Major fall in Auckland house prices only likely if all of foot & mouth, Rangitoto's volcano coming alive and houses being built at half current prices happens, BNZ's Tony Alexander says

Major fall in Auckland house prices only likely if all of foot & mouth, Rangitoto's volcano coming alive and houses being built at half current prices happens, BNZ's Tony Alexander says

Auckland's housing market isn't the biggest threat to the economy because an "apocalyptic scenario" is unlikely to occur unless a combination of an outbreak of foot and mouth disease, Rangitoto's volcano springing into life, and houses being able to be built at half their current cost occur, says BNZ's chief economist Tony Alexander.

Alexander says this in his weekly overview, adding a significant fall in Auckland house prices is unlikely given a shortage of housing supply and population growth.

His comments come after the Reserve Bank, in its bi-annual Financial Stability Report last week, warned of a growing risk of a sharp correction in Auckland house prices painting a picture of housing in the City of Sails as the biggest risk to the country's economy.

"A number of people are saying that the biggest threat to New Zealand’s economy is the Auckland housing market. This is not correct. A threat has to be assessed based on the probability of its occurrence and the apocalyptic scenario people postulate of prices falling over 40% is very unlikely to occur unless we get a combination of foot and mouth, Mount Rangitoto bubbling, and a technological discovery allowing houses to be built for half their current cost," Alexander writes.

He suggests the "common expression of fear" about Auckland housing is driven by several things. The first is the failure of prices to stop rising and fall as "99% of people" have predicted since 2008.

"The desire to one day be right and the inability to understand why they have been wrong leads people to assume unsustainable unpredicted forces have been at work and eventually the truth will come out and past wrongs will be righted," he says.

Secondly, impatience from a Reserve Bank that has taken its eyes off the ball by letting an asset market surge to an extent central bankers decided post-Global Financial Crisis wouldn't be allowed to happen again.

"They are struggling to develop and implement new weapons to influence the housing market now that changes in the Official Cash Rate are off the table because of entrenched low consumer goods and services inflation," Alexander suggests.

Thirdly, concern about worsening housing affordability for young people. This, he suggests, is leading to a "misplaced leap of logic" that because young people are supposed to be our most valuable asset and because something's happening that makes them unhappy, this will eventually be removed one way or another.

"Don’t know how but worldly or other-worldly forces will eventually gallop over the brow of the hill and save the day." 

Fourthly, a desire by many frustrated buyers for a price correction so they can purchase and make a future capital gain.

"You may recall that in one of the three surveys I used to run I would ask respondents to indicate whether they were happy or sad that house prices were rising. A majority were happy. Remember that as you lobby politicians to implement measures which will lower house prices and cause voters to opt for the other party," says Alexander.

'A Muldoonist nightmare'

Meanwhile, Alexander also says it's "highly likely" that under a future government the newly introduced two year bright line test for capital gains tax will be extended to five years, then seven years, and eventually 10 years. Furthermore he expects the Reserve Bank's new rule whereby Auckland property investors must have a deposit of at least 30% to get a bank loan, will be extended to other parts of the country if house prices there deliver price rises that "start to scare them."

"This is an example in fact of the way in which the Reserve Bank is outright experimenting with non-OCR tools to influence bank housing risk. They will be wondering how messy the 30% tool will become if they need to extend it to other regions. Will they stick with 30%? What about 15% in some, 45% in others? It could become a Muldoonist nightmare," says Alexander.

"Oh, and be ready for Auckland’s 30% to be boosted to 50% if that market reignites in the New Year. Trigger? When the Chinese economy stabilises, growth lifts, and the Beijing government relaxes rules on private capital outflows in order to achieve their goal of making the Yuan a truly global currency like the US dollar. They will have no choice in relaxing the capital outflow rules if global acceptance is what they want. Timing of such a thing is however anyone’s guess," Alexander writes.

"Remember how so many people ascribed foreign Chinese as main players in soaring house prices? I have yet to have a single person say to me that the sharp lift in dwelling sales outside Auckland and upward pressure on prices is being driven by foreign buyers let alone a Chinese hoard (sic)."

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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I guess he is wearing his bank PR hat rather than his economist one with these comments?

10
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Seriously , does everyone in the Beehive think all Kiwis are stupid or what ?

We know exactly what's going in Auckland .

Politicians need to start calling a spade , a spade and not try to bull$&1t us by calling it something else .

As long as Government immigration policy continues on its present course , we will have a constant flow of new immigrants all of whom need somewhere to live .

