Opinion: Olly Newland worries the whole property market is approaching a crisis and sees a large upward burst in prices and rents. Your view?

Opinion: Olly Newland worries the whole property market is approaching a crisis and sees a large upward burst in prices and rents. Your view?

By Olly Newland

It’s clear that house prices and rents are rising.

The news media run stories of astounding prices being achieved for what are sometimes old houses in less than mediocre condition.

TV ONE ran a news story on 14 July on how house prices are ‘locking out’ first home buyers. The suggestion is that the government should intervene to help those who cannot get into the market.

TV3News ran some property expert by the name of Newland (ahem) describing the property boom on the horizon.

Various talking heads were asked ‘what should be done?’ but had no real solution other than more land should be made available.

I’m sorry to tell you this, but they are all dreaming.

Let me tell you that more land may be the long term solution but it will take many years for ANY benefits to be felt.

What’s needed are more dramatic moves that will get results without distorting the market.

For starters, a suggested capital gains tax as some are clamouring for, will have the totally wrong effect. It would drive prices up even further.

If such a tax were to be introduced it would result in a mass withdrawal of property off the market.

Think about it: If you have a property that you are considering selling, would you rush it onto the market if you were going to be slugged with tax?

Of course not.

After all, if you don’t sell you don’t pay tax. It’s a no brainer.

Worse still, those pushing a capital gain tax want to exempt private homes. Well, that’s even sillier, because private home sales make up the vast majority of the market.

Under that system we will end up with mums and dads flogging off their houses for tax-free gain ... leaving house prices to continue to rise.

Look overseas if you want proof positive. Some of the countries that already have a capital gains taxes have suffered the worst property crashes. Such a tax does nothing to stop price rises.

Twelve months ago I predicted the coming current rise in property prices and told everyone the reasons why. That some sort of ‘mini bubble’ was forming has become obvious, as can be seen in this interview I gave to interest.co.nz last December.

I also outlined the reasons why price rises were inevitable when I spoke to various property investment groups in Tauranga, New Plymouth, and Rotorua in the past months. Regular followers of my commentaries will recognize some of the points I have made earlier. They bear repeating.

The reasons for the current situation are:

1. The extortionate costs of council charges when building or subdividing.

2. Escalating costs of raw materials.

3. The loss of tens of thousands of houses because of the leaky homes scandal.

4. The loss of thousands of houses from the Christchurch earthquake disaster.

5. Slow but steady immigration and increase in population. New Zealand’s population is growing by a small percent annually - 1% or so. By itself, that means an extra 40,000 people who will need at least 10,000 houses before actually getting ahead of the current problem.

6. The removal of tax breaks (small as they were) in the 2011 budget was a colossal blunder and I said so at the time. It wasn’t so much the money it was the message. The authorities openly stated that they wanted to discourage investment in property. Well, they succeeded didn’t they? It discouraged many buyers  from going into the market to provide rental accommodation. (Not to mention the huge fright everyone got from the Global Financial Crisis.)

7. We have GST on every new house or renovation. Think about it: A newly built $500,000 house (the Auckland average) carries a GST content of $75,000!  So why build ? Next door could be a second hand house for sale, GST-free and often loaded with extras.

8. The ongoing effect of historically low interest rates cannot be overstated. So long as these low rates exist they have the effect of providing a hefty wage rise to the mortgage home owners as well as allowing borrowers to borrow even more. These low rates are likely to fall even further which will add more fuel to the fire. The worry that interest rates will rise sharply has so far proven to be an empty threat. Many people are no longer believe this rhetoric.

My prediction that house prices could double again over the next 10 years looks more and more likely as every day passes. Low interest rates are the driving force behind the current the rise in prices, make no mistake. It would take a huge and sustained bout of hyper-inflation in wages and prices to reverse the current low interest rate regime, and that possibility seems as unlikely at present. Indeed, deflation is a greater risk than inflation and the risk of deflation and its consequence is a nightmare that should not be contemplated.

The thought must also haunt the Reserve Bank as well as the politicians. It wouldn’t surprise me in the least if these officials are quietly stoking the fires of a property boom in an effort to avoid deflation. Like most of us, they probably regard some inflation (especially in house prices) as a positive thing, whatever the downsteam effects are. The risk is worth it.

9. Low interest rates have another side effect: Depositors now earn almost nothing from their savings. I see this time and again from my advisory clients, where depositors sick of earning peanuts in the bank and are now pouring money direct into property or syndicates with the hope of better security, the hope of capital growth and some (very) minor tax breaks. Of course, what they withdraw from the bank often ends up in someone else’s bank account ... and thus the giddy round starts all over again. Commercial property too is showing the effects of low interest rates. Yields are now regularly falling below 6% for average stock. This would have been unheard of few years ago. What is happening is that  commercial buyers are paying ever more for the same cash returns, the consequence of which results in rising prices and falling yields.

Well, some might say it’s easy to criticise, but what can be done?

Here are a few ideas:

1. First home buyers should be given a GST rebate on new built houses of up to (say) $500,000. First time buyers only and not repeatable. That would be a good start for those who are trying to get on the property ladder. Australia has something similar and stamp duty is rebated for first home buyers. It’s the same general idea and it works.

2. Reinstate the building depreciation deduction allowances - thereby send out the message that being a property owner is no longer a sin.

3. Shake up the costs involved through council and water charges. They are scandalously too expensive and make up a disproportionate part of building costs. (See my article: Who’s to blame for the rising price of property?)

