Financial Markets Authority cautions on Auckland housing 'bubble', advises people to hold some assets that aren't in real estate

Financial Markets Authority cautions on Auckland housing 'bubble', advises people to hold some assets that aren't in real estate

By Gareth Vaughan

There is an Auckland residential property bubble, we're well into it, and it needs to be acknowledged with regulators zeroing in on what can be done about it, the Financial Markets Authority's head of strategic intelligence, Adam Hunt, says.

Hunt told people ought to make sure that if the worst case scenario did unfold, they wouldn't be "completely wiped out" financially.

"I think we just have to acknowledge it (the property bubble) and then work out how we can safely manage it," Hunt said. "We don't want it to burst. Ideally you want it to gently peter out, if I can put it like that."

"There is an Auckland property bubble and we're well into it."

The latest Real Estate Institute of New Zealand figures show the Auckland median house price reached a record high of NZ$562,000 in March, up 13.5% year-on-year. At 3,359, sales volumes in March this year were 18% higher than in March 2012, and 40% up on February 2013. Reserve Bank Deputy Governor Grant Spencer recently hinted the central bank may look at raising interest rates if the housing market continues to rise sharply.

And on Monday Prime Minister John Key said the Government was now doing all it could to help the Reserve Bank avoid having to put up the Official Cash Rate in response to Auckland house price inflation.

Balance your risks

There were a number of implications stemming from the bubble for a conduct regulator like the FMA, said Hunt. Firstly, he was keen that people get the right advice, and that they balance risks in their portfolio of assets, with the latter his major concern.

"I personally see that as the biggest problem. We tend to think that real estate can never collapse and it might, it might not. As long as you spread your risk a little bit and you have some non-real estate assets to bail you out in case something goes wrong, then that's probably a good position to be in," said Hunt.

"So we need to make sure that type of advice is getting into the market."

An additional concern was the retirement economy, with a significant proportion of people who, over the next 20 or 30 years, are likely to be relying on selling their houses, or downsizing, and living off some of that income.

"There's an important step you go through when you shift from that phase in your life where you're saving to that phase in your life where you're spending, you're drawing down on those savings. And you need to think in a different way about the assets that you hold," said Hunt.

"All I'm really talking about is doing a bit of reading. Sitting down one day, getting some advice is always a good idea, and thinking 'how can I reposition my asset base, how can I make sure if the worst did happen, I'm not going to be completely wiped out,' if I can put it that way."

Hunt said he had lived in England in the early 1990s, during a time when house prices there fell by 30%. A lot of his friends who had just bought their first home became "trapped" in negative equity.

"And I thought that was a tragedy. That has some significant knock on implications for the whole economy. People can't move house and get better jobs, there's all sorts of things like that. So this is a big issue. We need to acknowledge it and zero in on what we can do about it today," added Hunt.

FMA keen for the Reserve Bank to have a 'more selective' toolbox

FMA staff talk with their counterparts at the likes of the Reserve Bank and Treasury, and although there was no silver bullet, they were all looking for "gentle levers" to reduce the risk. They wanted to avoid harming the rest of the economy through "radical action." The FMA had made a submission on the Reserve Bank's consultation paper on so-called macro-prudential tools.

The four macro-prudential tools the Reserve Bank is consulting on are;

  • the counter cyclical capital buffer, effectively banks holding more capital during credit booms;
  • adjustments to the minimum core funding ratio, altering the amount of retail funds and longer-term wholesale funding banks have to hold;
  • sectoral capital requirements, or increasing bank capital in response to sector-specific risks;
  • restrictions on high loan-to-value (LVR) ratio residential mortgage lending.

 See all our stories on the macro-prudential tools here.

The Reserve Bank is also consulting on increasing the amount of capital the country's big four banks - ANZ, ASB, BNZ and Westpac - must set aside to cover potential losses from high LVR home loans. See our story on this here.

For his part Hunt said the FMA was "very supportive" of the Reserve Bank having a more selective tool box.

"I think we're seeing this globally, there's a trend internationally towards using a finer tool set, if you like. Interest rates can be a very blunt instrument," said Hunt.

"I think  it's worth keeping in mind that the property bubble is almost entirely Auckland-based. We're not seeing that type of growth in the regions and that means that your very broad tools aren't going to work as well because you can end up hurting people who haven't really got a problem."

