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Property investor Olly Newland says RBNZ lending limits could lead to a 'dysfunctional' property market

Property investor Olly Newland says RBNZ lending limits could lead to a 'dysfunctional' property market

The Reserve Bank's limits on bank lending might lead to a dysfunctional property market, so, the rules need changing, according to long-time property investor Olly Newland.

Newland, who's also an Authorised Financial Adviser and author, told the so-called speed limits put on high loan-to-value lending (LVRs) by the RBNZ from October 1 have created a "dangerous situation" that could lead to "chaos" further down the track.

But Newland also thought that a disrupted residential property market could lead to buying opportunities for investors - who might have a "field day".

New statistics issued by the RBNZ showed high-LVR lending, excluding exemptions, fell to just 11.7% of total new mortgage lending in October, down from 25.5% only a month earlier.

"There’s no doubt [LVRs] are starting to bite, contrary to what we all expected," Newland said.

"The banks are not only implementing these rules but they are implementing the spirit of these rules and not allowing people to borrow on their credit cards, or personal loans and so forth.

"And I think it is a very, very dangerous situation frankly, because the property market is like a giant chain and people sell and buy going around this chain and all these links are connected. People buy and then move up the chain or down the chain

"...And what’s happened now, the Reserve Bank has taken a big chunk of links out of the chain and problems are going to arise because this is not the way the market should be run at all.

“...I think we are going to end up with a dysfunctional property market if nothing is done about it."

Newland noted that next year was election year and said problems in the property market "would be embarrassing for the powers that be".

"So I am quite sure we will see the headlines over the next few months, where John and Mary wanted to buy a house and they were $10,000 short and they couldn’t buy a house and they are going to end up in a slum and so forth. It is not good."

Newland said he had heard from contacts in the market that a lot of builders - who build affordable houses - were finding a large chunk of their order book had "disappeared", because a large chunk of their order book consisted of people with deposits under 20%.

"...And suddenly, bang! They can’t sell them. And so the builders are screaming - and they are screaming - and this is getting much worse than it may appear..."

Newland conceded that he was surprised by how "harsh" the reaction to the LVR limits had been "and I think it is going to get harsher unless something is done about it".

"...I think we are going to end up with a dysfunctional market – which is very bad."

Newland said the RBNZ's rule on LVRs, which he likened to "taking a sledgehammer to a nut" needed changing.

He believed there were plenty of other things that could be done. He suggested for example a two-tier interest rate structure with one rate for home owners and a slightly higher rate for property investors.

"That would be one simple solution – and we could spend the rest of the afternoon discussing it – but I don’t think this system is any good at all."

'About to flatten'

Newland said he believed we had reached the point when the residential property market was about to flatten of its own accord anyway.

“…But to take a chunk out of the market and cause a disruption to the market is going to cause a bit more chaos down the line if we are not careful.”

Asked about what was likely to happen over the next year, Newland said the market now had "gone relatively flat" in the popular price ranges.

"...I don’t say it’s falling. It’s flattening out and hopefully that’s all it does – flatten out. So, people should be careful that they don’t assume that prices are going to rise forever – they never do, they always flatten out in the end. These new regulations are going to make it flatten out even faster. And maybe that’s not so good specially for builders and developers."

Asked what might happen to house prices over the next year, he said: "We are running a risk that the main centres like Auckland and Christchurch may flatten, while other areas such as Gisborne and Hastings and Rotorua – I’m just picking a few -  could actually fall. They are falling now. They could fall further, and this is something we don’t need."

Rate rises

The RBNZ has said that it will need to start raising interest rates from next year in order to ward off rising inflationary pressures. This week the ANZ was suggesting the first rise in the RBNZ's Official Cash Rate might yet come as early as January, 2014, while last week BNZ's chief economist Tony Alexander said that floating mortgage rates could be as high as 6.8% by Christmas 2014.

Newland said he didn't think rates would go up as much as many were predicting, given the low interest rates around the world.

"...I think it would cause chaos to the exchange rate and to companies and businesses. I think half the country could be in the street with mortgagee sales if they are not careful, if it went up as much as some predict.

"So, I think if there’s any interest rate changes they will be very minor."

As far as the lot of the would-be home buyers are concerned over the next 12 months, Newland said any first home buyer that didn't have a 20% deposit was "absolutely stuck" and going to need to rent for longer – so rents should start to go up over next 12 months if the LVRs keep biting.

'What choice?'

"What choice have they got? If a person can’t raise $100,000 minimum or whatever to buy a house – and that’s a big ask for many working class people – what’s their choice they are going to have to either live with mum and dad, which doesn't’t work out too well, or rent. And this is going to help landlords like me, that’s fine. But I don’t want to make profit on somebody who’s in an unfortunate position.

"But this is what happens when you start interfering in a market cycle."

Newland is sticking by his earlier comments that rents are due for a substantial rise.