4. Give first home buyers a grant towards any low cost home. This would only apply to newly built homes and that, along  with the GST rebate would give a big boost to builders to provide low cost homes. There’s the nub of the problem: Builders cannot make a profit on cheap houses. Radical thinking is required to solve that conundrum.

5. Give encouragement to investors to provide more affordable rental accommodation. For those who provide long term accommodation, remove some of the more onerous restrictions of the Residential Tenancy Act. The emphasis is on long term. If tenants could rent for years, free from the threat of eviction, able to call their house or flat a “home”, a lot of pressure would come off the rental market. In other countries you can lease a home for years if not decades. Think about it:  If you could rent back your own home (the one you live in) for, say, 30 years and use the money for business or similar would that not be attractive? Such a move would take a lot of pressure of people who currently think they need to buy or face eviction at relatively short notice.

Change of Direction for the Rental market

Most observers agree the rental market remained relatively flat during the housing boom  - much to the delight of the supporters of renting versus buying. There is no doubt that during that period renting became increasingly cheaper than buying.

The disconnect between the two types of accommodation in terms of costs became so wide that a correction was inevitable.

And so it came to be.

As properties became dearer, and tax breaks disappeared, the cost of providing rental accommodation dissuaded new investors from entering the market ... hence creating a shortage of rentals.

This trend was greatly exacerbated by the Christchurch earthquake tragedy which in one fell swoop removed thousands of rentals from that area and has resulted in massive rent increases through that unhappy city with the spill over moving to other centres, Auckland in particular.

See property managers Crockers Auckland rental price table for June (right).

And:

Rental property shortage near breaking point (NBR)

Businessdesk: Rents in Christchurch skyrocketed 26% in the past year, while nationally rents are up just 4%, according to Trade Me Property’s analysis for the three months ended June compared with the same quarter last year.

At the same time, listings of houses for rent in Christchurch are down 34%, even as demand, measured by the number of inquiries, has jumped 47%. Nationally, listings are up 4% and demand is steady.

“The news for prospective Christchurch tenants is still grim,” Trade Me Property head Brendon Skipper says.

The particular “pressure cooker” suburbs of Christchurch are the central city, Linwood and St Albans.

“We’ve seen the number of properties available for rent in these three suburbs plummet more than 40% on a year ago and, on the flipside, the properties that do get listed are attracting huge volumes of inquiry,” Mr Skipper said.

While shortages of houses to rent in the Auckland rental market have hit the headlines in the past, Trade Me found listings are up 20% and demand is down 18%. In Manukau, listings are up 21% while demand is down 4%.

North Shore listings are up 7% and demand down 2% but the Waitakere market is much tighter with listings down 10% and inquiries up 7%.

“Autumn has wound down and the winter hibernation period sees tenants hunker down so we often see listing numbers swell and demand taper off,” Mr Skipper said.

Still, one surprise is the increase in listings and reduced demand in central Auckland hasn’t led to lower asking rents, he said. Average rents in the city are flat while in Manukau and Waitakere they are up 4% and North Shore’s by 5%.

One reason demand has softened in Auckland is that tenants are looking to become home owners, he said.

“Over the quarter, we’ve seen a 16% increase in inquiries from potential buyers compared to this time in 2011 but they’ll be finding the market challenging, too.

“Listings are flat and there’s plenty of healthy competition in Auckland, in particular.”

Elsewhere in the country, listings in Palmerston North are up 30%, rents are up 3% but demand is down 14%. In Dunedin, listings are up 17%, rents are up 3% and demand is up 4%, and in Hamilton, listings are down 2%, rents are up 1% and demand is up 1%.

In Wellington, listings are up 1%, rents are down 2% – the only major centre to show a decline – and demand is down 4%. In Lower Hutt, where rents are unchanged, listings are up 15% but demand is down 4%.

Mr Skipper said landlords in areas in which listings have shot up “shouldn’t panic” because more than half of all rental listings stay on Trade Me for 20 days or less.

Even with the jump in rental prices in Christchurch, it’d be a pretty brave investor who’d buy or build rental property there while the ground is still shaking. The much-talked about re-build of Christchurch is only just starting and the are still years of shortages to contend with.

Expensive rents may be on the way out

Here’s a strange phenomenon I have noticed. While rents for average homes are increasing rapidly, rents for expensive properties seem to be falling. Some of my clients complain that top-end apartments and homes which may have been easily let from $1000 per week and upwards are showing weakness.

My own research seems to support the notion that people paying high rents now find that owning is competitive to paying high rents. Hence high priced rentals are tending to remain empty longer, while the pressure on the housing market increases even more as renters move to ownership.

This was proved to me when advising a client about renting out their luxury city apartment. For years it appeared there was no problem to obtain $1,200 per week in rent, and the owner was regularly rushed of her feet whenever it became available.

Recently when it became available again, heavy advertising produced total silence. It wasn’t until the rent was advertised at a $850 a week did the phone again start ringing.

Quite a discount.

Summary

The property market is in a state of flux with rents rising rapidly at the cheaper end and pushing people into buying as rents become too expensive.

The pressure on the existing housing stock is at bursting point in the main centres and we could be facing another bubble  - which would be a very unhealthy state of affairs given the weakness of the economy both locally and internationally.

In my view the whole property market is approaching some sort of crisis and I am picking a large upward burst of prices and rents in the next year or two until a new equilibrium is reached. That will hopefully be a situation where, the mix of low interest rates, shortages of housing stock and rent levels reach some sort of balance once again.

Can this be done or will there be collateral damage on the way?

