Squirrel Mortgages' John Bolton says a clamp down on money flowing out of China has slowed Auckland's housing market but the lull probably won't last much longer

Squirrel Mortgages' John Bolton says a clamp down on money flowing out of China has slowed Auckland's housing market but the lull probably won't last much longer

By Gareth Vaughan

Auckland house prices are down about 10% from their peak earlier this year with the clamp down on money flowing out of China the main reason behind this, according to John Bolton, managing director of Auckland mortgage broker Squirrel.

Bolton notes that the official property market data is generally two to three months behind what's actually going on in the market. The Real Estate Institute of New Zealand's November data is due out this week. In advance of it Barfoot & Thompson, Auckland's biggest real estate agent, has reported a record median price for November of $795,000, but an 11% year-on-year fall in sales volumes with 986 homes sold in November.

"October-November was really slow. We had a significant drop off in our business over that time period. The vast majority of that was in the Chinese market. We saw volumes in the Chinese market literally drop off a cliff," Bolton says.

By Chinese market he largely means ethnic Chinese who are New Zealand residents with access to money from China.

"It's essentially New Zealand resident Chinese, probably recent immigrants within the last 8 to 10 years, having access to large amounts of foreign capital. So a lot of money flowing in from China," says Bolton.

More than the measures introduced here in this year's Budget requiring foreign property traders to have IRD numbers and NZ bank accounts, or the restrictions introduced requiring Auckland property investors who borrow from banks to have a 30% deposit, Bolton says the slowdown has been mainly driven by Chinese authorities making it harder for people to take money out of China.

"And essentially that's the big thing that changed in October. It wasn't so much the rules here, it was the clamping down in China itself. There were two big things that happened over there. There was that massive sharemarket correction that they had, and I think that was actually felt quite significantly. And the second was the Chinese government cracking down on the outflow of money pretty much after the sharemarket crash. That really tightened things up and that was really noticeable," Bolton says.

All these changes within a short period of time mean lots of people are sitting on the fence, waiting to see what happens to the Auckland property market over the next few months, Bolton suggests. A similar thing happened when the Reserve Bank introduced its initial loan-to-value ratio restrictions in 2013, he adds.

"My view of it is that come February, once we get through Chinese New Year, I think you'll see the Chinese starting to come back into the market a lot stronger."

"If you look at it from a global perspective there's a lot happening in China at the moment. Particularly with (the yuan) becoming a reserve currency and starting to deregulate and probably free up their foreign exchange again," Bolton says.

A 10% drop

He reckons Auckland house prices are about 10% down on peaks earlier in the year.

"I think personally, without looking at statistics, my feel from what I see in the market is that house prices have come off about 10% from their peak which was around May-June. But that doesn't necessarily translate into the results," says Bolton. 

"Back in May-June our buyers were pretty much having to pay too much, that little bit extra to secure a property, whereas now with the auction rates declining and everything else, the same pressure's not there on the house prices. And there's an ability to negotiate, or an expectation that they can get the price down a bit." 

"In certain areas it's really obvious. Particularly the areas around Auckland where there has been a high proportion of Chinese buyers. They're just not in the market (now) and that has definitely softened the prices there. I think most people have a view that the market will come back and most people aren't in a position where they need to sell. So hence you're seeing auction clearance rates dropping, the number of house sales falling, because people are literally just withdrawing from the market until the house prices come back and that strength is there again," Bolton says.

Owner-occupier buying opportunities

Meanwhile, with the new lending rules in place for property investors in Auckland, Bolton sees buying opportunities for owner-occupiers.

"I think there's an opportunity in the market at the moment for anyone who is looking at owner-occupied property to get in. Our first home buyer market's actually going quite well at the moment. Because of auction (sale) rates falling the opportunity for them to get into the market at the moment's a hell of a lot better than it has been."

"Last year was near impossible for people to get into the market whereas this year it does feel more sensible, albeit Auckland house prices are really high. But the opportunity to buy is there right now through probably to February-March," Bolton suggests.

