. I've bought property and sold, all you do is hold onto it and sell when you get capital gains. You can use equity from house with capital gains and buy again, once again not hard. My point for this is, its easy to have an opinion about it, as most people know a little. Houses are pretty common.
I have tried to start up a gambling company in the UK, now that is hard especially trying to convince investors to invest, also the regulated environment and the risk involved makes it very hard and costly, especially when you have to have things like parallel servers for your test, development and production environments. This is especially true when your trying to get started and trying to create a minimum viable product. You have costs coming out of your wazoo, risk that the business may not work, and no proof of customers willing to pay a dollar. I could go on about the difficulty.
Now I'm trying to setup supply chains in the States, but this is more tried and true, so just following the process of other people. So a bit easier but still stressful. You still have to differentiate products build a brand and market it. But the rewards are good if it works and money is consistent. It will still take work, but you can get cheap help as well. As an example of reward you can get 30-40% margins from one product earning $50K a month (Not typical but achievable). Once you've proved your product just rinse and repeat and build up your product portfolio and brand. Anyway once again I am hopeless at this and even if I happened to make money, I would never consider myself great, just someone with a tonne of persistence. I will always make mistakes, I just learn from them.
But compared to all this I think property is a piece of cake in a rising market especially if you bought 20 to 30 years ago.
The comments section would be a hell of a lot better if we took some of the emotion out of it, listened to each others point of view and were respectful.
Yeah, I agree with that. I'm just surprised someone who says that is such a cheerleader for Yvil, who seems to spend a lot of time taking unnecessary digs at other commenters.
It also makes sense to be a bit skeptical of people who claim that their expertise makes their opinions more worth paying attention to than those of other commenters - it's an anonymous comments forum. Anyone can make anything up. Anyone could come on here and claim to be someone with decades of experience in property investment, even if that's not true at all. What matters in forums like this is what you say, not what expertise you claim to have. Which is why I'm kind of surprised people seem to put so much store here by the expertise others claim to have. It's pretty irrelevant when there is no way of substantiating it.
We've all made comments we would look back at with some embarassment. Everyone has an opinion, we don't have to agree but let's be respectful and try and see each others point of view.
I don't interpret his comments as you do, but we probably look at things differently.
No, I didn't say I was distrusting. Being distrustful is not the same as recognising that in the absence of being able to substantiate a claim of expertise, the smart thing to do is to look to what people actually say and evaluate those comments, rather than simply assuming that because someone says they are in an expert they are in fact an expert and you should just accept their claims on that basis. I think that's in fact one of the great things about a forum like this. There are lots of places you can get the advice of experts (by reading the articles for example!). It's good that there are also places like this where people can engage and evaluate others' claims based only on the quality of their reasoning.
HM, I would not buy an investment property in the foreseeable future until I saw a sure way to make at least an immediate 25% on the price I pay. If you're thinking about buying and holding in the hope the market goes up, then no, the numbers don't stack up at all. On the other hand, in the coming 12 months, some people (I'm not saying a majority) will be under stress to sell. As someone who knows property for years and has time to look at deals, I have a better chance to find a great deal than the average man.
I hope that answers your question.
Of course I have, from a year ago:
- Interest rates have gone up markedly and are expected to keep rising
- Inflation is sky rocketing
- Investors can no longer deduct interest cost
- LVR's have been reintroduced
- CCCFA is new
- DTI's are on the table
- There has been a net loss of people (emigration)
- There has been record numbers of new dwelling being built
Do you not think all these negatives for RE warrant a review of one's view?
One year ago? Maybe 3-4 months?
But good on you for changing your view. Some property commentators certainly haven't, and are still talking up property. The most obvious example is Ashley Church. Tony Alexander was also far too late in developing a more bearish view on property (only really last 1-2 months).
And then we have several perpetual bulls commenting here.
There is only one inflation that can improve home affordability and that is wage inflation, which is itself inflationary.
That may be bearable and not cause an increase in unemployment if NZs inflation rate remains (well ) below that of our trading partners, but how likely is that set of circumstances.
We will get more affordable housing alright....when the recession hits.
If a recession strikes many won't have jobs to pay for the cheaper houses. Then I guess the houses will become even cheaper so that those on the dole can afford them. We've spent all the Government's funds paying the wages of defunct restaurant and tourism-business employees.