---------------------------

Olly Newland
© July 2012 www.ollynewland.co.nz  Used with permission.

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

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79 Comments

Hello Gubmint - we have a serious supply problem with property - do something about it now !  It's urgent, get off your butts and produce a list of actions you intend to take pronto! Feel so embarassed that I voted for this clueless ineffective excuse for a Gubmint.
 
IF Labour was to  agressively start promoting a raft of practical actions such as suggested here, with the stated aim of reducing the cost of a first home by 50-100k it could blow National out of the water next election. Mind you, if I had wings I could fly, so, whatever. 
 

Olly - to run with the pack.
The property industry in this country is for a long time dominated by greed with all it’s negative consequences.
Political changes only occur when the “Asian Mafia” is taking over, what Kiwis cannot afford – when it is almost too late.

You voted for them but have the cheek to call them clueless, whats up with that?

I think this article could be applicable to the NZ market. The article is from the UK but I think it could apply in some respects to the NZ market also...
http://www.positivemoney.org.uk/consequences/house-prices/
I would be interested in feedback on this (once you have read the article and vwatch the video of course!).

4. Give first home buyers a grant towards any low cost home. This would only apply to newly built homes and that, along  with the GST rebate would give a big boost to builders to provide low cost homes. There’s the nub of the problem: Builders cannot make a profit on cheap houses. Radical thinking is required to solve that conundrum.
 
How would this improve the margin for the builder of a low cost home?  
 
Would the mechanics of it be that the builder charges GST on time/materials to the FHB purchaser (as per norm), but it is zero rated in terms of the builders return?  Or would the idea be that the purchaser pays more for the build than its actual market worth?
 
Or maybe I've missed something?

The only interest Olly has in first home buyers is to find more suckers to keep the ponzi scheme going. The writing is on the wall but he wants one last crack at it before it all falls over. He is totally self centred and has been milking the market for decades in his drive to secure even greater amounts of unearned income.

Quite right, Mr Scarfie.
Do notice how Mr Newlands 'ideas' ,mostly involve spending other peoples money.
e.g
1. First home buyers should be given a GST rebate
2. Reinstate the building depreciation deduction allowances
4. Give first home buyers a grant towards any low cost home
Grants, rebates & deduction allowances.
Geez , I wonder who will pay for all that stuff.
 

I hope Bernard charged him to put this article up, the promotional value to Olly must be huge. Wonder what the actualised value would be to him if any of those suggestions make it through.

Tosh ! ..... absolute piffle ...... it's hardly in Ollie Newland's best interest to promote an unsustainable property bubble , which eventually crashes , and burns off a chunk of his personal equity .
 
.... and if you cross reference his remarks with those of Hugh P. ..... a common ground emerges , does it not , of the bureauctratic bungling of local councils and the country's parliamentarians who've been largely responsible for the mind-freaking mess which is the house building industry of NZ .....

Hang on, Olly is a bubble denier isn't he? Certainly he has good history of failing to see it coming and then crashing and burning. Also has history of taking lots of fools down with him when he goes. Sure he might be able to pick the housing market a year or two in advance, but housing is an illiquid asset so a year to two might not be enough to get out before you equity is wiped out.
 
Then we have the unearned income issue..... this is criminal like antisocial behaviour on the part of property investors, especially ones the know the system and wilfully take advantage of others. At least Hugh for the faults in his growth theory has a history of adding some value as a developer.

What is up with spelling the word government in different ways such as gubmint and gummint?
Just wondering what the desired effect is supposed to be.

Olly sees: a large upward burst in prices and rents coming
That will be nice - to go along with the large upward bursts in prices and rents I've been seeing for the last 2 years!

What needs to happen is thus:
 
1. Stop foreign interests owning residential property in NZ. Legislate against it. This could be done in parliament in an afternoon.
2. You are not allowed to own property here until you're a permanent resident or citizen. Potential caveat to this is that people staying here on long-term visas could be allowed to buy property so long as it was commissioning a new build and adding to the housing stock. Non-Citizens/permanent residents will be forced to sell property upon leaving the country.
3. Launch an enquiry as to qhy building materials and build costs are significantly cheaper in Australia despite the fact that builders and building labour is more expensive in NZ dollars than in NZ. If necessary regulate / penalise the building supply cartels (Carter Holt / Fletchers) for price fixing.
4. Disempower local bodies from much of the building process and simplify the RMA to stop the price-gouging and restriction of land supply around our major centres.
5. Capital gains tax on property. Full stop, on every property.
6. Mandate maximum LVRs of 20% or 25% to require purchasers to have decent equity, thus insulating them against a downturn. Require that you cannot borrow money against an existing property if it increases the LVR on that property above 80%
These measures will keep the property market relevant to NZ citizens. It will:
- Prevent foreign landlords pricing us out of our own market with printed money from abroad.
- Stop the gouging our councils and building industry forces on us for new-build housing.
- Forces the housing market to be more closely tied to peoples' earnings by enforcing LVR restrictions and require that property investors can only leverage themselves 75-80% across their portfolio.
These measures would bing our market back to reality quick smart and would prevent it running away from what people can afford in the future.

you have most of it there Esprit. Good list. A few other things: 
1. Limit immigration into NZ until the housing crisis is fixed 
2. Follow that with scapping the accomodation subsidy which 1 in 5 households are on now
3. Introduce low cost build methods from overseas i.e. they build in factory and assemble house on-site in a week or so. Being done in Japan and highly effective. 
4. Introduce a land tax for people hoarding land and not producing anything on it
5. Fix the tax loopholes which allow property speculators to run at a loss and offsett that against their other income 
All those measures would quickly bringly price affordabiltiy back ot the market.
 