"I’m always optimistic they are going to rise tomorrow from my point of view. But I think if nothing else changes rents are going to increase and they should theoretically double – but of course people can’t afford that because prices have doubled. But if we have pressure on the market from people who cannot buy a home and we have pressure on the market from increased interest rates then the only thing left is rental. And rentals must go up, they won’t go down."

Good for the investors

In terms of the outlook for property investors, Newland thinks that could be quite good over the next year.

"Well, if you’ve got a little bit of cash it could be a buyer’s market, suddenly, for investors and you can buy stuff to rent out because you’ve got the rents starting to make sense. It could become a real buyers market.

"So, I think investors could have a field day, which I think is contrary to what the Reserve Bank wants, so, we’ve got to watch this space very carefully.

"You should never distort the market with regulations. We’ve been through all that in the 1970s and 1980s with the Muldoon regime – distortions due to market regulations and the market went crazy – one way or the other, and we are running a risk it will happen again."

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How about this one: A family are moving from auckland to wellington to be closer to family/new job offer/better schooling or whatever reason.  They need to sell their house to buy one in wellington (having around 100k equity in house that needs to now be freed to buy  new house, no longer option of retaining as rental and leveraging the 100k to buy a second house at 5-10% lvr in welly).
So forced to sell.  Who will by the 600k property?  The LVR rules have knocked out a large chunk of people who could have afforded it. They will need to drop the price to met the new buyers market, sell for 485k to someone using 10% dep through first home buyer thing. Happens enough to weight on the metrics and Auckland will see 5% price declines over the next 12 months in the lvr stay in place (my guess for now...)

"  Who will by the 600k property?  The LVR rules have knocked out a large chunk of people who could have afforded it."
The people who can no longer afford a 900K property because of those same LVR rules, will now be in the market for a 600k property.
Incidentally the LVR rules also apply to wellington, so any loss in sale price may be made up for in reduced purchase prices, and associated with that you are losing a smaller amount of cash to the agents commission %.

Oh my goodness, it was obvious prices couldn't keep going up if you took a good chunk out of the market. The economists were saying it would impact only 1-4% on price increases which I can tell you it will be much more than that. First home buyers aren't buying, second home buyers can't sell or haven't got enough equity, investors can't buy unless they have enough deposit, and foreign buyers are spooked. The writing was on the wall months ago.

Agree.  The old 'we were getting 10% price gains, so 4% less, now 6%' models never work.
It's all about momemtum.  In my auckland price next 12 month prediction, its closer to a 15% impact, where prices on the index level (use reinz) become 5% lower than today.  Would be more but property also is sticky to the upside, and only real low sales prices will be seen when peoples hands are forced, so the impact will be diluted by the other transactions where people will still be paying too much...
Investors wont be into the auckland market anytime soon (apart from inner city apartments where yields make sense), as the ave auck property makes a massive cash loss every year as price is too high relative to rent.
Regions and in particular wellington are much better placed as they haven't experienced the recent price bubble, and yields are a lot better, so if a forced sale occurs, an investor would likely step up to take a quality property at a fair yield.  Regions are also insulated as FBH grants up to 300k support a fair chunk of property up for sale there.

An investor would go for a CBD apartment for cash flow.
A speculator would go for the landed property. 

You would rent your multi-units out to who?  If someone want's to live like that they will choose an inner city apartment so they can walk to work and enjoy the city's attractions outside of work, and use the apartment for sleeping only.
Your landed property at 2000/sqm will not be within walking distance to work or attractions. 
You are speculating that you will have fututre rental demand, thats unproven.

  • $1726.6 per sq m of land, which is what you are paying for if your plan is to add multiple dwellings.

And at 695sqm you will not be getting multiple dwellings, so NO, your future rental income will not be multiple of what it currently is. If this was 800 sqm then would likely sell for around $2000/sqm just for the land.
Thanks for your example tho, proves my point.
At 1.2m, all borrowed (against other equity), your paying 72k (take 6% int) a year interest, take 80k after rates, insurance, maintenence.
At 5% rental yield, you'l get 60k income.
Congratulations on your 20k p.a gauranteed loss.

  • I buy 1.2m of inner city apartments returning after BC's and rates 7.5%; 90k revenue.

90-72k interest expense = $18k profit for leveraging 20% of my equity, i.e $240k, 7.5% return on investment.  Any capital gains are a bonus but not needed to make the investment make sense.
BC maintains building and common areas, easy for me as I have better things to do than paint 150 sq m of weather board during my summers.

How did you come to own the land already?  How did it not cost anythign? You inherited it?  

Agree the cost to purchase something you already own is zero.  That doesn't mean it has no cost.  How much could you sell it for if you subdivided?

Zanyzane ... not sure that u are comparing apples with apples..
If I was thinking of buying an apartment and I wanted to compare, I would  divide the 1.2 mill by the size of the house...not the land... ( apartment dwellers are not interested in the land)
this gives a cost of $8000 /sq mtr..   for the Mt Eden home vs $4-5000 for apartment
I'm not saying that this is the way  to determine value....   but that things are not as simple as the way u figure.