'We're very supportive of the new tools they're talking about adopting. We think it's very useful for them to be able to target risk in a much more localised fashion," Hunt added.

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Quote from this week Weeky Outlook (Tony Alexander)
"The worsening housing crisis would not be so bad were it not for people buying into the
ridiculous forecasts five years ago that house prices would fall 40%. Believing those forecasts led to a pullback in long-term efforts to address NZ housing affordability, a reduction in construction, and first home buyers putting off their buying. Effectively those bad forecasts have cost the country five years of addressing
this deepening social issue."
BH, take a bow, yours was 30%.. so you are off the hook !!!

Look at the future OCR track that Alexander was predicting in June 2008 (when it was already clear the credit crunch was inevitable) and you'll realise no one is perfect!

What a plonker....he was pretty rock bottom in my estimation anyway, now I see he really is a champion carrot puller.
Very few ppl, in fact reported or said there was a drop going to happen, and how big it might be. These were ignored by just about everyone else in property and the mainstream. Yet those few voices who were ridiculed for thier prediction are now being blamed now.

Why is the FMA moving into this area? God almighty are we that stuffed. The regulators talked the market down for four odd years whilst completely ignoring the supply side. It doesn't take a rocket scientist to understand that growth in investor confidence would lead to a spike in demand, and eventual bubble. FMA stick to your knitting and simplify the process of investing. And maybe look in the mirror and follow your motto which to to make investment transparent. Who on earth is running that outfit? Unbelievable.

The FMA are in a no win situation. If they say something everyone jumps into them, if they don't say something everyone jumps into them.......
Isn't it better the authorities voice their concerns than sit back idly watching it all unfold?
Property as an investment class will fall under the FMA's mandate and many financial advisers recommend or advise on property and debt structuring/financing.
I think the FMA deserve some credit.

Craig the FMA role is as a market watchdog. They ensure transparency in investment markets. And police those that don't behave. They should not be commenting here. It is totally inappropriate . There posturing actually affects behaviour and pricing.

Kane & Kimy, me thinks you doth protest too much. Adam Hunt's key message here is not to have all your eggs in one basket, ie hold assets that aren't just property. Because property prices can fall. And if all your money's tied up there, and you're heavily leveraged, you might be in trouble if prices drop.
Isn't that investment 101?
I think it's very encouraging that we finally have a regulator prepared to publicly speak out like this. I think it should be applauded. Or are you gents a tad highly leveraged in Auckland housing?

You say; "I am not overly concerned about my property portfolio. A correction does not affect me. What affects me is a banking collapse, people out of work and the NZ economy dead in the water."
And what comprises the biggest slice of banking assets in this country and is therefore the most likely cause of a banking collapse?
A big drop in residential property prices.

GV we think you are right. Thinking about the fma words, the obr actions. All the policy settings are geared to individuals looking after themselves.

We were looking thru parts of the SCF wreck and you can see how govt. Never wants to be involved in such exercise again. Esp. The way the gtee sucked that extra last wade of cash...

= we note the real bank several top dogs had been with (but same for Strategic as well so nothing of note).

Issue we see is that not all pop have such an appreciation re deps.
Or many think, lets pin our ears back and borrow cause on a wage I will never have the chance of such riches....

We don't know which. Its probably both...

With all due respect to you Kimy , (given your committment to your chosen portfolio)....because if your only realising a 2% real return on a leveraged 5million portfolio....I'd be taking some advice not giving it.
 As always good luck to you...! P.S. even when you have the best of intentions for others , it's very very hard to escape motive , particularly when your protecting a 2% margin.

GV yep did ok in economics 101 - top few percent in country all those years ago at uni. I  however agree totally with Kimy. the distortions are with the supply side of the housing market. this was partially exacerbated by the fma (former sec. comm.) wiping out mezanine finance. i actually went to a conference and listened to participants being lectured to by the sec. comm. on how they were going to shut things down.  from this we have seen the development of property  syndication, and the favourable terms that fletchers have been exteneded on the canterbury rebuild. The sec. commision left the meeting stating that "the financial services sector would use its collection nous to find a way around property develpoment " ie use equity as opposed to debt for leverage. this hasn;'t happened for a whole raft of reasons. primarily because in the current market the risk to financier / developer is just too large. Again until the supply side of the situation is addrressed prices will continue to rise unabated. this is ecomonics 101!

Kane, how exactly did the Securities Commission "wipe out mezzanine finance"?