If a depression strikes there will be empty houses in every street including leafy inner suburbs. My 98-year-old mother (yes, she's still alive but memory fading) told me years
ago that when the Great Depression hit in 1929/1930 she was a 7-year-old living with her parents renting in Mt Eden. She remembers walking along the street with her mother
and being told to look at all the empty houses. She remembers asking her mother "where have all the people gone?"
Surely money-printing has its limitations.
When talking about inflation, it's important to differentiate between price inflation and monetary inflation.
Monetary inflation is the proverbial "thief in your wallet". It is an increase in the money supply relative to available goods and services. Monetary inflation means the value of every dollar is decreasing.
Price inflation is what's measured by the CPI. It is an increase in the nominal price of available goods and services. The CPI does not tell us why prices are increasing, only that they are. It does not mean that our currency is depreciating at the rate of the CPI figure, which is what some of the calculations in this article seem to assume (and what crypto bulls will try and tell you until they're blue in the face).
Very well said. This is an important distinction that is missing in a lot of these debates. I see growth in bank lending for assets commercial and residential as monetary expansion but not government borrowing as it is drawing money from the public and banks and redistributed.
Happy to learn if this is a misunderstanding on my part particularly in the context of government borrowing.
"In other words if people do stay employed and they are able to get financially compensated for at least a portion of their increased costs, then mortgage holders will get by and they won't be under pressure to sell houses."
Big 'if'. Generally the key to this is to change jobs as many employers rush to blame rising costs as a means for not giving out any pay rise at all, let alone what their own employees face in living cost increases. If this was a reasonable assumption, then we wouldn't have seen house prices accelerate away in terms of earning multiples. But here we are.
...providing people can get cost-of living pay increases...
You won't get wages to accelerate as fast as inflation is at the moment. It was critical that the Reserve Bank keep a lid on the rate of inflation to ease the crisis but they let it get away from them big time. We are now in overheating territory.
Yep I agree. The company I work for just released its 'cost of living' increase and it is pitiful, not even close to the rate of inflation. I feel a lot companies simply cant get near the rate of inflation or some just chose to throw a carrot and maximise profits.
The inflation horse has bolted and there is no catching up now. A .25 point OCR increase next month will just be fuel on the fire. We are sinking fast.
Agreed. My company gave a blanket 2.5% wage increase for the current year. Inflation will be 7% and given the way the CPI is measured that is probably understated. Losing at least 4.5% of purchasing power in 1 year is painful.
Why don't people just leave is what some may suggest, but there is no other comparable company in NZ, we are a one off and the only alternative is to relocate overseas.
The more youthful in our company should definitley do this.
But there would be very few companies in NZ offering across the board wage increases that match anything like inflation.
"You won't get wages to accelerate as fast as inflation is at the moment." That has not been the experience in my industry, people need to understand their worth and confidently negotiate fair and reasonable pay. CPI is not a pay increase it is simply treading water, don't be afraid to seek CPI minimum and stick to your guns, labour is in very short supply.
Dangerous game though because if everyone starts doing this then it will have a feedback loop into even higher inflation....which is the exact opposite of what central banks want (hence some random claims that they don't want to see wage inflation in their economies).
If this is persistent, then it will force central banks to raise the OCR even more, which would be even more detrimental to asset prices like housing. And depending upon what number you wanted to adjust nominal to real house prices (if consumer inflation as opposed to monetary inflation) then the real house price index could start falling at an even faster rate if nominal prices remain static or slightly falling.
I think David and others underestimate the need for some people to SELL, and not hold out. And it's often not because of job or business problems.
For example, my father's best friend recently sold his townhouse in Wellington for about $1.3 mill. In Spring of 2021 he might have got $1.5 mill. But he's 81 (but in very good health and mobility) and wants to move to a retirement village NOW. While he's still well and fit, and while a nice new apartment is available at the village he's going to.
Assuming he doesn't suddenly fall ill / pass away, he could probably comfortably stay in the townhouse another year, and 'hold out' for a better price. But they want the peace of mind of getting settled into a retirement village.
He's also smart. They bought the townhouse 20 years ago, it's appreciated an awful lot in value. He knows he's made big gains, does he really need to try and hold out in the hope he might get a little bit of a better price?
Plus he's done very well out of shares. The "potential' of another 200K doesn't mean that much for him.
Because he's also very financially savvy, he also realises that that potential is probably forlorn, the way the market is headed.