 

Why don't we scrap the three-yearly election and make our PM as Dear Leader and imprisonment the top 2% of all earners so thay can't buy any more properties.  Those ideas are identical to what they have in North Korea.

Esprit and rp.
All of the above are a great start. Just to add more points:
1. Tomorrow the government could telegraph the above to existing owners that they would be forced to offload any property that does not meet the new criteria within one year. 
2. Some  (maybe many) of the multiple properties owned by overseas domiciled non-citizens are being used as an investment medium to meet the use of capital to secure future residency. Make that type of investment impossible.
3. Hence many of these properties have no local mortgaage finance or are financed using low interest overseas loans. Make any overseas loan non-deductible as a tax deduction on rental income.
AND $120 billion of HOT money from China alone is flooding into many countries. NZ must be getting some of that to our detriment
Force local bodies to allow for extra land outside existing limits conditional on that land being sold at existing valuation for immediate development so bypassing land bankers inside the existing limits.
 

Esprit
You are right on the money - Thoughts on item 3
We need to use the tools of government to make markets function when they do not.
The building indusry has 10,000s of customers, 1000 of builders designers architects etc
But very few supplieres of materials from
Cement
Concrete
Steel
Timber
Steel
Wallboards
etc
This is a classic problem. Lack of competition in these areas is a real problem. We need markets to work for us not just for the small number of players controlling the pinch points.

Why is Olly so sure taxing property investors is bad for the market, yes it will reduce rental supply but does he really think all those tenants want to stay renting? 
 
The vast majority want to own their own home and would do so if property investors were incentivised through taxes to sell some stock and provide selling pressure into the market.  Even if taxes just stopped new investment properties being purchased it helps the first time buyer who no longer has to compete against property investors.

As a potential first home buyer, the last thing I want is a first home buyer rebate or subsidy as it only ends up being capitalised onto the property value. The only person that benefits is the one who sells the property. Look at the Aussie experience, parents were registering their second house in the names of their children.
A much more sensible policy is to have a max allowable LVR of 80% and a maximum mortgage term of 25 years. Ultimately, house prices can go no higher than what people can afford. That is why there won't be a second boom, the smart ones are saving and deleveraging in anticipation for hard times ahead.

the reality is there are only 3 things driving this market, 2 of which were not reasonably forseeable:
1) the earthquake - lots of christchuch residents heading to Akld, and immigrants who would otherwise have gone south now go to Akld.
2) stupidly low rates for too long - this was not forseeable becasue it was caused by the above
3) stupidly high immigration - this was forseeable as the govt uses high immigration to keep housing at dumb levels --> although we might be surprised that it outweighs the number of NZers fleeing overseas to earn enough money to be able to buy a house in NZ.
So whats going to happen going forward?
Easy - the govt will try to keep the ponzi scheme alive. it will implode at some point (even Olly admits that), when is anyone's guess. But with our debt levels we need to be mindful that ANY decent economic recovery will be still born - WHY??? becasue as soon as the economy heats up again, higher rates will feed into a massively in debted housing market which will in turn push the economy down again and rates will follow. The ONLY way to get out of this race to the bottom is to have a housing crash, better to get it over sooner than later.
 

Why on this site do people blame property investors for forcing up property prices?
The true investor wants to purchase at the lowest price they can get it for and effectively you will find that if they know what they are doing will always pay  less than the going rate. The people looking to live in themselves are the ones who overpay.
There are always opportunities and if  you are prepared to work rather than moan you will be far better off.
Go for it before it is too late.
 

Becasue there is limited supply.  You snapping up a bargain prevents a first timer buyer snapping it up and removes a house from the stock of listiing.  If you had left the house alone there would be more pressure on sellers to compete for buyers and more opportunities for the first time buyer to get a good price...

Because they are the ones/fools who fell for the global ponzi scheme at the expense of our ENTIRE world economy simply because none are financially capable of understanding even basic economic fundamentals such as 'how is money/tender even created' and how is it given real value?

Absolutely coorect , my good MAN . If people don't like the current house prices , don't buy . It's that simple !
 
There are alternatives available for dwellers and investors .
 
...... think " beyond the square " folks !

Pity about all those gullible readers believing that they have been 'smart' over the past 4 years by renting - when they could have been paying down their own house at super low interest rates.  They could have paid a quarter of their house off in time  -   but no they believed the doom & gloomers, thought the house price crash was coming so they could buy a bargain. 
The low interest they have earned while saving has been outstripped by potential equity gains they have forfeited ....
 
Where are the house bargains today?  Where are the cheap 3/4 bedroom homes in a leafy suburb with nice modern improvements?  Why are they not giving them away?   Oh .... Kiwis highly value their homes?   I didn't realise that .... I was so smug renting and 'saving' ....  
 

I'm an owner but I wouldn't be too smug, there is still plenty brewing in Europe, China and the US which could bring the whole stack of cards down.  Just because the life support has stemmed the bleeding doesn't mean the patient will live.

Truth is many of those you refer to are now panic buying, I hope they don't get burned and regret giving up on their convictions.

Believe it or not for some of people 'home ownership' is not even a worthy goal in life!
Paying thousands  to some bank in interest for a loan they (bank) created from nothing only to have the local council strip it from you year on year via well above inflationary rate increases once you retire! All that percieved CG stripped due to annual inflation and cost of living increases.
 
haahahahha Talk about gullible! Only mugs ask for mortgages (death contract).

deathly silence eh?
 
lol, very telling

Nice one Olly - your prognosis of the property market is spot on. 
Well done!