Absolutely no doubt about who was at the forefront of  some bad P.I. advice there ostrich....Bernie's bad....but as to mistakes, missed opportunity is more apt I think, that may have cause for regrets in heeding the wolf boy's cries......
 Probably why you get such vitriole here poured on P.I.'s , it's a mixture of regret, embarrassment, and wishing it to fail  (for some) to justify  the confusing emotions .
I maintain, as I said only yesterday, while we have been insulated or just end of the chain post GFC catch up in so far as captured monies and hard assets beging swallowed by Central Banks as they get busy with the new have to be looking to where the vast ammount of exposure is in Australasia to see where the probability of captured money would be.
Despite person to person situations, there is no doubt the N.Z. banking system  (big Four) are excessively exposed to property lending....requiring them to remain super alert to sensitive shifts in the Market, if not  in fact to be the driver of that market to maintain inflated stability.

your message there christov is you agree with what wolly has been saying all along

Well I like to think we reached the conclusions independently ...iconoclast....But I'm ok with it if you see it that a lot of time for wooly I have....all jokes aside.
To be fair I think you'll find ground zero theory was first posted by myself...but that's just me being defensive.....idea's get reacted to and acted upon through consensus.

I was thinking more about Gareth Vaughan's serious attack on wolly a couple of weeks ago and you didnt come to wolly's defence .. maybe you didnt see it

If your refering to" drive by shooter", iconoclast  you would be incorrect , as I did defend wooly's right to,  occassionaly  drive by shoot (in Gareth's words).....suggest you pop back there, Gareth was a little keyed that day....just wasn't in the mood for it.....just as easily could have been me he unloaded on , but wooly posted first.
 The inconsistency alluded to there was the lambasting of things without proffering alternative options on the matter, something I myself  am guilty of on many occassions......knockers without knackers some say.
 Now with wooly this is particularly glaring with politics....wanting none of them offers no relief., in reality.

Thats the one I'm referring to. Was a bit taken aback by the attack. I was going to come to his defence because I dont think there are any simple solutions. It's is political. And thats why I eventually put up Michael West's tome because he spelt it out extremely well .. an article which you called a "goodie" .. my failure was remaining silent on the day

In fairness iconoclast ...I think occassionaly, I myself , need to consider the time and effort put into articles put up by the Team there, and while a joke, jibe , or inference to the value of the piece based on merit, because it may not inspire me to think should not be the only thing  I offer in preference to not posting at all.
Any of us who have been here since near the sites very beginning , should be able to take it occassionaly , if we can dish it out from behind the cloak of pseudonym.... I expect Bernard not to take it personally, but don't find myself that surprised  when he reacts occassionally, same goes for Gareth and so on...I mean gosh , I ...know ...I'm not popular at all with one of the team, but that's just a reflection of society mix when your just not the right to speak. 
 After all compadre....we are just blogging at the end of the day.......some good some bad some funny some's a bit like the real world....
 Unless your a Banker...then it's all good mate.!.eh nudge

Hey Christov, what about the vitriol and scorn poured out by some of the property investors (read SK, Mortgage Belt, Your Landlord etc) about their "stupid tenants" and their gleeful boasts of how they keep upping their rents till their tenants 'squeak.' Price gouging is not a good thing, I am sure you will agree... I will continue to question the afore mentioned and their morality and their gloats... as for PIs in general, I have no problem with people making an honest buck (honest to me is a fair price for a fair profit - NOT because it's legal - remember slavery used to be legal)... I have been a landlord in the past and the way things are going in the market I will be in the future... it's the lack of humanity displayed by some that gets up my nose... and that transcends PIs to the prevailing attitude of many in business/government/leadership/banking etc "... of profit at any cost! "
ps I agree with everything else you said about the banks...

Well said General reference there to the vitriole poured on P.I.'s was largely a reflection on my own actions,  post a rant on the matter...I guess figured I wasn't alone.

Auckland property bubble, maybe, maybe not, as far as I'm concerned it's sound ( albeit obvious) advice from the FMA, NZers need to diversify their wealth away from residential property. I do have concerns for people borrowing to the max when property prices are very high and interest rates are at historical lows. Interest rates will rise, maybe in 6 months it may be in 6 years but hopefully people have calculated what the impact of higher interest rates would have on their ability to live / save / repay debt etc. Cashflow is the most important thing, asset prices go up and down but you've got to generate enough cash to roll with the cycles.