Shamubeel Eaqub says there could be a modest correction in Auckland house prices but a potentially major downturn in Christchurch and Chinese investors won't be coming back

Shamubeel Eaqub says there could be a modest correction in Auckland house prices but a potentially major downturn in Christchurch and Chinese investors won't be coming back

This is the fourth and final article in a series that features the views of different commentators on the outlook for the housing market in 2016. In this article economist and author Shamubeel Eaqub gazes into the crystal ball.

Economist Shamubeel Eaqub thinks Christchurch will have a major effect on the housing market this year but not in a good way.

"I think Canterbury will be one out of the box this year in terms of the negative side of things," he said

"It will move into oversupply this year in quite a big way."

And that will have what he called "a significant impact on prices" in the region.

"I think you'll be getting [housing] price-to-income ratios similar to where they were prior to the earthquakes.

"That's quite a big number, but it will happen over time rather than as a short, sharp correction.

"We'll see that continue for the next 12-24 months."

He also sees the economic benefits that have flowed from the rebuilding of Christchurch starting to tail off in a big way, putting further pressure on the economy.

Up in Auckland he believes prices could drop by around 5% this year but any correction would be short lived because it would encourage more first home buyers back into the market and the supply of homes will remain tight.

"That underlying supply and demand imbalance is not going to go away any time soon," he said.

"If there is a small correction in prices we are likely to see quite a lot of people coming back into buying mode."

"There are a lot of people in the wings who have just enough money for a deposit at the prices of 12 months ago.

As prices come down to a level they can afford they'll make their move, slowing the rate at which prices fall.

"Which is what we saw in the initial recovery after the GFC," he said.

But while first home buyers may become more active, Eaqub is not so sure about investors.

"The really big uncertainty for me now is what investors decide to do," he said.

Changes to LVR rules and the tax treatment of investment properties had an impact when they were introduced last year, but it remained to be seen how effective they would be long term.

"I don't know whether that's going to have a permanent impact or not," Eaqub said.

However one group that he does expect to stay out the market is investors from China.

"I don't think they'll come back," he said.

"The biggest driver has actually been what's happening in China.

"Those who follow China will know there are significant changes taking place there in terms of their ability to take money out and the focus of the [Chinese] government on people trying to take money out 

"And also the slowing economy there and their banking system's under huge pressure, so people don't have the ability to borrow money like they did in the past.

"That's going to be a really big challenge for Chinese buyers this year.

"So if there is any correction [in Auckland] it's going to be purely on the investor side of things, whether that's local or foreign," he said.

Eaqub is not so optimistic about the strength of the housing markets in other regions.

"I don't think the regions are going to have an easy time of it this year," he said.

"With the drought, very low commodity prices and slowing demand from China, I think the regional outlook is looking very challenging this year and the halo effect for Hamilton, Waikato and Tauranga is likely to dissipate."

He believes mortgage interest rates will remain low, although to get the best rate borrowers may have to move from fixed to floating.

"I think the Reserve Bank will cut again, probably in the second quarter of this year," he said.

"We're likely to see some of the weakness in China and emerging markets coming through to our trading sectors and the reversal of the Canterbury rebuild really starting to bite from about March or April this year, plus the tallying of the impact of the drought.

"We are going to see a bit of bad news coming through on the economic front and that might encourage the Reserve bank to resume its cutting cycle.

"So if nothing else, I think interest rates will stay at a very low level.

"The only risk now is that with rising interest rates in the US and the uncertainty in the junk bond market, we might see some fixed terms starting to rise.

"For a long time we had a very flat curve in terms of mortgage interest rates, so people could buy some security and surety in terms of their interest payments.

"It's very likely that over the course of this year we'll see the mortgage curve starting to steepen and that means mortgage rates could start to become a little more expensive.

That will mainly be for fixed rate mortgages, which means people may need to take out floating rate or very short term fixed rate mortgages to get the best deal..

"But then you don't have the security of knowing you have fixed repayments, especially if you are at the margin in terms of your repayment affordability, Eaqub said.

Click on the following links to read previous editions of Property OIutlook 2016 featuring the views of Westpac's Dominick Stephens, BNZ's Tony Alexander and ASB's Nick Tuffley.

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?

We welcome your comments below. If you are not already registered, please register to comment.

Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.

42 Comments

There is still a huge gulf between so-called floating mortgage rates at 5.85% and short term fixed rates at 4.39%. Either way there seems little risk of rising rates, so borrowers are simply choosing the lowest rate rather than risk management concerns.

Since we do not have transparent data on who exactly is buying NZ houses, then how can the market be commented on? Prices in Auckland have been disconnected from wage earners borrowing capacity for some time.
Chinese property buyers and investors will find ways to transfer purchase money regardless of the official rules, so their influence on prices will still continue.

Non-dairy regions may still see house prices gains over 2016, especially the NZ families and retirees etc forced to migrate out of Auckland.