Against this backdrop he says Squirrel's on target for a record month in December, despite the Chinese slowdown, with the firm set to break through $100 million of settlements for the first time.

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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59 Comments

Without looking at the number it feels like a 10% drop from its peak? B&T recorded a record median price in November? Bolton, why don't you just look at the numbers which speak for themselves?

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Selling more properties in higher valued areas, thus resulting in a higher median price, does not mean house prices have increased.
Read into the numbers, not the headlines the vested interests want you to see to keep the "its only going up" mentality.

Should we only accept the numbers when they are going down? It is said that a rising tide lifts all boats.

Agree a good opportunity for FHB's to get in while competition is lower. If my old 5th form economics teacher was right we need a lot more supply before prices will reduce substantially.

But if they have become overpriced due to overseas money prices are now normalising. May not be a crash but they will become more in line with salaries - residents on NZ salaries just couldn't afford 9 x salary prices. What happens next year will heavily depend on China I reckon.

the new norm is 500k + mortgage is ok and average NZ salaries as a measure are long dead,
we now have 59 suburbs with an average price over 1 mil we have an average auckland wage around 60k, does anyone think that young people under 20 will ever be able to live in those suburbs without coming from a rich backround or becoming a CEO.

I think 60k is the median wage, not the average wage.

I'd say it was the Average. According to the 2013 Census the Median Wage for Auckland was $29,600.

http://www.stats.govt.nz/Census/2013-census/profile-and-summary-reports/...

that sounds like median income, not wage to me. The difference is that the unemployment benefit is income but not a wage, and a 15 year old doing paper runs has income that isn't a wage, etc..

It's just not sustainable, and it will starting to effect immigration as well since NZ is already getting a reputation as being a very expensive place to live.

Residents on NZ salaries are the main group buying most of the houses buzby. $200k-$300k income households are not uncommon in Auckland. I know a lot of professionals aged late 20's / early 30's on $100k+ salaries. Put two of them together and a $1M house is 4-5 X income.

Kiwis on "average"/"median" incomes for whom many of the properties currently being sold would be 9x individual income aren't the ones buying. If you are going to look at income multiples then you need to instead look at the average/median income of those who are buying. A simple way to do this would be to exclude from your calculation the bottom 50% of income earning households because home ownership rates are roughly 50%, using this very crude method you can see that using the upper quartile household income to derive your house price to income multiplier would be far more accurate and yield a 4-5x multiplier.

When sufficient supply exists for 100% of Aucklanders to become home owners then the average\median wage will be able to be meaningfully compared to average\median house prices.

"When sufficient supply exists for 100% of Aucklanders to become home owners"
Surely sufficient supply for 100% of Aucklanders to be home owners would be the same as sufficient supply for 100% of Aucklanders to have a home (people either rent or buy - houses don't disappear when people switch between the two) - unless you are saying that there needs to be a glut of unoccupied housing in order for all Aucklanders to own their own home?

or they squeeze 2 people who would rather have their own rooms into 1 room. This is what we call pent up demand. It is a bit like applying pressure to a spring the mass of a spring never changes but the amount of space it occupies does, a reduction in the amount of pressure applied against the spring will cause the spring to occupy more space while having the same mass. In this analogy the mass of the spring represents the number of people in Auckland and pressure applied on the spring represents the supply shortage. the amount of space occupied represents the number of people capable of buying a house.

Alternatively consider gas in a pressurized tank. withe the following variables:
Size of tank = number of houses available
volume of gas = number of people in Auckland
pressure in tank = pressure on housing market ( percentile that can afford to buy houses )

if the size of the tank increases and the volume remains the same then the pressure will decrease. ( if the number of houses increases but the population stays the same then more people will be able to afford homes - because the upwards pressure on prices drops )
If the size of the tank stays the same but the volume of gas in it is greater then the pressure increases. ( if the number of houses in Auckland stays the same but more people arrive then less people will be able to afford a house. What we have at the minute is high pressure which has expressed itself as overcrowding in some of our housing. The effect of this is that if you added 50 houses to Auckland tomorrow they would all have at least 1 person looking to own them to live in, the person who gets the houses is likely to be the person who can afford the next most after all those who want housing but can afford more than him have their houses.