Would be classic bubble psychology if everyone now decides 'hey yes the market has peaked...I wasn't in it for the income, I was really in it for the capital gains...time to sell before the next guy/girl does and lock in my profit'.
Be like people who tell me they like to HODL but then the pain becomes too much and they sell when prices start falling.
It strikes me that the workers most affected economic dips caused by people WFH are in the hospitality/cafe industry. Due to this industry's traditionally low wages these people aren't my first candidates for being recent homebuyers paying $950,000 for a 3 bedroom house who would be forced to sell their homes due to a 'change in circumstances'.
If any of these people own their own homes they would have bought ages ago and would still make insane capital gains if they were forced to sell (if they even have a mortgage anymore).
The owners of the hospitality/cafe/food businesses would fall into this category though...
Good points.
The one to watch is the residential construction and property sectors. Directly or indirectly employ around 20% of NZ's workforce. Many people employed in these areas are quite well paid, and many own property (owner/occupied and/or investment).
Think about all the jobs / professions heavily reliant on the health of these sectors - developers, builders, subbies, tradies, architects, civil engineers, surveyors, planners, builder suppliers, landscapers, valuers, real estate agents etc etc.
Also, I've heard many RE agents own multiple investment properties. If sales dry up, some might need to offload some of their investments.
So many SME's are propped up against residential property. They make up a very large % of the workforce, I dont disagree that hospo will be unduly affected, but the fall out will be much bigger than just that sector. Check the auction houses, plenty of liquidations going on all over the place.
Only the RBNZ can believe that inflation will return within the targeted band of 1% to 3% by June of next year. Nobody else can seriously believe it....well, not unless some really dramatic demand shock happens, or unless the RBNZ dramatically and suddenly tighten overall monetary conditions (which they won't do).
I can easily see a scenario of an overly timid RBNZ being forced to play a long game of catch up with an increasing level of inflation, and going way too slowly in their tightening, being ultimately forced up to a OCR peak much higher than would have been necessary with a more timely policy change. They are trading some pain now (in terms of monetary conditions tightening) for much more pain later on, and in doing so they are just doing the exactly opposite of what they are supposed to be doing - potentially exacerbating the cycle rather than trying to smooth it.
If the sharemarkets keep tanking the way they are, confidence in the future keeps falling, then credit growth contracts, I think we could easily be deflationary by June next year and below the 1-3% target.
Perhaps this is what the central banks are praying for...something to happen so they don't have to be the guilty party for causing it from raising rates. That way they can drop OCR back to zero. Problem solved.
You might be right, this scenario is also possible. However I personally I do not expect sharemarkets to tank much more, unless central banks start really taking action against looming inflation. I am personally ready to get into some serious share buying if the markets go down by another 10%. In the long term, shares in the right sectors can better protect against inflation.
The interaction between confidence and inflation is also a very important factor, which the RBNZ have not really taken into account. Inflation can be highly recessive, if it destroys confidence and it forces a restrictive monetary policy (or it creates an expectation of such event - as reflected in swap rates). This could be, in my opinion, the real wild card.
Important week coming up for sharemarkets...S&P has hit the death cross (50day below 200day MA)
I might be more bearish than you, I guess if the Fed raise rates later in the week it might be the final straw.
I suspect the fed will move and create a recession like they have done historically when the same circumstances have arisen, the RBNZ however will likely follow its history of too little too late and too much too soon and create much higher interest rates and a deeper recession.
At the moment there's no real reason why vendors should have to start dropping their prices ie they lose their job.
Except maybe if you have a bridging loan because you have already bought - that can end up costing the vendors thousands of dollars very quickly to hold onto their price.
Then there is the investor who may have given his tenants notice - unless the property is mortgage free then the investor still has to fund the loan with no income coming in.
Then there is the couple who may be about to divorce and don't want to rent but immediately buy- keeping in mind most minimum rental terms are 12 months fixed are hard to get out of when you find the house thats "just right"
I cant imagine many people "in their right mind" who will wait until wages increase enough to offset interest rate rises so that somebody can afford "to buy their house" - that could take years.
Keeping in mind a wage earner needs to increase income by 15000 for every 1% lift in interest rates to maintain the same level of affordability - if interest rates rise 3% between now and this time next year which is forecasted) then thats 45K a household needs in extra income to borrow the same amount as now.
We could just consider that housing in NZ is terribly unaffordable from a deposit perspective to get entry into the market for starters....then if mortgage rates rise far higher than incomes do, then equally based upon current amounts of debt that FHB's are taking on, could also be terribly unaffordable from an interest payment perspective also.