Jeez , I really never imagined this mini-boom we are having , it goes against all the fundamentals , but its been a problem in Oz and Canada , and to some extent in Singapore , but in Canada the Government has tken some steps to curb the market , but introducing a deposit (equity) for buyers

Julyz. The property market is just not Auckland. That market is probably seriously overvalue by way of fundamentals. Yes it may well come back a bit. Move to another area where prices are more affordable. You can stll buy property in major cities for less than renting and rental reruns much higher than interest rates.

 
"Think about it: If you have a property that you are considering selling, would you rush it onto the market if you were going to be slugged with tax?"
Why must CG only be applied to a sale Olly?
Your clueless assumptions are very telling.
Anyone with half  a brian knows that for a CG to work NOW it must apply annually via a land tax based on house price values.
Many landlords as you know do not plan to sell up until well after retirement! , Hence lets just apply a law that states no pension for +2 home owners EVER!
My point Olly is simple: The government can crush who ever it likes via any means to redistribute wealth. The innovative "tax ideas" are far from run out

 

Ohh, then maybe the government should (during such economic times) introduce a rental price cap tied to average annual CPI inflation figures. 
Like I said, the creativity is endless when you  are the judge & jury like the NZ government is.
How about while we are at it Housing NZ start paying the Governments bond account  interest payments directly back to the tenants based on the CPI?
Why should the alleged poor be funding a government department (Housing NZ) via their own tenant bond payments?
Think outside the box time!

Maybe........Poverty below 1st world status which is not far off  IF we keep going as status quo, screwing our exporters with that overprived NZD to fund more borrowing in RE 

Yes....race to the bottom we are not doing for now. However when the greed turns to panic I expect that as a risk currency we will get abandoned....and with short term bank borrowing lent into long term mortgages that suggests a very nasty period.
I wonder that fixing for a year isnt a sensible safety strategy....
regards

"the bank is actually allowed to re-fix your rate"   ouch...kind of wondered if there was such a catch somewhere.
12month fix depends on your view, so I think we will go into a depression, but just before thats its possible that there will be a very short term spike in rates as money exits NZ and the banks have to charge us huge amounts to get investors to [re-]lend.
Im not sure why you think 60%?  I thought the leverage was such that handfuls of % would be enough to cause mayhem.?
RFC, yes I think its going to be that turbulent. If they had actually fixed things during teh GFC then I'd have some confidence that we'd stagger along for some years....and maybe recover (ignoring the impact of post peak oil on things)  They have not really and the LIBOR scandal is just one example of numerous.
regards
 

Fortunately we are not North Korea yet  -   so your Utopian vision of a command-based economy is a mirage in your unrealistic dreams (of controlling others lives)....

North Korea? So even half the way there would be fine by you? How about half a Utopian vision? (your words not mine)

Uh no.....depends on what you mean by work....if its collect $s yes....if its to stop comapnies loading up with debt to avoid paying company tax, no....a CGT is fine.
regards
 

Ever noticed that those among us who lack business creativity or any form of innovation ALL flock to property? Just like Olly.
Just look at that tie! the old phone, the corded keyboard, the leather chair from Blakeley's of Kaiapoi ;-)
Just kidding Olly lol

"Ever noticed that those among us who lack business creativity or any form of innovation ALL flock to property? "
Yes I have Justice......yes I....................... have.

don't forget the transitions glasses Justice!
I would never trust a man with transitions....

My late grandfather used to say "never trust a driver wearing a hat". It is bloody true to.

So Mist....I conclude if you haven't got a leg to stand on ....you'd be clueless then..?
P.S....wow thank you...!.. I just ditched the hat n prosthetic in the interests of Focus.

I did and your right......hence the thank you...!
At this stage however, I found my single line of focus was staying upright, I'm sure that will improve after hopping around the place.

aaaah ya makin' me larfff. really.

LOL! nice one

I still feel this "mini boom" could have an ugly ending.
Time will tell

I hope you are right re ugly ending. But the more debt we pile on, the more incentive for the govt and RBA to socialise the cost of the ponzi and prop it up due to the alternative dire consequences. NZ was tracking really well in regards to the GFC (ie slow deleverage, gradual fall in house prices, mild recession). This new "false dawn" is very concerning -  to think we are having a debt driven asset bubble blowing up again when we are a stagnating economy recovering from a major natural disaster in a world facing a real chance of global meltdown CAUSED by debt driven asset bubbles is madness of the highest order.
Personally, I've given up on any form of forecasting. I am not sure that there is such a thing as "value" any more. There is monetary manipulation, and then there is more money manipulation - its basically down to where the govt and central wants to pour incentives - you are better getting an asset price prediction from a political analyst than an economist. How do we explain for example that the NYSE is close to its peaks pre GFC, whereas the ASX is 40% below? I thought Aus was booming and US was in a multi decade recession? Its all where the policy makers decide to put their printed dosh - and in NZ's case I think we are getting printed dosh flowing into our housing market via foreigners and NZers gourging on cheap credit.
Do we take the sweets on offer from the govt knowing they will rot our teeth, or eat greens knowing we will be punished for doing so? Choose the lesser of the 2 evils, right now I dont know which one that is.

Why would you hope for an ugly ending?
Bitter person?