Do you actually know anyone in Auckland who has had a bank approve a loan at a 9x income multiple?

http://www.interest.co.nz/property/78586/reserve-bank-says-its-not-consi...

"For investors, the latest figures are even more eye-catching. The RBNZ says about 60% of all investor lending is at a total debt to income (TDTI) multiple ratio of above five times, with around 25% at a TDTI exceeding seven times."

25% at 7 times+

The RBNZ has a duty towards OBR depositors/bank capital underwriters to rein in such practices, while continuing to enforce below risk adjusted unsecured deposit returns approved by government oversight.

But these NZ salaries alone are not currently pushing prices up - as stated in this article. They are coming down from the peak to more realistic levels. If the Chinese come back in force next year it will push prices up again. That's all I was saying.

If they're to adjust to reality, there will be a crash.

So if supply demand is purely to blame, the 25% increase in auck prices from say middle this year from mid last year has resulted from the supply-demand balance changing by 25%?

I.e 25% of housing stock was destroyed or Auck population grew by 25% over that 12 month period?

Do you see how rediculous it is to blame supply demand for such massive price moves?

Large price moves are common in all things where speculation is allowed to exist. Look at gold, oil, stock prices (Xero a great local example).

Human nature plays out across all these, all rushing to buy at the same time, all rushing to sell at the same time, hence you see booms and busts and never a logical, fundamentally driven move higher (note rents are mostly immune from speculation so are a better measure of underlying supply-demand imbalance)

Agree, speculation is parasitic and damaging on main street by wall street.

They wont stop however until maybe main street is about dead and the lynchings start.

:(

You only need a 1% supply shortage to get a 25% (or other disproportionately large number) price jump. As long as no one wants to be the one to go without everyone will dig deeper into their wallets.

Imagine that you have $11,000 while Bob has $10,000 and Jane has $12,000 in disposable income and that there are only 2 houses. Normally houses cost 50% of your disposable income, but if you and Jane bid $5,500 and $6,000 each, Bob in an effort not to be left out would bid more than 50% of his disposable income. Eventually houses will cost closer to $10,001 ( this being more than Bob can afford ) .

Have you got any statistics to support your 1% shortage can lead to a 25% increase in house prices?

Yes that would be interesting.

I've seen comments that a 4% shortage in oil causes a x4 fold increase in price. This was from a scenario of the Iranians? sinking tankers in the strait of hormuz.

It is an extrapolation to cover housing. As Steven points out it frequently happens with other commodities such as petroleum.

In June 2008 U.S. energy secretary Samuel Bodman had said that insufficient oil production, not financial speculation, was driving rising crude prices. He said that oil production has not kept pace with growing demand. "In the absence of any additional crude supply, for every 1% of crude demand, we will expect a 20% increase in price in order to balance the market," https://en.wikipedia.org/wiki/2000s_energy_crisis#Investment_.2F_specula...

The point is that 1% of shortage will not necessarily correlate to a 1% increase in price. As far as i'm aware a shortage will drive a price increase but there is no rule stipulating how much that increase will be.

You can't separate out the portion that is speculation from the market prices of either oil or property.

Oil is $35 today as opposed to $150? back then. So those sort of price moves are all due to supply-demand balance of people going about their days in exactly the same way, demanding the same amount of oil to purchase, or property to purchase during both boom and bust phases?

The point is, speculation gets absorbed into the supply demand equation as added, but artificially high demand. As prices go higher people want to buy more (not less), which is speculation, and which happened when oil was 120+ a barrel (and happening again in reverse now at $35).

Genuine supply-demand without speculation can be seen in rental markets, where as prices increase, demand reduces (not increases!).