At present people saying housing is still affordable because interest rates are low...well yes if you can afford the deposit and it assumes that interest rates were going to stay at 3% for the next 30 years of servicing the mortgage (or at least the first 10-15% while you start making a small dent in the principal).
Not sure where the 15,000 additional income comes from, it depends on mortgage amount, term of repayment, tax rates etc. But it seems reasonable.
But the additional income required for each % increase is not linear, a jump from 5%-6% mortgage rate requires a bigger jump in income than a 4%-5% increase, as the monthly mortgage repayments get exponentially bigger. And that is notwithstanding the larger tax bill likely on the higher income.
So anyone who is holding off selling in a period of increasing interest rates is gone to get done worse than you anticipate, as the value of the house is inversely proportional to increases in mortgage repayments, and so will decrease exponentially.
As rates rise from emergency levels and inflation running high the RBNZ have to keep up with whatever the rates are in US or NZD will tumble more making inflation . With million dollar mortgages common it will be just to costly as the prices are already out of average earners affordability prices will come down maybe around 50% from highs.
I think this is what the RBNZ wants you to do without actually spelling it out. Its been up to you to join the dots, they have held off on raising the OCR for months now so if you have not already seen the picture you don't deserve to be saved. Its time to lock in that 3 to 5 year fixed term.
Indeed inflation eats away at the house value. I have suggested previously that the best way to mitigate this is to have a nice, big mortgage on said house*, which will of course also be eaten away by said inflation. Alas few on here seem to be able to understand this.
*Edit, provided income to service the mortgage is secure of course
It makes sense, especially if you purchased in the 1980-now period as interest rates continued to fall and wages continued to rise at inflation.
Its quite possible that the reverse of that cycle is starting where we see 40 years of rising rates (look at the full history of global interest rates).
Unless wages rise faster than mortgage rate increases (in the correct proportion), its likely that paying off large debt will be a far more miserable experience than it has been for the generations who purchased last century or are well through their mortgage repayment now (boomers/gen x). Everything gets more expensive, including consumer items and the interest payments on the massive debts (which you say are your friend).
It would come down to whether your wages are increasing faster than the general rise in mortgage repayments and putting food on the table and paying your bills.
"Indeed inflation eats away at the house value". No, it doesn't Yvil. Since 1962 the long run relativity of prices to inflation is prices go up MORE than inflation.
For a bit of light reading:
Housing Prices Relative to Consumer Prices: An Analysis by Brian Easton.
Robert Shiller covers this in detail in his book 'Irrational Exuberance' if you wanted greater insights into different asset class performance vs inflation over the past 120+ years.
He has a nobel prize in asset pricing, so not a wanna be expert like me :-)
IO, that's the fundamental difference between you and I, you're a "reader", I'm a "doer".
It's not that I discount knowledge, I studied many years and I graduated in Architecture in one of the best universities in Europe, when I entered the real world, I realised I knew pretty much nothing. I subsequently realised that some friends who didn't study so much, were far ahead of me in life and I had to learn from them how to actually "get things done" rather than read how things "should be done".
But your assumption is that I'm not a doer without knowing what I do or have done? You can be both a reader and a doer at in one. This isn't a binary world...'he reads books so only has a theoretical understanding of things so his views are useless' - is pretty much what you've been putting forward. That is very limited view.
I've owned/own residential and commercial property (not just in NZ) in the past and am the trustee/beneficiary of residential properties within NZ.
I have skin in the game even though you assume I'm a doom gloom merchant because I see significant risk in the market. Just because it would benefit me that property prices keep going up, doesn't mean I think its the right thing personally or for society as a whole.
Its quite bizarre that because I have a negative sentiment towards the market, therefore my views must be discounted by anyone with a bias towards property prices continuing to go up. I mean I have that bias as well given my exposure, but I like to look at issues beyond self interest and to what is actually happening based on past historical events, the conditions we are experiencing in the present, and assessing risk of what could play out in the future.
Making faulty claims that someone is a 'wanna be expert' or not a 'doer' without knowing who they are or what they do/have done is crazy! I know you're better than that :-)
Imagine Yvil as a landlord (or motel slumlord), giving his harrassed and poverty stricken tenants little lectures about how they should be "do-ers" and not "losers", before he hops into his sporty little expensive imported car and zooms off into the distance.