Costs to knock down the house on the landed property and building the dwellings?
Still going to be less than 4000/sq m once your finished?
You're property developing and speculating, not investing. 

Im not a property developer, but DBH shows costs of around $2000+  per sqm to build.
You pay 2000/sqm for 800 sqm of land, and another $2000 per 800 sq m to turn the land into inhabital units/apartments, and your right back at $4000 per sq m what I could be paying for a few inner city apartments.  Buying in a big building gets me advantages of ecomomies of scale for maintence etc.  And the main point, my apartments are where people want to live, walking distance to work and leisure.
If you paid $2000/sq m for your landed property you have already paid for that future potential to add multiple dwellings, and the building.concenting costs to actually make the dwellings on the land mean its costing you more, for a style of accomodation that only suited to the inner city.

You have just given a very poor definition of investing.  'add value and increase the income'.
In their 1934 classic text, Security Analysis, Benjamin Graham and David Dodd provided a general definition of speculation: "An investment operation is one which, upon thorough analysis, promises safety of principal and a satisfactory return. Operations not meeting these requirements are speculative."
Slightly better defintion from the man who taught warren buffet.
Property developing is what you're doing, you fail the investment test as your invested principle is not safe when you pay such over inflated prices for auckland property that only has future potential income after development to justify the price paid. 
Suggesting my maths is poor (it's actually my spelling and punctuation that's really terrible) tells me your maths must not be very good (was it dad or a teacher who gave you grief over this?).

I've got a few apartments and they're just fine as investments.  Even with 100% borrowing they are positively geared and if you get the right one, in the right building, there is some capital gains to be made also.  Beaumont Quarter and Precinct Building on Lorne Street are both quality buildings that have proven to have the right blend of owner occupier (so capital gains) and well geared. 

If all landlords do that, we'll have an excess in supply and rents will fall. You're assuming demand will also increase.

Denial, Anger, Bargaining, Depression, Acceptance.
We've had the denial phase, we're now into anger with a touch of bargaining (perhaps a two tier system etc.).
Olly is obviously suffering from a bit of grief that the property party is coming to a close and his portfolio might stop growing at 10% a year.
The solution to the affordability problem is for prices to fall. 20% of an affordable property (3 times income) would only be 40-50k - much easier for the average couple to save towards.
Rents aren't going anywhere, they're controlled by ability to pay, not the landlords demands.

Spot on. If a FHB can't save 20% they shouldn't be buying anyway. Graeme Wheeler is to be applauded.  The sad thing is if prices do drop to anything like reasonable levels he will be  demonised by vested interests like Olly.  Of course the whole thing would have fallen over spectacularly anyway at some point.  Speculative bubbles don't "flatten out", they go pop and ruin the economy.


I bought my first property when I was on an unemployment benefit.
How the hell on an unemployment benefit do you think I was going to pay rent and save a 20% deposit???

Just what kind of income range are you demanding your house owners to be?  And what kind of poverty slaver do you have in mind for the rest?!!!

And here we have the problem, straight from the horses mouth.
I was going to say something else but that would have been against Government and Site policy.

You miss the point. There is no way someone in Auckland on an unemployment benefit could purchase a house today, because prices are crazy!
If prices were closer to historic averages your average Kiwi would have a chance. At 7x income or higher home ownership levels will only continue to drop.
I don't have an issue with a ~10% deposit per se. I have an issue with a 10% deposit coupled with a $600,000 mortgage while interest rates are at historic lows, and house prices are at historic highs.

All credit to Olly for acknowleging that first time buyers are being screwed in favour of property investors, especially given that he is a property investor.  Given this, what possible excuse can the Reserve Bank have to keep the scheme in its present form.  As others have said it is generally a good means of targeting property prices without puting the currency through the roof.  The problem is that it is poorly targeted.  We need lower restrictions for first home buyers and new home builders, and much higher restrictions for property investors and speculators.  Overseas purchases need to be totally stoped and existing foreign owned property taxed at about 2% of the capital value.  
As always we need a free and open market in the supply of land and building materials plus a capital gains tax.

Why blunt the tool? It's already proving to be effective. If prices come down to an affordable level over the next few years the 20% deposit won't look like such a mountain to climb for first time buyers - especially with schemes like Kiwi saver.
Totally agree that foreign investment needs to be brough under control.

?? rjf?

"proving to be effective"?

At what pushing out the low end homebuyers and FHB, and replacing them with a higher bidding customer.   Prices for like for like haven't come down, they've gone up; with the only lower prices being from motivated sellers forced to take under market value from a investor as the low end competition don't get a look in any more.