Also, has nothing to do with consent numbers, the supply = number of listing, the demand = number of active buyers, both can change over night as a result of sentiment. So watch out. Aucklands in for some large declines in property values, 10% so far, another 10% at least to come and a long wait for the next up turn.

“There was one other important factor that contributed to the downturn, especially as the price decline gained momentum,” OPEC said. “That was speculation.”

http://www.bloomberg.com/news/articles/2015-05-04/opec-says-speculation-...

More positive commentary from another vested interest. It will be interesting to see whether all of this "its just a lull" commentary from the banks, mortgage brokers and real estate companies are enough to turn back on the market mentality of "its only going up" - that is the only thing holding off a correction in the short to medium term.
Yes, people can sit on their profits for now and hold until the market "starts going up again" - but it will be interesting to see in the next year or 2 when the US hikes their rates a few times, credit is no longer as cheap, and the mortgage rates start to go up. Houses "affordable" at 4.2% interest can become unaffordable quite quickly at 6% interest.

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Just find it fascinating, again, that vested interests (including the Government) denied the Chinese money was ever a material factor prior to the leaking of that real estate agent data to Labour a few months ago. When it was leaked they then claimed it was racist etc but in the same vein not wishing to actually collect bona fide data on offshore buying. And not that that it wasn't plainly evident (e.g. billboard signs at the airport) and a well documented theme in offshore property markets. I also see in Melbourne 20% of investment properties are not occupied (determined by water usage). Maybe a similar study could be done here?

The new racism is if you dare tell the truth about what is happening...ACB.

You are not supposed to notice, comment, just go along with the spin.

Stick to just housing, who wins, who loses, it is called Monopoly. Probably called Land Banking pretty soon. It appears to have different con-notations these days.

Yes I agree....power retailers could do this quite simply..... In fact they probably know already.

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The prognosticators are at it

When doing diagnostics after multiple fixes have been made simultaneously, and a reaction occurs, the difficulty is to determine which of the fixes brought about the reaction

These are the events that have occurred in the past two months
The question is which change did the damage or is it a combination of all of them

1 October 2015
Auckland Investment LVR's move to 70%
China clamps down on money outflow

30 November 2015
IRD number
Bank account number
Foreign buyers required to disclose home Tax File Number

It should be noted that property prices in Sydney and Melbourne also tanked at the same time as Auckland prices stalled. Chinese buyers have disappeared from both markets. The AU regulators have not implemented IRD and Foreign TIN or TFN numbers or Bank account requirements

The one commonality is the clamp down by the Chinese Government

two otherguys, I agree the capital controls in China are making a big difference but there have been major regulatory changes in Australia as well;

APRA changes to investor loans (similar effect to RBNZ LVR rules)
http://www.afr.com/real-estate/apra-bank-loan-changes-put-the-brakes-on-...

Enforcement of existing FIRB rules (similar effect to IRD and bank account rules)
http://www.afr.com/news/policy/foreign-investment/chinese-home-buyers-ca...

One way to assess the RBNZ and Government rules will be to look at RBNZ investor loans data over the coming months (because foreign capital will not show up in loan data).

Yes and No

Joe Hockey started going after foreign buyers of existing residential property in February 2015 with great fanfare - providing an amnesty period from Feb thru end Nov which was only of benefit to those who owned up - the tightening of existing laws started in Feb and pursuit has been passed to the ATO

Then there was a Senate enquiry mid-year chaired by Kelly O'Dwyer into foreign buying

APRA began tightening the screws in June 2015 without fanfare - had little impact on overseas buyers - only domestic borrowers

Chinese buying suddenly evaporated November

Agreed. Deny deny on Chinese impact but clearly seen in the last 2 months what the impact was. DGZ will be taking a big hit if Chinese buyers dont return next year. Same with Investor debt ponzi buyers, though now stuffing up Tauranga and Hamilton. Bring in prudent debt to income rations please and hurry up about it.