I guess because he's hoping that those of us who have refused to support the madness don't end up having to bail out those who have gorged at the trough. Much better that those who directly contribute to it get the slapdown they need and society as a whole learns a valuable lesson than we enter a cycle of ever-increasing bailouts and eventual socialisation of every negative economic event.
There WILL be a hard landing at some point... whether that's December this year or December 2024, it will happen. The longer it's delayed the harder the landing.

Esprit has summed it up perfectly.

 

Fiscal, Distributional and Efficiency Impacts of Land and Property Taxes
The Property Council hates the idea of a land tax.

 

In all our general equilibrium simulations, aggregate indebtedness of the 

economy declines with the introduction of a land/property tax, essentially because 

New Zealanders borrow less to finance domestic property holdings. At a conceptual 

level, the value of New Zealanders’ housing assets and liabilities fall but, at the 

margin, the liabilities are sourced from foreign savers and a land/property tax 

reduces the amount of foreign capital that must be borrowed to fund domestic 

property.

Owners of existing property would incur a loss of wealth following 

introduction of a land/property tax unless there were perfectly elastic supply. Even 

in this latter case, if the owners retained the property they would face the present 

discounted value of the future land/property tax flow (although of course they would 

also be in receipt of tax reductions from other sources). With a flat land/property 

tax, the wealth loss would be proportionate to the existing value of land/property. 

Owners of land-extensive residential properties (including lifestyle properties), farms 

and forests would be liable for the largest losses in proportion to their property holdings if a land tax were introduced (since improvements would not be taxed in 

that case). Those with no property holdings would not face an immediate wealth loss. 

The effect on their rents would depend on the supply elasticity; the less elastic is 

supply, the less that rents would rise following introduction of the tax.  

http://www.motu.org.nz/publications/detail/fiscal_distributional_and_efficiency_impacts_of_land_and_property_taxes

 

We are continually being told due to the internet, distance to NZ is no longer such an issue for many of our industries.
Accepting this as being true, then surely the same theory relates to distance within NZ? 
Therefore,  the inevitable will occur once broadband is rolled out (to the likes of Wanganui).  That is, once the Auckland pressure  explodes, those who can move and operate anywhere will set sail for the provinces.
The provinces have cheap housing, good schooling, no congestion, access to the great outdoors and so on.  Let Auckland bubble over, the masses will relocate - eventually.
This is the simplest solution to the housing question that there is!
 

Not easy to telecommute today, mindset mostly, but if the future costs of UFB are an indication the price drop is 6 fold....ie $150 today for 150gb = $150 tomorrow for 1TB (1000gb/month!!!)
and thats just the opening shot for UFB as well...
regards

I think you are right Rastus,
Over the next 20 years there will be many factors negating the relative advantage of being located near lots of other people. These are:
- working from home will become easier and easier, and as technology improves perhaps no different to working in an office (eg you could have holograms appearing next to you in a virtual meeting place)
- retail will continue to decline as more and more purchases go on line ie relative advantage of being located close to good shops will be negated
- due to the above factors there is less and less demand on commercial property, expect to see more and more commercial property being converted to residential to fill the gap. We might call this high rise fields development
- due to first 2 factors it becomes more and more feasible to live in the provinces, and actually becomes a lot cheaper for companies (ie they wont have to pay people as much if they are living in a cheaper area)
Dont get me wrong, big cities will always be more expensive than smaller ones, but the relative advantages priced in (and speculated in) will likely dissipate.
 

You're correct Justice about those lacking business creativity or any form of innovation all flocking to property.
While we like to believe the mythology of New Zealand being a culture of innovation and number 8 wire/espirt de corps, in reality it's become a land of horse traders. John Key being the ulitimate manifestation of that little abritrage pyramid scheme aspiration and dear old uncle Olly likes some fishing as well, as we know. Profits being easily harvested on the rising tides and lures of market speculation. Throw out the bait of easy gains and then reel in your prey.
After all real work isn't easy....bending your brow and sinews day after day to forge something of substance takes effort and has become unfashionable in the face of easy short term gains popularly parroted in the lamestream media as 'wealth creation' via property.  Politically it's been much more profitable in the short term to support this little mirage to the benefit of the financial overlords while sacrificing the foundations of an economy.
Poltically you have to supply demand and appease the status quo afterall to remain in the conduits of power even if it means blowing up an economy.....or two. At which point they say.....'who could have known!'
We need to get back to fundamentals of a fair and decent society and not just manipulated for the profit of our current 'Oligarchy'.
 

Why the hell hasn't anyone around here interviewed Bob Clarkson? He outlined some real interesting 'outside the square' ideas on the whole housing affordability crises/dilemma on Jim Mora's show 'the panel' yesterday, well worth a listen for those who didn't catch it.
http://podcast.radionz.co.nz/aft/aft-20120718-1633-the_panel_with_raybon...
The interview with Bob starts at the 18:40s mark....

Thanks for the link. That's forward thiking on BC's part. Would never happen in Auckland, there would just be some bribe money paid, some free land offered to those making the decisions and it's then a vested interest in keeping the prices up as high as can be done.
Look at Stonefields in Auckland. A suburb in a hole where in winter the fog doesn't lift until the afternoon, and the price of entry is $620,000... for an apartment. Want something freestanding and you're into the mid $800,000s. The whole lot should have been completed 2 years ago... instead, Fletcher Living has been drip-feeding properties onto the market to keep their margins up during the slow-down, and now they can't build them fast enough to meet the demand of the poor suckers buying!