At what pushing out the low end homebuyers and FHB,
Buying is the wrong term - the local bank depositors have a bigger theoretical stake when so called buyer's deposits are less than 50% - let's be clear at 80%+ LVRs banks are documenting speculators, not FHB.

yup. but most people don't have the position to get the perspective to see it, thus helps to spell it out :)  Thigns with 80+% speculation is you're really opening yourself up to a lot of risk - a big speculator with 20mil exposure gets hit with a 1% interest increase is going to have to have reserves somewhere.   A FHB, if they haven't really overextended themselves (and at 90%, over 25yr, they don't really need to) might be out an extra $10 a week.  harsh but not big.

A big speculator going for 95+% across a whole portfolio is really asking to fail. as any one of those places could have an incident, pushing them past the edge.

Less demand means lower prices. You can't remove a significant chunk of potential buyers and expect prices to still go up at the same rate. The LVR change should turn sentiment a bit negative which will also impact the market. It could even spook foreign investors.
I don't expect an immediate fall in prices, there will be some initial stickyness with sellers refusing to budge but eventually they'll accept reality and we'll see lower list prices. Good news for first time buyers!

no rjf.

Go recheck the rules for elasticisty of demand.
The buyers that have been removed are small end and new entrants, weak (thin) forces in the market.
The remaining buyers are qualified and much harder (less elastic) but also much deeper.

Foreign investors are able to take extremely longtime positions, thus they will happily sit for 20 - 50 yrs, as long as they don't liquidate they don't lose, and being more savvy than many NZers, they'll be leveraging their security in other markets - remember they're only paying 0-2% for their loans so that's a lot of years interest lost if they sell vs  just waiting it out.  and if prices were looking like falling, they can just pull in more 2% loans to shore up their portfolio.

LVR won't turn sentiment negative (except for FHB, who aren't in the market yet, so don't count).

<le sigh>What you might see is poorer properties on the books for longer.    But unless there are motivated sellers, things won't change downwards.  Instead bigger holders will take longer positions, knowing that because the FHB market is harder to enter,
  THE RENTAL DEMAND HAS RISEN (and become more captive!)  thus rents are likely to rise, with property values following.........


I've heard investors bemoaning emotionally driven first time buyers bidding houses up to silly prices at auction. That won't be happening as much, settlement prices will be lower.
We'll see what happens early next year, I have a feeling you won't like it.

Yeah investors are like that, but then if that's what the market is worth to the FHB (and it is) then that's the market price.   Thing is the investors don't like to compete, and do like to moan about not getting easy scores.  Now they have to compete against each other and foreigner bidders.

Hey if the market goes down, I'll be happy as pig in mud.  I'm currently over 50% equity, so I could do with some bargin rentals to push out the portfolio.

Used to see the same thing at the car auctions with all the dealers trying to snatch great deals.

We already have a dangerious, dysfunctioanl market, doing a LVR restriction properly would correct that.
Doing it too fast however will collapse it.
So be safe (not implode) I think from Steve Keen's work 1 or 2% per year correct. So If the change is 95% to 80% or 15% in one year/step that suggests a huge impact.
The problems seems to be I suspect the RB hasnt accepted the property market is already x2 and over-blown.
Could be an interesting quarter or 2 as we wait for the data to tell us.
Maybe someone at could ask Steve's opinion on this?

I think it should not be forgotten how much it costs to build.
The prices have risen to approximately $1800 per sq m since the article was written.

From the REINZ-RBNZ house price index on this site, if we work from the turn of the millennium: House price peaks were Nov 03, Nov 07 and Oct 13 (current) and troughs were Jan 02, Jan 04 and Jan 09.
House price inflation between the Nov 03 and Nov 07 peaks was 53.5% - and the deflation during the trough inside that period was 1.7%.
Quite a different story when you look at the inflation between the Nov 07 and Oct 13 peaks, as that was only 13.5%, whereas the deflation during the trough inside that period was 11.4%.
In other words - since 2000 - capital growth during booms decreased markedly and the capital loss during busts increased markedly.

"...John and Mary wanted to buy a house and they were $10,000 short and they couldn’t buy a house and they are going to end up in a slum and so forth. It is not good."
Ummm... bank loans are not charity. You need to have a sufficient income to be able to pay it all back plus interest. Loading more debt onto people who cannot afford a house does not solve anything. Isn't the true issue here actually that our incomes are not sufficient to pay for the high standard of housing that we have set for ourselves?

Doesn't work that way - due to the fact that living beings have to live somewhere.

The loan cost money to get.  (Interest).
By purchasing a fixed asset (first home and using it for personal accomodation) that living cost is transferred into debt servicing the loan.   The money that was paid into rent pays some of the interest,  meaning that the FHB now only has to personally cover the remainder of the interest and the principle. 

This is the process by which the consumer can turn their consumption cost (rent, needing housing) into reducing expenses (interest service).   Even if the rent only covers a portion of the interest owing, it reduces the _interest_cost_ (% interest) of the investment.