What is so special about the Chinese New Year. Why are the hordes holding off pricing kiwis out of their country until then?

Hey that button on the squirrel website to turn the european looking squirrels into chinese looking squirrels is pretty neat.

What's special about CNY? The behavior of the Chinese people around that time. We can see similar patterns of behavior among Caucasian people at Xmas.

It's a couple of months away. That's the equivalent of late October to Xmas.

With China trying to stabilise the stock market, and the fact that the Government owns a large portion of the total market the clamp down will stay in place for some time. How long until there are a lot of underwater property speculators with large interest payment outflows?

HK sales around 40% down yoy. A lot of talk of US rate hike spooking the market there. If thats where a lot of the china money is tied up, then a slow down there will mean a slow down in auck too. US rate hikes are not a 'blip' or 'lull' but a final move higher in interest rates to finally end the mass flow of easy $ into global real estate. No surprises HK, Syd, Auck all coming off. If its US rates that are doing this then prices will not start the march higher again anytime soon (i.e next 5+ years as all that future buying has been brought forward).

What was interesting about this is John Bolton's matter-of-fact attitude towards there being NZ residents of Chinese descent as the recipients of a huge pipeline of capital from the motherland. While the Chinese capital controls are well understood by those who bother to understand them, there seems to be a tacit acceptance that our property market is partly funded and driven by capital that is literally "smuggled" out of China. People basically accept that as "just the way it is" now.

So while this outflow of capital is driving asset bubbles across the globe, we fix our export focus on the China and compete with all the other recipients of Chinese capital to sell our products and services in their markets, yet the supposedly materially well off Chinese are appearing to be fleeing. If that seems kind of screwy, I guess that's because it is.

We're definitely in a surreal new paradigm.

"My view of it is that come February, once we get through Chinese New Year, I think you'll see the Chinese starting to come back into the market a lot stronger."

If Melbourne is a template, a wave of potential sellers are built into the community?

Australia’s three-year property boom is leaving Melbourne awash with empty homes.

In the country’s second-biggest city, growing numbers of local landlords and absent overseas owners have locked up their properties -- forgoing rental income as they focus instead on price gains, a report by Prosper Australia said Wednesday.

Some 82,724 properties, or 4.8 percent of the city’s total housing stock, appear to be unused, said the report, which estimated occupancy rates by gauging water usage. In the worst-hit areas, a quarter of all homes are empty, said Prosper. The Melbourne-based research group is lobbying for more affordable housing through tax reform.

Driven by a wave of Chinese buyers and record-low interest rates, average home prices have soared to about A$700,000 ($505,000) in Melbourne and around A$1 million in Sydney. But with prices now cooling, the empty accommodation also masks a hidden glut of supply that could worsen any housing slump.

“Those properties need to be utilized,” said Catherine Cashmore, author of the Prosper report, Speculative Vacancies. “Having property sitting vacant has a very high cost on the economy. It’s very destructive to our national prosperity.” Read more

Interesting presentation and use of data

Based on water supply and useage figures for Melbourne

ACB up-thread says 20% of all "investment" properties are vacant
Stephen Hulme above quotes 4.8% of "total housing stock" appears to be vacant

Well, depending on how you want to do the figures it could be either a lot worse or a lot better

In 2000 the Victorian State Government changed the method of charging for water from a connection-and-rates-only system to a mixed connection+useage+rates component system

Didn't last too long because it was soon discovered that most of the high-rise commercial and residential apartment buildings didn't have individual metering

And that remains the situation today - they can't reconfigure and re-engineer the buildings
A large proportion of those high-rise buildings were bought off the plan by foreign investors and nobody knows if they are vacant or not - they would be better monitoring electricity use

Anyone know what the case is in Auckland with converted commercial and high-rise apartment buildings?