My urban design lecturer pointed out that Auckland has always been a speculators town, and probably always will be.
 
I did an assignment on Stonefields and concur with your comments. On top of that I managed to get a copy of the geotech report. It is all the old bottom of the quarry that has been back filled, with the contours varying by up to 10m before they levelled it. We found evidence of subsidence on our case study. The geotech report stated that "the use of rigid claddings are NOT recommended", but notice how they are all brick down there. 

Olly, some reasonable points interspersed with some complete nonsense.
The property market is in a state of flux with rents rising rapidly at the cheaper end and pushing people into buying as rents become too expensive.
Who are these people who can't even afford to rent, so decide to buy? Who are the banks approving these loans? It's not high income people because as you say earlier rents for higher priced property hasn't taken off to the same degree. I just find it a bit far fetched to suggest people at the cheaper end are heading on down to the bank to mortgage themselves up.
You didn't mention the word 'job' or 'employment' in your entire piece. Kindof essential things if you are planning to be mortgaged for the next 10+ years.

I like this from today's paper
"There are also new rules that require Canadian borrowers to show housing costs are no more than 39 per cent of income, also making it harder for some buyers in Canada to get a home loan."

Things are getting more expensive for indusrtial societies:
 
Oilfield services (OFS) firms such as Schlumberger are the unsung workhorses of the oil industry. They do most of the heavy lifting involved in finding and extracting oil and gas. They are far less well-known than the oil firms that hire them, but immensely lucrative. Schlumberger, with headquarters in Paris and Houston, earned profits of $5 billion on revenues of $40 billion last year. Its market capitalisation has risen fourfold in the past decade, to $91 billion. That is bigger than several international oil companies, including ENI ($82 billion), Statoil ($75 billion) and Conoco-Philips ($71 billion).
Schlumberger’s success highlights a shift in the balance of power between oil companies and their flunkeys. Until the 1990s OFS companies were far smaller and earned low margins on straightforward tasks, such as drilling vertical wells. That has changed dramatically.
 

 
With the price of oil so high, firms are scrambling to pump it out of ever more remote and costly crevices. Over the past decade the oil industry’s annual spending on exploration and production has increased fourfold in nominal terms, while oil production is up by only 12%. The big services companies, which invest heavily in technology (see chart), have been growing by around 10% a year. According to McKinsey, a consultancy, OFS companies grossed around $750 billion last year.
 
http://www.economist.com/node/21559358

A land tax would function as a citizens stake. It would put a pin in the property investors bum.

Nice contraditions, to prove that Capital Gains tax doesn't help keep prices lower, he lists countries where house prices actually crashed and got back to something like real value.
As opposed to NZ where the speculators have stayed in the market, and prices are still well above traditional values relative to incomes etc.
It's no real surprise his article is riddled with self interest throughout.

Olly
I wonder about these various subsidies for first home buyers. Won't it simply increase the house prices? That's what happened in Australia.
cheers
Bernard

Bernard
It's worse than that. With the FHOG, that, plus a bit of savings, was the deposit for many first home owners, and with the current downturn of 10%+ and loss of jobs on the eastern seaboard, many of those young people are being wiped out, having to sell up, hand the keys back in to the banks, and walk away with a debt on their hands.

Of course, that's why Olly recommended it.

Bernard, I reckon a large proportion of the current housing upswing is due to the ChCh earthquake.
 
Consider the numbers:
7,000 plus in the red zone - ie they must buy elsewhere and are fully cashed up.
10,000 could be 20,000 houses to be written off in other zones.
 
So let's be conservative and say 8,000 of those with written off houses in other zones take the insurance and buy another house (or do so at the instruction of the insurer).
 
And let's say 6,000 of the red zoners do the same (buying rather than directly building).
 
Then 14,000 buyers are out there in the market over a period starting about June 2011.  Assume some go to Australia, but most will buy in NZ - say 12,000 households.
 
Then as most Cantabrians won't have a bar of moving to Wellington, most end up in Auckland.  So whether the red zoners and wrecked house owners move directly to Auckland or whether the owner of an undamaged house sells to a red zoner or wrecked house owner and then moves to Auckland, either way Auckland ends up with potentially a large proportion of that insurance cash.  Eventually perhaps 8,000 households after all claims are settled??  Maybe more??
 
So Auckland in a period of say 2 years from June 2011 to June 2013 gets 8,000 cashed up buyers.  That is 333 per month or about one sixth of total house sales in the whole Auckland region.
 
In Christchurch over the same period a net extra 167 cashed up buyers per month is an extra 25% more buyers.
 
Normally a cashed up buyer creates a chain of several other cashed up buyers before a chain ends with either an investor selling, an estate sale, someone going overseas or a new house being built.
 
So the pressure from cashed up buyers is huge as each cashed up buyer potentially creates 3 or 4 more cashed up buyers.
 
Hence the current conundrum.  If you increase the numbers of cashed up buyers by 25% of the total number of monthly sales then you would probably need to see the number of sales increase by 75-100% just to keep up with that demand.
 
As the numbers of people selling hasn't increased that much because of low interest rates and the perception of rising prices, then there is only one thing that can happen and that is that prices will go up.  Which they have.
 
But the problem is: we are not even half way through the number of insurance settlements that are likely to occur.  Hence this problem is far from over.
 
Prices have a long way to rise yet.
 

Not sure why they wouldnt go to wgtn....IT salaries for one are higher...so if you are going to move....
regards

Does this suggest that instead of using the $x billion in insurance payments to actually build real replacement houses, we in effect only bid up the prices of existing houses, such that the market clears at an even more ridiculously high price?