And that ...which strangely you don't read in any of the mags & how it works.
Now I've put it out there publicly, watch the institution investors try to close the market....

The point was there will always be a % of the population that cannot get a mortgage, unless you want to do NINJA loans?
Sure you convert rent but you also then take on the risk of a loss.
15 years ago that was probably sensible, today IMHO crazy.

It's still Contracts For Difference.  No matter what the underlying asset price is.
using your rent to reduce the buyin price?  good plan.

You've lost me - what doesn't work what way?
Also confused about which part of this is supposed to enlighten everyone?
You may be getting confused with the term 'rent'. If you buy a house with a loan, then you pay principal and interest. If you live in the same house you are therefore not paying rent anywhere else. You may decide to set yourself a rent on your house if you are so inclined, which once paid to yourself can then be put towards your P&I cost, however the net effect is no different.
The principal part of the payment can be considered savings, as you are paying your house off. The only other variable here is the fluctuating market value of the house, whereas if you are renting you need to save and invest in other areas.

If you buy a house with a loan, then you pay interest.
you don't actually have to pay principle.

However, you do have to pay the interest.  That is rent on the money borrowed.
Also you lose opportunity cost on the equity you invested, and you've commited some of your leverage-ability.

But the rent you were paying, will be linked to the landlords idea of what that property was worth.  Which is linked to the "rent" he pays himself for use of his mortgage and his equity.

When you purchase an asset (house; value of return, accomodation; future value: resale) you will be paying for it, yes.  But it's a CFD instrument.  What is its cost vs return now compared with it's cost vs return at times in the future.  If you resell on the market, you will get a percentage of your principle back, therefore you haven't actually paid any principle (on the CFD - it effective reverses itself).   If you keep the asset then you have full equity and all your principle is tied up in that until it's liquidated or lost - so you still haven't repaid principle it.

So you're not buying P+I.
You're buying I.   But your market orientated rent payments already do this with return=0 for you while you're living in someone elses property.  The question then, is how much is the cost of I, when you purchase your own property.  The value of the assets return vs the difference between I and previous rent.   That difference, is your cost or your investment; depending on how you can afford to improve your asset.

If that's why they acted then that would be really bad of them.
Thta the same for any investment - The cost recovery of principal is the first concern, can't show a positive yield if you don't get your principal back....

I get your point, it's just not correct.   Or if it's correct (about RBNZ acting to block capital investment) then it's really bad news....

not really.
the 'rent' that you were paying, if it does not cover all the interest expense, then you are not better off.
And you forgot about rates, insurance, maintenence.
Simply does not make sense to buy property when it is as expensive as it is in auckland.  Unless its an apartment, where your 'rent' you were paying will cover all interest expenses, and rates and BC's, and some principle.
In this way, your rent is reducing your interest cost expense as the priciple is reduced.

No Simon, that's the outsiders view.

The rent is an expense, gone each week.
Interest is the cost of renting of an asset (cash).

The rent doesn't need to reduce the principle.  Ideally it might, but if that the case, then in theory, you're over-capitalising.

When you make a purchase of this nature, you're looking at the value of the work returned by the asset (somewhere to live).  Either you can buy straight up, or you have to rent someone elses equipment to do the job.   buying straight up, is purchasing your own tool - is that the best usage of your capital/equity?  Normally no.

In the example of rent not covering the whole interest - which is normal - because if there is an effective immediate cashflow positive situation then it is very likely you will be rapidly outbid by an investor (or anyone) willing to take a fraction higher risk for longer term plan.
  So if you can cover 80% of the interest with your old rent money; then that's one rental expense (re:home)  covering another rental outgoing expense (re:cash loan).
 Which means you are now having to service 20% of the interest price for usage of the cash to buy the investment.    As in investor (in your own future) you need to weigh up how much leverage you can buy and how fast you want to do so.   The big bonus is that you now have ownership (control) over the market for that property - i.e. you can convert it to a cashflow positive investment without another bidder trumping you out.     So that's your investment - how long you're willing to pay that extra 20% + how much and long it will take to return some of the borrowed cash until you get into the grind.
And remember - if you're bidding then you're bidding against people willing to make that investment....

So you are saying people are seeing a house as a CFD, where they are happy to inccur a real expense involved in using the banks money for a period of time while the house goes up in value?
This is speculating in property, not investing in property.
But I won't argue that it appears this action is the only logical reason why auckland house prices are where they are.

"people" aren't seeing them as a CFD.  They are a CFD and that kind of investment mindset is what you have to do if you're going to compare investments.

The real point is, that you're never going to find a retail P&I deal less than rent.
If you shop around, and have a particular property type you're good at, you might find a private deal occasionally - but that kind of deal seldom ends up in the hands of a FHB (unless they've got friends in the trade) and opportunities like that have lifespans of hours not weeks.