So they should just shut up , because there is no way in hell prices will fall dramatically while we increase the population by over 1000 a week with new migrants

A good start would be stopping the "large investment" category of immigration including residential property as an investment - or make it only investing in new builds.

How is an investment in property beneficial to the country ? How about these investments not being property based at all, business only.

Excellent! I should just email my comments straight to Tony and cut out the middle man.

So now that we are starting to agree that all the demand-side interventions are not going to have any noticeable impact (and, in fact, likely to morph into Heath Robinson/Rube Goldberg complexity) perhaps we can get some supply side action from the government and Auckland Council. There aren't any more blind alleys left to wander down.

It's like saying that the stock exchange never crashes, or the NZ dollar falls, or there are never any financial crisis. What goes up will come down. I suspect prices will stagnate and fall a bit, but over time the inflation will deflate the market. Many of the houses are low quality, built to low standards. I mean it is a bubble,there is no other word for it, and bubbles either pop or deflate and go saggy.

Well that's a relief! Only an apocalypse can cause a property bubble to burst.

Didn't see an apocalypse in California in 2008-09, didn't see lots of houses being built, didn't see the cost of building a house change (much) - all I saw was appalling prudential standards and credit drying up. Yes Auckland is different, but how different? Life is awesome when everyone has a job.

Why is it that the a house price can increase by 25% in a year, without any change in the underlying asset and not go back down by 25% ever again? The answer is it can, it's simply a matter of whether circumstances do/don't occur that cause it to happen.

Also, in a major property downturn the cost of building a new house does decrease materially, because the value of land decreases materially.

Completely correct ZP.

There have been many markets crashes throughout history and no apocalypse was required - usually just greedy bankers.

Tony is a sellout and nothing more than a mouth piece.

Of course the Government has been warning of apocalyptic outcomes for Auckland house prices for years now , but as long as they pack people like SHADINGYU into Auckland constantly , there can only be one outcome , and it will not be apocalyptic for investors .............. unless ...........they stop

Headline could easily be 'As long as we keep pouring on gasoline then the fire probably will keep burning.' Who would've guessed?

But since we already have had enough 'foot in mouth' disease cheap talk and cheaper solutions to housing affordability as the price climbs even higher,

and house prices have been 'erupting' at volcanic pace,

and Yes house (land) prices could be dramatically lowered by legislation (RMA reform next year),

maybe the apocalypse ain't that far away.

Population growth seems to be the only thing keeping the snowball rolling, and there has been very little consultation or discussion about how much or how fast that should be happening. I disagree that the house market is not a cause for concern, way too many eggs in that basket..

Excellent, keep doing what we have been doing and nothing will change! Banks at least will be happy.

Did anyone really think it is going to be apocalyptic? I don't think so. Just a slow down and long term shallow slump surely?

Tony has been rather stupid in using the word apocalyptic as it is such an emotive word. There is no doubt there is a change of mood in Auckland. There is enough evidence of that happening. Where it will end is hard to guess at this stage. I have never been impressed with Tony as he has consistently pushed the buying of property which of course he has to do as he is employed by the BNZ. In my opinion the economists in the other banks have been far more balanced and honest with their views. You know he is always going to take the pro property stance so you do not give him too much time. The BNZ have made a lot of money out of housing loans so they are not going to do anything about him. Just like they pushed swap loans as they were all making very good commissions. The banks are not as squeaky clean as some people think.

The economic consensus never really 'predicts' financial calamity (at least not in time for it to still be a prediction), or else it would be more of a leveling, arbitrage type situation than a calamity. When it happens, Tony and his mates will know. Although I can hear the excuses already, "well yeah of course under these circumstances, but nobody could have predicted this!"

Well said Tony Alexander, finally some common sense and surprisingly honest for a banker

Secondly, impatience from a Reserve Bank that has taken its eyes off the ball by letting an asset market surge to an extent central bankers decided post-Global Financial Crisis wouldn't be allowed to happen again.

What are you talking about?

Ben Bernanke specifically stated: -

In using the Federal Reserve's balance sheet as a tool for achieving its mandated objectives of maximum employment and price stability, the FOMC has focused on the acquisition of longer-term securities--specifically, Treasury and agency securities, which are the principal types of securities that the Federal Reserve is permitted to buy under the Federal Reserve Act.3 One mechanism through which such purchases are believed to affect the economy is the so-called portfolio balance channel...

Thus, Federal Reserve purchases of mortgage-backed securities (MBS), for example, should raise the prices and lower the yields of those securities; moreover, as investors rebalance their portfolios by replacing the MBS sold to the Federal Reserve with other assets, the prices of the assets they buy should rise and their yields decline as well. Declining yields and rising asset prices ease overall financial conditions and stimulate economic activity through channels similar to those for conventional monetary policy.