A real winner among losers. NZ has bred so many of these this generation. Winners who "do" things and get magically rich off rent seeking and blind luck. Investing geniuses, every one.
Kaaark!
There's a certain type of wealth that is built by trampling on the backs of others. And unfortunately it has been that kind of wealth that has been lauded and promoted and celebrated in NZ.
We have got to the point where it is widely thought that the "clever" thing to do is to leverage up and buy property. Become a lord of the land. And anyone who dosen't do that is somehow defective - lazy, or too much of a thinker, or stupid. The fact is that many good, fine, motivated, hardworking people do not have enough access to credit to "get on the ladder". And that mostly comes down to BLIND LUCK. The lottery of birth. All those motivational slogans don't mean sh/t to some child born and raised in a slum motel.
As an individual, you are probably a really decent guy, but it is the stereotype that you represent that I object so strongly to.
When I provide premises to a business so that they can channel their funds into their business as they probably don't have enough money to buy the building they operate from, I don't see that as "trampling on their backs" or being parasitic.
When I bortow money to run a motel, provide jobs to my employees whom I very much respect and provide accommodation to tradespeople, travellers and yes, also emergency accommodation to women who had to flee their abusive husbands or to people who don't have a roof over their heads, I also don't consider that "parasitic behaviour" or trampling on their back.
I guess we will just have to disagree.
BTW what do you do that is so much more noble and that gives you the right to judge if what others do is good or bad?
by the way
I agree with you that there is evidence of recent duplicate accounts.
I’ve been watching a number of DDDDebt’s posts. For someone who has been on this site for only three weeks is inconsistent with posts in which he/she is very familiar with comments made some time ago.
Fitzgerald is also a member for only three weeks.
It also appears that there are posters with multiple accounts who up tick themselves.
Personally it doesn’t bother me. It is the validity of the comment not either the poster or number of upticks. As to upticks, I’m too old to worry about worry about flattery for assurance.
Me? One account and not desperate for the need of multiple accounts.
Pretty easy to sort out IO, every account should have mobile number linked to it and require a 6 digit verification code to setup a new account sent to the mobile first. Perhaps every 6 months your required to login and verify your account again with another 6 digit number sent to your mobile number or it gets suspended. This would stop the use of burner phones for those that are really desperate. Obviously two accounts cannot exist with the same mobile number. Perhaps this would also take away some of the total anonymity that exists on this site when the cops give you a call for being a dick head.
"I agree with you that there is evidence of recent duplicate accounts.
I’ve been watching a number of DDDDebt’s posts. For someone who has been on this site for only three weeks is inconsistent with posts in which he/she is very familiar with comments made some time ago."
Sorry, I'm confused P8 - can you please explain?
I have been reading user comments on and off for years, but decided to start adding my 2 cents worth 3 weeks ago.
I don't have multiple accounts. Why would I bother?... to give myself extra ticks?
I do share the same point of view of other posters (and the OECD) that think our house prices are unsustainable, and unfair to pass onto our children and future generations.
Which is counter to the boomers and spruikers that believe they are financial wizards for buying a few properties when the metrics where at sustainable and affordable levels.
Being a landlord and becoming wealthy from property are separate and not to be confused. Since year 2000 over 20 years ago rents have increased 45 percent over that time. Not a fast pace of increase and probably slower than wage inflation. I would not say that is trampling on the backs of others.
Yvil is a funny fish. A very scale fish with very thick skin (scales).
Praises those who agree with his world view (eg. Te Kooti), never praises a good view from someone he detests - like me.
Funny ey because sometimes several new posters have come on to this website and said they rated my views and asked for my opinion. Hardly ever seen that for others. But never mind, I could never say anything that Yvil might think is worthwhile.
Me? On quite a few occasions I've praised Yvil for some good opinions, even though I usually don't agree with him. Because I'm a grown man not a silly (House) Mouse.
I'll praise a good opinion when I see it, rather than bear silly silly silly little grudges.
Anything, enough of this silliness from me. I'm over the pettiness. Good night.
IO
You keep holding Shiller up as the paragon.
I listened to Eugene Fama, also a Nobel Prize winner in Economics in an interview. He says of Shiller:
“Shiller has been consistently pessimistic about markets, and given a long enough horizon, Shiller is bound to be able to claim that he has foreseen any given crisis”.