So for a modern buyer, you've got to develop your own cashflow positive / rent vs P&I opportunity.    To do that you have to know what you want and how much you can afford to pay for it (and of course how much risk you can wear doing it).   For the FHB, just getting some affordable equity under your belt is a big deal...but no point selling your soul for it.

I like to think of it as an Option.
A deal for P&I is worth $X, in 17yrs it will be best paid off, and in 3-5 it will be holding what kind of value, and service what kind of debt ... in FHB world, that's how much principle will you be able to comfortably paydown at  yrs 3 - 5 (after crossing the P&I /positive cashflow line).
 That will give you an idea of what it's worth to pay above P&I to seal yourself that deal (ie That's the value of the option).  More than that, and you're blowing cash and thus better off renting.

The thing with the CFD approach, is even if you don't sell up - and you never should! - the asset still has security value, and represents those funds tied up.  Each morning you effectively buy the property from yourself...right up until you think why have I got this value tied up.  And if you can't answer that question then you'll start wanting to liquidate it...

Buying a house is not like buying a contract for difference, it's the otherway around. Buying a contract for difference on realestate is buying the financial properties of home ownership, but without having to actually own a house.
When you buy a house you definately end up owning a physical house, with all the disadvantages that entails. Therefore very clearly buying a house is not like a buying a CFD
"An arrangement made in a futures contract whereby differences in settlement are made through cash payments, rather than the delivery of physical goods or securities."

you're mixing up your underlying physical asset with your investment paper.
Common mistake.

You can't utilise the tools of investment and finance if you put the asset in the mix.  Whole point of my original post.  Most people "buy the house/farm/cow/pig"  rather than separate the physical "services" they purchase, from the financial transactions and transactions they're making.

Paying "rent" is a purchase of a service.  (one which the rental service market segment monitor)

Paying "interest" is an investment choice.

In making the decision it is good to change the "rent" expense, to an "interest" investment.
As making investments is good, and paying expenses is bad.

Can you please explain how purchasing a house does not involve a physical asset?
CFD do not involve purchasing a physical asset.

first you explain how you purchase a house without a financial transaction.

Did you get this cr#p from an property investment seminar?
I look forward to bailing you out in the future. Said no-one. Ever.

No. It's what I've learnt being a property investor for 10+ years.

and you??

First home buyer here.... I never hear property commentators like Olly talk about how high prices make it hard for first home buyers?  This is essentially what the RBNZ is trying to target with this policy and I commend it. I'd rather have to save an extra $50k, then suffer from houses going up another $50k whcih will cost me $100k in the long run with interest.
I cringe when I see my freinds leverage themselves with 95% loans and get them into a situation where they can't go out, go on holidy, afford car repairs, have kids and rely on handouts from family & friends to get them through. At least we finally have someone as sensible as Wheeler in NZ.
"About to flatten of its own accord" - Olly said only a few months back that prices were going to double! All these guys want are perpetual capital gains which is slowly destroying my generation.

"how high prices make it hard for first home buyers?  This is essentially what the RBNZ is trying to target "

No, the RBNZ is trying to prevent the banks going bust when the housing market crashes.

That it may reduce house prices is merely a pleasant side effect.

Better to save than be stuck with so much debt that having kids or upgrading in the next 30 years isn't possible. I must have unrealistic expectations. The boomers tell me "it was terrible in my day, we had to buy 15 minutes from the city when prices were 3x income and endure 17% interest rates for a few months" /sarc

In stocks, if prices change without big volume to back it up, then the change in price is not given much respect.
In property terms, less than 3% of housing stock sells per year, and these sales are used to value the remaining 97%.
Unless your property is able to return rent that justifies the value of your home, then it is likely a correction will occur at some point.  I recon now is as good a time as any

Stocks aren't being used, nor do they require maintenance.
The property trade, only really 5% of the entire underlying asset is liquid.  10% if you want to rock the boat.

And yes it's not good that these trades are used to set the asset price of the non-liquid portion but that tends to be the way it's done.  That's why if 3% of the 5% available chage then it's taken as significant.

With stocks, a price spike of low volume is not "normal" trade, it's someone wanting control or buying out partners - that signifies special interests that aren't market paper related.

If we’re all giving our predictions I might as well throw mine in there.  RBNZ’s target national house price inflation rate is 1 – 3%, Auckland is currently running at 15%, most regions somewhere between -5 to +5% giving a national average of about 8% yoy.  If RBNZ are going to use macro tools (namely LVR and OCR changes) it is safe to assume that the effects will be broadly similar across the country.  To bring the national average down say 5% to 3% using macro tools it's safe to assume that Auckland’s rate of increase will go from +15% yoy to +10% and the regions will all have flat to -10% yoy falls.
Then 10% figure for Auckland is conservative; if rents go up and interest rates increase there will be an increase of investment (both foreign and domestic).  A combined yield of approx 13% yoy (capital gains and rent) will still look attractive to most investors, especially foreigners who will also gain from a increase in the NZD resulting from increase interest rates.   