Large-scale asset purchases can influence financial conditions and the broader economy through other channels as well. For instance, they can signal that the central bank intends to pursue a persistently more accommodative policy stance than previously thought, thereby lowering investors' expectations for the future path of the federal funds rate and putting additional downward pressure on long-term interest rates, particularly in real terms. Such signaling can also increase household and business confidence by helping to diminish concerns about "tail" risks such as deflation. During stressful periods, asset purchases may also improve the functioning of financial markets, thereby easing credit conditions in some sectors. Read more

How wrong he turned out to be.

Nonetheless, the RBNZ jumped in boots and all and sacrificed bank depositor's capital to affect upward "portfolio channel balance" asset price revaluation in the residential real estate market, since the bond market was already owned by foreigners. Read More

Good article.

"[The reserve bank] are struggling to develop and implement new weapons to influence the housing market now that changes in the Official Cash Rate are off the table"

Pretty much sums it up.

I'd say Tony Alexander top ticked the market with that puff piece.

when a banker says there's 'no risk' what the banker means is there's 'no risk to me'. A worst case collapse to investors is a best case scenario for a banker once the quantitive easing brings free money printing.

It's the banking cartel's very own krusty the clown.

The Auckland bubble would be very easy to pop. Just stop immigration and put interest rates up.

have you not heard JK, the way to get wealthy is to sell everything to overseas not each other.
lets sell Auckland off and we will all be rich yippee
next he says its only a supply issue no demand here.
He might be the best salesman since Adam was a cowboy but for doing anything he is like all top salesmen not a practicable person

Its really quite simple, record low interest rates makes borrowing cheap, and housing is considered low risk to leverage equity, so if you cant wholesale regulate all housing then find a way of regulating the housing investors which is exactly what has been done with the 30% and the 2 year, perhaps a higher interest rate on second and subsequent dwellings in the next and easiset to manage, But these are all short term fixes, that will only create speed wobbles. What needs to happen is fix the underline cause and effect.

Immigration at record highs but predominantly students of wealthy overseas families need somewhere to live ( we must also remember they are also one of our highest export earners).
Foreign policy of overseas countries creating fear for wealthy people who need a Switzerland to hide their wealth, perhaps we regulate they can bring their money in but limit their investment in housing in Auckland, perhaps they need to be regulated to spend in the regions
In a world of fear little old New Zealand is seen as a safe haven for money and people. ( perhaps we need to be a little bit more picky about who we really want in New Zealand - Contributors.
Overseas people want to live in cities and all it offers jobs, entertainment etc. Auckland is now the only "international" city in New Zealand

I say the resolution to Auckland Housing boom would be resolved if we could move people around NZ quicker and create regional development ( interestingly if i recall this was a Muldoon policy). sort out New Zealands transport issues create a secondary city around Manukau and rapid transport between Hamilton, Tauranga and New Plymouth and Auckland house prices will correct over time.

It interesting to see how the laws of supply and demand work, we are seeing middle New Zealanders selling up thier homes in Auckland buying homes for half the price in Tauranga banking the balance to live off. But is this what we really want the regions to be full of semi retired Aucklanders, not really contributing to growth, while Auckland develops in to a getto for immigrants serverd by wealthy landowners.

My conclusion is Regional development and rapid transport system will fix the Auckland Housing issue.

Finding ways for New Zealanders to save in safe haven outside the surety of housing might be better than
than trying to dull thier appetite for housing as an investment with no other alternatives. Perhaps guaranteed high value investment bonds from NZ Government.

A lot of these issues could also be resolved if we had an Auckland Mayor who displayed leadeship but and can correl his team to expediate policy to get osme of the suggestions above done,

The classical economic laws of supply and demand dictate that in a free market increased demand will produce a small increase in prices and thereby mobilise significant increased production. None of this is happening in our house and land supply because they are corruptly rigged and the government is failing in one of its primary responsibilities. That is, to ensure that markets are operating freely open and honestly. In a free open market, supply and demand maintain equilibrium and prices don't change that much. Look at the market for any other product, in fact increased efficiency over time tends to reduce prices.
This is basic ECC 101 stuff and how most of the economics profession can spout on about just about every other facet of the subject while ignoring the simple basics, does them little credit.

Problem.

Went to auction at Bayleys in Hamilton last week. Young couple with child turned up to bid on a house. Innocent and clearly naive, bidding away anxiously.

Lost out to couple in their 50's who looked like they had very little spare cash (looks can be deceiving I grant you).