Translating Shiller to everyday life it is the equivalent of saying the car is going to crash, you are going to get hit crossing the road, the earthquake is going to hit . . . we are all aware of the risks but people are prudent and get on with life.
Meanwhile your comments are consistently pessimistic - "the sky is going to fall". Shiller published his book in 2005 – in the 16 years since he published his book (and the seven years you have been calling the same thing) the NZ property market has not crashed. People - especially FHB - have not put their lives on hold.
Yvil
I wouldn't worry about IO and willingness to refer to theoretical economists.
By Fama's (the Nobel Prize winner in Economics) definition, IO is a pessimist and this is reflected in all his posts.
Not surprising, given his consistent posts over the past seven years he is likely a little bitter regarding FHB and investors who have done well.
As to his comment being "the trustee/beneficiary of residential property" that will be impressive to the naïve. A translation can simply be: my parents own their home in trust, I am a trustee (common so that the trust can operate beyond their death) and naturally he will be a beneficiary.
Interestingly, relating to the questioning regarding the validity of posters' assertions above, I queried IO four years or so ago (when the Auckland prices were flat) and he indicated that he didn't have property rather choosing to invest elsewhere. Having dealt with many tenants and developing a BS filter, I tend to remember pertinent comments so, like the "I'll pay the rent shortfall next week", I tend to be somewhat hesitant in unquestionably accepting it. First time in five years I have seen IO claim to have interest in property.
Seriously, P8
You’re a property guru because you bought your first house 40 years ago when the price to income ratio was 3-1?
I/O is not being a pessimist. He’s stated his position. He’s hedged with property.
He’s just reiterating what the rest of the world knows… we have the highest chance of a crash out of any property market globally… and we’re heading into a global recession.
You don’t need to be a theoretical economist to work that out. Look around at the obscene prices for poor quality stock.
You just need to compare what people like TTP is asking for a 2 bedroom apartment in Palmy with what you can buy in countries with far greater economies than this one… to see how overcooked it has become.
The markets now turned grandpa so let’s just wait and see if we have a real economy that can withstand shocks or a housing market with an economy tacked on.
Anyone who bought a property 40 years ago was a Guru but they still faced the same decisions to buy or rent and could have still pissed all their money away and ended up with nothing. So fast forward 40 years and people are faced with the same decisions. You can study, work hard get a decent job and then still make the sacrifices required to buy a house or you can sit on the sidelines pissed off because houses are not still 3-1 your income ratio and rent.
PLENTY of people study, work hard, get decent jobs, and STILL can't afford to buy a house.
Because houses are UNAFFORDABLE. Your comment is an insult to the ~ 37% who are paying rent to a parasitic landlord and do not wish to "sit on the sidelines". Many have been pushed to the "sidelines" and that is a very unhealthy thing for society.
Houses aren't unaffordable Fitzgerald. Otherwise there wouldn't be a shortage. Everyone in NZ has the same opportunity to do well. They make choices throughout their life that have varying consequences. Don't make your problem everyone elses, perhaps its you that is the parasite.
Inequality has deteriorated over the last 30 years while rates were dropped to zero - so no they don't have the same opportunity to do well.
Fine if born into a property owning family who can help put you through university and with a deposit for a home.
For those raised in poverty, the challenges of getting out of that situation are very real and extremely hard (and will require a certain amount of luck coupled with very hard work (not bad things..) ) - but they are far from on an equal footing with those who have wealthy parents.
It can be something as simple as divorce too or becoming a single parent. It can have a steamroll effect on peoples choices and cause further challenges.
The level of condescension by investors, many homeowners and I guess society as a whole, towards those that haven't "succeeded" is rather disgusting. Labelling everyone as lazy or entitled because they couldn't or didn't make free money highlights the lack of compassion or empathy in vast swathes of the population.
Sure meh, I agree. However, you rarely see that sort of behaviour here. Life is a lot more complex and nuanced, I own investment property but also totally disassociate my self from the smug landlord class (the clue is in my name). There are good landlords and they provide a service. They don't set monetary or tax policy. I have argued for a capital gains tax on this site for years.
That's why I think we should deal down the ad hominem attacks and discuss topics respectfully.
The fact we hve had GST on food but no capital gains tax on investment property has been an absolute stain on NZ.
You can play the victim card or you can get ahead. Go back 40 years and still not everyone owned a house. There will always be a percentage that rent its just the way it is. No point me writing a letter to Ferrari to tell them I cannot afford one of their cars, move on and buy something you can afford. Plenty of FHB still getting into the market up until very recently, people that are moving on with their lives.