I think the ungrateful interest commenters should show some appreciation, most sites would have this disagreement off their own comments forum.

Surely the quick answer to providing affordable housing is to set up large trailer parks. Trailers are relatively cheap to manufacture, can be moved easily, can be comfortable and spacious and require very little infrastructure.
The housing problem could thereby be solved inside 12 months with little effort.
QED.

ppl still poop, still need water, power,  phones, broadband and shops....so really I cant see your idea doing much.....
You could certainly do prefabs easily though Use 100mm insulated freezer panels as the walls, floor and ceiling, very fast to put up......expectations as they say.
However the risk really is repeated earthquakes and loss of insureability and hence capital...then labour leaves....
regards

BD - modular panel is better, and could be mounted on a 2-axis shock-absorber. Better living, and just as easilt moved.

HAha. You'd have to have very thick cables, a high transmission voltage, and a lot of windings. Time is the short-supply item there.
 
Maybe under a brothel, you'd get more movement for longer. It would complement solar well.

Overpriced $NZ – imo this is due to quantitative easing so the other currencies that are subject to this are being devalued.  It’s pretty hard for NZ to do anything to counter this except join the quantitative easing club.
Trying to influence the market through tax policy will fail.  It won’t generate any revenue (acknowledging that isn’t the point).  While it might scratch the envy itch in the short term, but when it doesn’t change the market, people will be angry and then blame the government.  Anyway, tax isn’t a magic bullet in any area, tax hikes haven’t stopped people smoking and neither will tax policy, i.e. new / increased taxes, increase housing supply or reduce prices.  Unless a capital gains tax applies on everything (which Gareth Morgan seems to be advocating) and is levied irrespective of whether you sell (akin to a land tax or rates), it won’t achieve much.  In fact I think a capital gains tax at time of sale would be fairly easy to avoid (except for holiday homes). 
If Govt is to get involved, tax policy isn’t the only tool available.  The Govt could roll up its sleeves and start building to increase supply.  If it wants to stand back and wait on the private sector, nothing much will change.
I also wonder about the real effect of the proposed demand-side interventions.  Giving tax breaks to certain people to help them buy would increase demand, and unless supply increases at the same rate, prices will get another boost.  The last Labour Govt tried this and it stimulated the lower end of the market, caused a ripple effect in other segments of the market and may have put some financial stress upon the people who it was intended to help.
If the problems are in the Auckland area, the solutions must be customised to address the Auckland problem.
I think Olly Newlands criticism of the Council shows a lack of understanding of the Council’s position.  It’s not as if Council’s use building fees to subsidise other activities.  If Council’s costs are not to be covered by fees, that requires an increase in rates for everyone to subsidise the consents and infrastructure for developers.  If other residents and ratepayers want Council to do that, then they can make a submission to the Council’s funding policy. 

Overpriced $NZ – imo this is due to quantitative easing so the other currencies that are subject to this are being devalued.  It’s pretty hard for NZ to do anything to counter this except join the quantitative easing club.
Trying to influence the market through tax policy will fail.  It won’t generate any revenue (acknowledging that isn’t the point).  While it might scratch the envy itch in the short term, but when it doesn’t change the market, people will be angry and then blame the government.  Anyway, tax isn’t a magic bullet in any area, tax hikes haven’t stopped people smoking and neither will tax policy, i.e. new / increased taxes, increase housing supply or reduce prices.  Unless a capital gains tax applies on everything (which Gareth Morgan seems to be advocating) and is levied irrespective of whether you sell (akin to a land tax or rates), it won’t achieve much.  In fact I think a capital gains tax at time of sale would be fairly easy to avoid (except for holiday homes). 
If Govt is to get involved, tax policy isn’t the only tool available.  The Govt could roll up its sleeves and start building to increase supply.  If it wants to stand back and wait on the private sector, nothing much will change.
I also wonder about the real effect of the proposed demand-side interventions.  Giving tax breaks to certain people to help them buy would increase demand, and unless supply increases at the same rate, prices will get another boost.  The last Labour Govt tried this and it stimulated the lower end of the market, caused a ripple effect in other segments of the market and may have put some financial stress upon the people who it was intended to help.
If the problems are in the Auckland area, the solutions must be customised to address the Auckland problem.
I think Olly Newlands criticism of the Council shows a lack of understanding of the Council’s position.  It’s not as if Council’s use building fees to subsidise other activities.  If Council’s costs are not to be covered by fees, that requires an increase in rates for everyone to subsidise the consents and infrastructure for developers.  If other residents and ratepayers want Council to do that, then they can make a submission to the Council’s funding policy. 

One has to agree with the author. We are living in a world in which massive money printing is the new normal, and if the govt keeps sitting on its hands nothing will change the inevitable effects of oceans of cheap money on asset prices.
It would be easy, however, to stop the craze by means of interest rates rises. The bubble would be done with over night.
RBNZ/govt wont do it coz of too many vested interests involved.
Not sure, btw, Amanda M is doing herself a favour by staying out of the property market. If you want to live in NZ for good, you need to acknowledge how this place is being run. Renting and waiting for the big correction is more suitable if you have to option and desire to move on to different shores, if the correction never comes.
With the ECB now full-on printing money, the Fed anyways and forever, dito BoJ and BoE, it is hard to see an end to near-zero interest rates. Even if all of a sudden money becomes expensive again, so many NZers would get into trouble, that the NZ govt would start printing to save its voters.