Sales assistant bustled over to young couple to convey the message that new owners were looking for someone to rent the property, and were they interested.

Young couple declined and left deflated.

New Zealand in 2015. Not a place where we care about each other.

Good luck.

Scum.

..sounds like they have secumbed to the media and peer pressure to 'invest in property'. I have had such pressure for some months....it is not fun and can be very devisive on the home front. A property correction wil certainly help my personal life!

and the investor has an advantage over that FHB as they can go a bit deeper because the government will give the a tax refund on expenses claimed, time this was turned on its head so the FHB had the advantage

yes the way to get rich is to buy as many rental properties as you can.

no, the way to get rich is to SELL as many rental properties as you can.

It appears to me that every second house in Hamilton is a rental and the figure climbs
even higher when you look at FRANKTON,NAWTON,DINSDALE and HILLCREST.
Hamilton sure ain't what it used to be.

I used to work with Tony A when he was marketing coordinator at Big Save Furniture!

Where did it all go wrong?

gee who would have thought this would happen when national changed it so they could work

http://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=1154...
INZ has been concerned for more than a year that large numbers of Indian students may be arriving in New Zealand more interested in exploiting the work rights available under student visas than the often low-value, vocational skills courses offered by many PTEs.

But I thought Tony reckoned that house prices go down when unemployment goes above 8%? Or is my memory playing tricks? He doesn't seem to mention that here, for some reason... Funny how we listen attentively to the commentary of a very interested party.

Tony has been consistently accurate with his forecasts over the last 10 years. His views should be given considerable weight. Even if he is a bit of a knob.

You are quite correct Thomas.

He takes a long-term view of property markets. He's worth listening to.

Perhaps you also notice... he's quite pompous :) How many times does he refer to himself in the 'royal we' sense? Some times he dismisses with derision the questions of people who contact him about his Weekly Update.

Yup Tony A. thinks highly of himself. But, for a guy so pompous about financial matters, about the best it seems he can do is invest money in a bank.

He'll be collecting a pension, for sure.

Described half the commenters on this site in one sentence:

"The desire to one day be right and the inability to understand why they have been wrong..."

It's not bad letting in rich and skilled migrants. Just look at Singapore.

Singapore is not as open as you think, they have a lot of protections in place for their citizens.
The ownership of such properties by foreigners is restricted to those who make adequate economic contribution to Singapore
maybe we should adopt some of their protections, opps national trying to sin them away with the TPP
http://www.sla.gov.sg/Services/RestrictiononForeignOwnershipofLandedProp...
also a website like this would be shut down
https://www.hrw.org/news/2015/01/29/singapore-rights-restrictions-tighten
“The Singapore government is pulling strings behind the scenes to hinder citizens from going online to get news and engage in political discussion

A director (at least one) and coy sec need be local residents or like
https://www.acra.gov.sg/components/wireframes/howToGuidesChaptersDetails...

Tony encourages people to borrow money off the Bank that employs him. And he will be eligible for an annual bonus. Conflict of interest? Those who are borrowing right now in Auckland need to have their heads checked.

There's no conflict of interest in having expertise in a matter that you earn your income from Gordon. For example, one would hope a doctor who recommends a course of action to a patient is also good at their job and earns plenty of money at it. If he/she doesn't I would change doctors.

Anyway, not true Gordon. People, especially young people, "need to have their heads checked" if they DON'T buy property.

House owners fare better in their latter years than do tenants.

Bankers get bonuses YL. That is why they push insurances, kiwisaver, life insurance ,loans and swaps. That is a conflict as often people do not need these products. Doctors help people with needs and get paid a fee. Quite different. I am happy for fhbers to buy but why buy when the market is back peddling. Be patient and you could save borrowing tens of thousands . Timing.

Ha. Nice construct there gordon. With respect, doesn't the thinking start more like: "doctors are nice people who kindly help me and would never overcharge" and "bankers are the scum of the earth!"

News for you Gordon, just about every sales person has some sort of sale incentive or bonus arrangement - many can be lazy buggers otherwise. Unfortunately some people expect someone else to protect themselves from themselves. Whether its a salesperson in a shop, an insurance saleman, a banker, whatever, my advice is, engage brain, we live in a commercial world.

....sometimes not so easy....such as when your Dr gets that free trip to Fiji once he's prescribed xxx amount of drugs. Or the donation the medical supplies company makes to the conference fund when xx hospital has purchased xx arount of their equipment!!

It's obvious isn't it? Tony Alexander has far too much to lose if house prices suddenly correct.