I have to admit I don't really understand what your point is. "There will always be a percentage that rent its just the way it is. " What has this got to do with unaffordable housing and DTI of 11 to 1 when DTI should be about 3 to 1. Which it is in many countries.
Then you go "No point me writing a letter to Ferrari to tell them I cannot afford one of their cars, move on and buy something you can afford." What does that even mean?
Not sure how hard it is to understand. $1,250,000 average price of home in Auckland 2021, mean salary $71,500.
2005 Average price of Auckland home $433,000, mean income $43,000. Not rocket science to say this is an obscene increase in property prices.
Got this off infometrics easy to find.
But at the end of the day Carlos even 2005 was overpriced, now its just beyond the pale of nutty land. But we know you only want to talk yourself up, and do not care about Nzers and the future of NZ But be good if you could make some sense in your arguments and have a proper financial point.
I have suggested previously that the best way to mitigate this is to have a nice, big mortgage on said house*, which will of course also be eaten away by said inflation
*Edit, provided income to service the mortgage is secure of course
And - crucially - provided that income increases in line with inflation. That's by no means guaranteed.
All well and good, but since 1962, the long run relativity between inflation and house prices shows that house prices go UP at a greater rate than inflation. So you'd expect the house price in question (given the long run relativity) to at least keep pace with inflation resulting in net zero, at worst.
But the point is, that for the last 20-30 or so years, house prices have gone up waaaaay more than inflation. Which isn't normal when you look back over the past 150 years. As you point out, the general trend if for housing to rise at/about, or just above inflation. So the recency and confirmation bias that you can't lose with housing is quite possibly because the recent period is an anomaly, not the norm (as long as you look back far enough).
Which is why and I've been saying for long periods that we could be in a real house price bubble. In 2020-2021 house prices going up 30-40% while we were fighting off deflation (zero inflation). Other periods its been 10% while inflation was at 2% - again an 8% real return which is waaay above the long term normal.
And the point of the article is not what has happened in the past, but what might happen in the future. In real terms, getting out of the housing market last year, might have been a once in a 100+ year financial event which we may never see again in our lifetimes. Sure nominal prices may go higher, but in terms of extracting maximum buying power across asset classes, or relative to real currency (gold) it could have been a missed opportunity. But its impossible to know that at the time...you only know that following the point (the joys of not having a crystal ball).
The causation of the anomaly of the past 30 years might be to do with globalisation and inflation rate targeting by RBNZ. Where globalisation has provided deflationary forces since the 1990's which has resulted in RBNZ driving interest rates/mortgage rates to zero, and blowing asset bubbles (when you discount future cash flows at lower and lower rates). So its been an asset price super boom...which CPI has been very low due to cheap imports from China/Vietnam/Korea etc. But now that the OCR is at zero, how do you continue to discount future cash flows at lower and lower rates? Especially if the CPI starts going up and returning to long term normals - and like now if something like a war or crisis causes things like oil and food prices to rise and its reverses the deflationary forces of globalisation the last 30 which allow asset prices to be pushed so very high?
The decoupling of house prices from inflation began in the 90s for the simple reason Bolger and then Shipley, removed land, the cost of existing homes, and the cost of servicing a mortgage from the CPI.
This meant that house prices were free to skyrocket without impacting the CPI and interest rates. So all banks had to do was double the money supply by lending ever more and more, and bubble is set in motion without any negative feedback loops.
Meanwhile, wages were tied to CPI which was far lower than real inflation, so wages declined in real terms.
All of this was done by design, which is what makes it so evil.
But it is guaranteed to fail at some point, because now house prices are completely decoupled from fundamentals, rents and yields have reached their limits, interest rates cannot decline much further, governments can no longer afford to subsidise FHBs, and no one can afford to buy a house unless they have existing capital. Coupled with growing public anger at the ever increasing concentration of wealth, we are about to see the mother of all ponzis collapse.
In the long run houses improve - double glazing, fitted kitchens, insulation, multiple toilets, etc. So you are not comparing like with like. However the land that houses are built on doesn't change and as with any product with a finite supply its price goes up with demand - for NZ that is growth in the number of families - smaller families means population growth is magnified.
Yes but land is artificially constrained in NZ. We are a low density population. Land should not be a constraint.