"  If you resell on the market, you will get a percentage of your principle back, therefore you haven't actually paid any principle (on the CFD - it effective reverses itself)."
So what you are saying, is if i buy say shares, and then later sell them, i never actually bought them, but rather i bought a contract for the difference in value between when i bought and when i sold.
In that case, what do you call an actual contract for difference, now that you are calling the underlying instrument a contract for difference.  A contract for a contract for difference?

Just about everyone writing here is missing the point . Anyone who thinks house prices will fall 20% or that buyers will disappear is in for a rude shock .

  • We have Mortgages at 4,95% p.a which makes ownership cheaper than renting
  • We have migrants arriving from China and South East Asia DAILY by the Planeload  and they need a roof
  • We have Len Brown who is totally unfocussed on anything but housing and he refuses to allow Auckland to grown beyond current city limits.
  • We encourage land Banking by those albe to afford the holding costs  
  • We discourage subdivision of sections by ordinary homeowners , by rorting them for fees
  • Prices are set to go NORTH in 2014  , albeit slower than before

One cavet on that Boatman, we won't have mortgage rates at 4.95% over 2014, but admitedly only modestly higher on average over that first year, and unlikely to make alot of difference in that year to the market unless it knee caps confidence - probably not on past history although leverage is now much higher

Boatman, I've spent years, literally a couple of years now, posting similar comments.  No matter how many times you remind someone about the rules of supply and demand and it's effect on prices, it seems to fall on deaf ears.  Ostrich, head, sand approach. 

Where does this idea that buying is cheaper than renting come from? Where I live, I rent for 21% less than owning the same house even when comparing with a 20% down 4.95% interest-only mortgage over 30 years.

buying is cheapier than  renting because after a certain number of years your cashflow improves.   Also a significant factor is that if one buys "now" then in "now+10yrs" the rents will have gone up, but your mortgage will have stayed the same or gone down.  
Also in buying you have the opportunity to subsidise yourself into an investment position where some of your "rent" starts building equity reserve.

For the rates, insurance, repairs etc your landlord is going to pass those through to you well as his legal, commission and interest costs.  Basically all the costs of ownership.

For most young people, renting is the better option.  The costs involved to get to gaining equity outweigh the advantages and they are fluid in their location.  

However, the sooner one starts paying down a little principle, the sooner one can start compounding the savings, and building an asset to use as security.

Later in life 30yrs after starting the mortgage, you should have the mortgage either paid off, or taken abnother cheap home loan to invest elsewhere (it's one of the cheapest forms of borrowing). So in that 50-60yr old bracket, do you want income with no rent outgoings?  Especially useful when you retire.

Yes, because the proprety market was so functional before LVRs.

To all of you who think it's going to keep rising, in the barfoots auction rooms this week on the north shore only 13 out of 58 actually sold at auction, 6 sold at preauction, and 3 sold on auction day after the auction. The rest passed in or had no bids. There are more and more for sale by negotiation on trade me. It may be a temporary blip, but it is definitely having an impact.

Excellent, look forward to property price/value falling/flatlining.
As then interest rates will drop, as banks worry re asset values.
If property drops - theres no way interest rates will hike. 

Except the follow on of  severe recession wont I would think light your fire....not unless you have huge wads of cash.

@  cowboy | 29 Nov 13, 1:16pm In principle this may be of interest, but your principal principle should be to distinguish between an economic principle and the use of principal as it applies to interest.

go and stand outside the principles office and see what he/she office you. Should be interesting - after all, at the end of the week one should be intoresting.

Principal's office

not interested :)

lol. yeah keep correct myself the wrong way on that one.  Usually discussing principles (and typing principal there instead...silly Engrish Languge!)

Ollie says prices may flatten??? Wasn't this the clown who predicted a couple of years ago that prices would double "within a few years"????

They almost have doubled in some central suburbs in Christchurch and Auckland for character homes on full sections in desirable quiet streets.

All predictions are subject to change when unexpected events occur.
If Olly gets half his predictions right he would be better than all the others who comment on the market .

I don't think it took a rocket scientist to know something would be done to calm a potentially catastrophic boom

Can you provide link to the data to confirm that 1.6% figure please.

The link to the source of those figures please?

REINZ figures show for the auckland region prices are up 31% in the last 5 years.
October 08 435K
October 13 570K
Where do you get 1.6% from?

Sorry, that's last months figures.
Nov 08 430K
Nov 13 582K
up 35%

Why are you using pre credit crunch housing prices as a benchmark like its a good thing? There are similarities between 2007 and 2013 in that there has been unrestricted lending leading to price bubbles. It has also only been 12 months since banks have allowed 5% deposit mortgages for investment properties, prior to that it was much more restrictive. It's only been about 18 months since banks have even been allowing anything less than 20% deposit mortgages and we have seen a huge price increase in that time. House prices are around 7 times household income, surely unrestricted bank lending fuelled price gains should not be used as a benchmark?