We've both read the same article. I think the writer must have overlaid the unoccupied homes data with investor-owned properties from maybe APRA data to get the 20% number - who knows. Of course the other thing to wonder about is how the unoccupied data is scrubbed i.e. do they only include houses with consistently non-existent water usage or is it just a snapshot. Even then, the upswing in the trend is fairly compelling. Electricity usage makes more sense I agree.

metering for power per ownership should be easily available, assuming the power companies wish to disclose it. I am sure if you paid it would appear.

Politicians and bankers saying it is not the chinese causing increasing house prices? Except labour, when they said it was the chinese they were called racist!! What bites?

So, is this guy racist too?

Of course it is the chinese (and other immigrants). This put the squeeze on supply as chinese were willing to pay kings ransoms for dumps.

and mum and dad investors..

The price increases were not driven by a shortage as rents didn't grow at the same pace. Not even close. It was pure speculation.

All the bubbles have something in common, a huge supply of money.

The money was coming from overseas, but also from our banks as you can see in the levels of private debt.

In Tauranga it wasn't Chinese who were bidding on already overpriced houses. It was Aucklanders coming to auctions in the weekend (now I see lees and less).
The greed gen is not only in evil overseas speculators. They just entered an "easy" market with "easy" and untaxed gains to boost the party towards insane levels that cannot be kept unless cutting interest rates on loans (hopefully not).

The rest is NZers with the "property ladder" mentality and the fear of missing out, and policies designed for property owners and landlords. It's all part of the same speculative mentality.

Can't wait to see what happens in a few months..

Government now funding pensioner housing for asian community this is so so wrong are we not all equal does the colour of our skin or where we come from matter?
i hate race based policy whether its maori, polynesian asian etc etc Government assistance should be based on need
http://www.stuff.co.nz/business/74902576/pensioner-housing-for-aucklands...

Where does the largesse for this come from ? We are all in this together, many contribute in many different ways, but......

Told you so - 3 months ago - we are importing them
More than 55% of current baby-boomers in NZ are imports
Now we are accepting impecunious new settlers on the thresh-hold of retirement
And now have to support them
http://www.interest.co.nz/property/77706/migration-gain-hits-all-time-60...

Jaw dropper
New settlers' who are low income retirees will get welfare rent subsidies

How does that happen? - where did they come from? - how did they get in? - Were they skilled?

So, so wrong. Reverse racism at its most foolish. Whats next - housing for poor, old, Sud Afrikaners in Browns Bay?
Can just see the ol folk yakking - " Kiwis so dumb lah" and we are. Dumb, dumb, dumb (or just bought off perhaps)

"The market feels it has gone down 10%" so now we gauge the market according to what someone feels the it is doing ???????????

Yes, the accountant would say take a hike before IRD demanded so.

John Bolton is in a good position to comment on these matters. it's his observation from actual experience, and only his observation -- but so what. He doesn't claim to be conclusive. I'm happy to hear his perspective and I thank him.

Just imagine the risk to the bubble pricing if/when National lose the next election.

Foreign buying and proxy buying made illegal.
Kiwibuild policy enacted.
Auckland prices ten or eleven times local incomes.

The risks one makes buying into this stupidity are not insignificant.

We should keep voting National then. Forever.

Good luck with that.

interesting story my interpretation picking market has topped and movement against landlords is just starting in the UK
http://www.telegraph.co.uk/finance/personalfinance/investing/buy-to-let/...

Attended a house auction last night on my street. Very nice place with a CV of $810 and the bidding tried to open at $850K. Very small crowd of people and no bids. Vendors wanting about $925K but the market has turned. Finance is now tight and the buying frenzy is over. Housing shortage ? probably not the shortage is now people that can afford the homes that are still getting built. Wage in NZ is no way $60K, your lucky to get into the $50K bracket these days and you still need skills to get that. Huge number on $14.85 an hour, do the math.

Yep and why would any sane Kiwi with a half decent overseas job come home for that. Low skilled immigrants however will jump at the chance to earn $$14.85 an hr and all live under the same roof mum, dad, grandparents and kids combined.

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