NZ has heaps of timber and heaps of land. But we have one of the worst affordability issues in the world in respect of houses. (Not to mention quality)
Ok that's a simplistic view but our issues are 'man made' not a product of our natural environment.
Land is not a constraint until you want road access, sewers, waste water, power, planning permission, a sea-view, no one overlooking your privacy, easy and quick access to your place of work.
Has anyone compared the cost of building a 90sm standard state house in 1960 and an equivalent place today - leave out the land and the consent charges. I'm guessing price has not changed once you allow for inflation.
In a sane world they would be much cheaper than 1960. Compare the ratio of an average wage to the cost of say a car - cars are cheaper, computers are cheaper, basic tools are cheaper (I remember seeing what I thought was a bargain price hammer in 1975 it would cost maybe 4 times as much today but inflation is nearer 10 fold.
Isn't the key point that, even after a 20-30% correction, most people wouldn't be selling at a loss? That's what makes extremely high price growth so dangerous - those prices relate to a fraction of the total housing stock changing hands. I really don't see any way to avoid a sizeable correction at this point.
what about leverage?
If it is only 500K of my money in the million dollar house, value increases are benefitting my equity at a factor of 2x. Inflation only hits at 1x the reported inflation rate.
This is of course why the property investor narrative is so poisonous - borrow and leverage as much as you possibly can, any tiny increase in property values is multiplied. You won't lose because we have politicians desperate to maintain the status quo and give you the steady but small property price rises.
Forgive me if this has already been raised in the comments (too many to read) or if i have misunderstood the statement but...
David you say...
Let's say for example someone bought an Auckland house for the February 2022 median price of $1.19 million and sold it in a year for $1.25 million. A gain of $60,000, or 5%. Hey, it's not a 'party like its 2020-21' kind of gain, but it's okay.
However...What if the inflation rate over the same 12 months is 7%, or even higher? Yep, you've actually LOST money on the house without really realising it.
No money's been "actually LOST" though has it if a $60,000 gain in actual cash in my bank has been made?
Of course there are some costs to come out of the $60k like the real estate agent and legal fees but still whats left over is still money i now have IN CASH that i would not have otherwise had... isn't it?
Real vs nominal is about loss (or gain) of purchasing power.
So if you invested that money in a diversified portfolio of goods, instead of a house, your buying power was better at the start than after the $60,000 gain. (i.e. the equivalent basket of goods might be worth $80-$100,000 now so you can no longer buy as much).
I think that is what you are asking.
"People struggle to accept the concept that a house is just another tradeable asset that theoretically might go down in price. That is not the New Zealand creed. You buy a house, live in it for a while, add X amount of dollars on, sell and then buy another. Rinse and repeat."
So, just like we trade cars and other second hand goods? Makes sense if houses weren't speculative assets with massive loans attached to them. Depending on the house price and size of mortgage, many people don't realise that after paying the interest there is no financial gain unless there are capital gains.
Overall the article only makes sense if house prices stabilise at average $1M and average wages catch up to $250k, or mortgages are much lower. Which is most likely to happen? One may also have to have regulations as to whom can buy up homes in a distressed scenario.
No mention of the credit market and willingness to lend into the scenario you describe. Those with 7 figure mortgages probably have higher than average wages. It's those with 6 figure mortgages on average incomes that are going to feel the pain of higher interest and inflation.
I'm of the mind we are headed to a 70's type scenario and this time we don't have the deflationary forces of cheap energy or a cheaper market to expand into.
meh - have a look at inflation and interest rates during the 1940's. I think the Fed are more in a war time like situation in terms of the quantity of debt relative to GDP and big swings in deflation/inflation - as well as operating with significantly negative real rates in order to try to 'inflate away' the national debt.
What we are seeing could quite quickly become another deflationary crisis in my view - but that could be even worse if you have a lot of debt at there are no wage increases during deflation...
"However...What if the inflation rate over the same 12 months is 7%, or even higher? Yep, you've actually LOST money on the house without really realising it. Basic example. But you get the idea. This of course was a common feature in the housing market and even with things like domestic goods purchases in the 1980s."
Wrong - if mortgaged to the hilt like most then inflation works on the mortgage also.
So they may have put in 200k deposit, walk away with 260k after paying off mortgage = 30 gain (inflation adjusted at 7% still = 23% gain) .
We welcome your comments below. If you are not already registered, please register to comment.
Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.