I thought i'd quote the auckland figures because you were focuing on Auckland. "Matt in Auckland. What catastropic boom? In the context of the last 5 years the average increase is around 1.6%. It is a recovery. " 
 Allot of people on this site seem to play loose with the figures, so i thought i'd do the readers a service and correct your figures which are about by a factor of 4.
2 years, acukland city Oct 11 516K, Oct 13 680K. 32% increase.  That's not sustainable.  Median price will be $2.6million in ten years at that rate, but median income and rents will not support a mortgage of that size.
It's just a question does it flatten out like after the last boom, or does it go pop?
You can say 32% increase is a recovery after 3 years of flat lining.  Or you can say 3years of flatlining was a recovery in affordability after the last boom.
Either way 16% per year for two years is an unsustainable boom.  Remember this isn't one companies stock price out performing the market, it's the median price across all of Auckland City.

Name me one NZ bank that lends money using Xero shares as security.
If you think the RBNZ is scaremongering; you are going to be really squealing mid next year.

So what?
Why would that overly concern the RBNZ compared to the AKL housing market, as the banks have not lent money on them.
Who EXACTLY are the beneficial owners of these Zero shares?
Note, I asked beneficial owners, not nominee owners.
BTW, NZ ownership of Xero is MINISCULE compared to residential mortgages.
That is why RBNZ is concerned about one, not the other.

The collapse of Xero will have next to zero impact on the wider economy.
The collapse of the whole sharemarket would, and regulators take an interest in preventing that.
The collapse of the property market will have a massive impact on the wider economy.  Especially if the banks have leveraged themselves so much that a 2% drop in values bankrupts them.

Totally agree, the only people who would lose in a collapse in Xero are pepole who can probably afford to lose it anyway. Another Rakon. But then again, it is doing pretty well, so cheers to those onboard, i would have been one but missed the boat and now the ticket price is too much.

Your quote:
"NZ investment funds which would include a lot of our banks would have to reweight their portfolios to be more heavily invested in Xero."
Name me one NZ Bank that is heavily invested in Xero with their own funds.
For the avoidance of doubt I am talking as beneficial owners; not as nominee owners ( custodians on behalf of other investment funds)
Your 1.6% figure comes from where exactly ?
(Even the NZ median OCT 08 - Oct 13 is 21.6% increase over that 5 years)
I note however your 9:04am post  refers to a 16% increase over 12 months.
This is an Auckland figure is it not ?
Yet when dtcarter shows your figures as incorrect you suddenly suggest NZ wide.
(still 21.6% over 5 years on my calculation)
Can you show that your bank / xero suggestion is any less made up ?

So, you admit you made up your housing figures ?
Now, for the 4th time, you mention $27.
I"ll leave you alone with your "figures" now.
I doubt whether the RBNZ will be, or should be, as concerned as you pretend to be.

Dysfunctional Property Market Olly...? what exactly do you think it is right now..? 
You mean could lead to causing dysfuntion to your subscribers I think.
 In the run up to the Sub prime collapse your American counterparts thought it was all going along just fine, funtioning normally, until it wasn't.

If you had listened to the interview he said it could lead to a disfunctional market.
The over heated market in Auckland carried the seeds of its own demise without any outside interference and would have flattened on its own- as it must.
Now the risk is that the market may become even worse than just a natural flattening.

For those who have been convinced  by property investment experts into  borrowing more than they should are likely becoming increasingly concerned.
A transfer of wealth from the over-indebted to the cash rich.
Happens in every cycle.
Some are about to experience it for their first time .
Others will welcome the opportunities that are thrown their way

This recent bubble could have popped in a stiff breeze, based on any fundamental you look at.
At least some FHB's have been saved from the hell of negative equity?
Fear is a more powerful emotion that greed. Watch it take hold.

Yes indeed but as a tax payer hold onto to your wallet because the expectaion will be the tax payer bails out the depositors etc etc as the neg equity makes the banks insolvent.
Really bailing out the bwankers has given ppl the expectaion that they too will be bailed out, that leaves the last man standing unable to bear the weight, our children.

When I got my first mortgage 25 (mumble mumble) years ago, I needed 15% deposit and my repayments couldn't exceed 30% of my net income. I also needed to reduce my credit card limit. These were requirements of the mortgagee bank, not the government at the time.

All the RBNZ has done with recent LVR restrictions is partially wind back the clock returning to some of the credit risk policies the trading banks use to implement on their own accord.

The banks can only blame themselves for the RB implementing it's LVR policy. It's the banks that have relaxed their credit risk requirements, but it seems it's up to the RB to recognise the implications of the banks' actions and implement policies to prevent potential damage to the wider economy should these loans fail en-masse.
And Olly, you're well known to have a significant interest in the property market, stop trying to use your influence (?) on this website to talk up the market for you own personal gain.

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