There was an interesting article on the BBC News website in th past week or so - effectively what they were saying is that wealthy Chinese hold on to their wealth at the whim of the Party. If a Party official decides to investigate you may loose all that wealth that you have acquired. The Chinese will not want the Party to know what assets they have overseas - and having to have both an IRD number and a bank account may just scare off many - a risk they don't wish to take in case the Party starts to ask questions about how the money was sent overseas. The official channels for sending money overseas have been tightened and in November one of the largest unofficial means of getting money out of China was shut down. While there will still be ways I don't think it will be same flood that has occurred in the past few years.

Even though this view might be perceived as "negative", I think that Shamubeel frames a scenario that should be part of any foundation for a reasonable risk analysis. If you don't set parameters like this, what would be the point of risk analysis at all?

If you do not know what constitutes the buying market composition, then how can you judge buyer behaviour?
How many homes are bought with a mortgage? How many bought with no registered borrowing on that particular property? If you can't answer questions like these (& others) then the market is a black box.

I disagree. Understanding buyer behavior can be explored using qualitative research of home buyer segments. To understand how many homes are bought without a mortgage can be estimated by understanding the inverse (homes bought with a mortgage).

So, if 28% of Auckland house buyers are nonresident, or semi-resident, or temporary resident, then they are likely to be disconnected from the local fundamentals of jobs, local interest rates etc.
The large rise in Auckland house prices since 2009 cannot be mainly explained by interest rate decreases and Auckland wage earners. Migration, International students, offshore buyers & investors etc are the real catalysts quite apart from local conditions - & this is the difficulty of traditional economic analysis -

What exactly do you think "traditional economic analysis" is?

Typically excludes hidden and global data - very NZ- centric.
Commentators in 2009 - 2011 were predicting a housing crash due to their 'traditional economic analysis'.

So you're saying that the housing market is driven by dynamics that nobody can know or understand. The data doesn't exist. Therefore, regardless if you can make use of the data or not, everyone participating in the market is doing so a partial state of ignorance. That's not very encouraging.

Well, especially since 2009.
Auckland has become more like Sydney or London or Vancouver. House prices are somewhat disconnected from the economic drivers of the middle class locals.
Auckland is now significantly different from all other areas over NZ.

This is one of the Govt aims - to have a super-city, attracting immigrants, international students, foreign investors, and tourists.

Where is the data? Qualitative or quantitative? NZ citizens, nonresidents, PRs, students, temp visas, etc?
Home owners vs investors? Mortgaged vs cash? Size of mortgage? First home buyers vs 2nd/3rd etc buyers vs NZ investors?

A lot of economic commentary is really guesswork based on broad trends.

Also, you have to wonder about someone who is a dedicated long term renter. If you have never put your self on the line by borrowing personally for a home/house then you have not experienced equity growth yourself or otherwise, you have not understood the psychology of housebuying etc.

Much economic commentary is based on "guesswork" (I tend to refer to it as "inference") but if you can't back it up with time and effort researching and basing inference on data and qualitative insight, then your inference is likely to be less informed. Therefore, Shamubeel is likely to be better equipped to deal with economic commentary than your average property punter.

I'm not really sure why the experience of purchasing property makes you understand your own behavior any better. And that is the value of qualitative insight. You may think of yourself as a rational decision maker, but you don't really understand the emotional and sociological influences on your decision making process. Don't take that personally. It's a widely understood phenomenon in most consumers and investors.

Agree with Shamubeel re Christchurch housing. There were another 525 new dwellings consented in November between ChCh, Selwyn and Waimak councils. That's a high number considering the stage the residential rebuild is at. Canterbury is in for a reality check sooner or later but most down there seem oblivious to it.

That has been obvious for a long time. Near me is a new subdivision of maybe 100 sections - not a great number, but round the corner is another new subdivision being prepared (both in the Styx Mills area). On my way to work there are perhaps at least 10 houses being built (and one or two older houses I suspect will be demolished) - and that is going from Papauni to Riccarton. I am sure this is happening all over Christchurch and its environs. The relaxing of the rules after the earthquakes have allowed developers to create these new subdivisions in the belief that there was demand - that was always going to end in tears, ie supply overtaking demand. According to TradeMe there are currently 2000 houses for sale in Christchurch, and another 1600 in Selwyn and Waimakariri ( a rough proxy I know). It will be interesting next year or so....

so many saying this is NZ can not happen here house prices never drop, hear it everyday more than ever before, same as noticed a few puff stories in the MSM.
I hope any correction is slow and shallow but I feel we have gone past that point
http://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=1157...
Some of the stories that are coming to the press are real peak of the market chatter," Bennie says.
The fund manager brings up the example of Auckland first home buyer Ollie Wall, who told the Herald this week that he wasn't worried about having to borrow $520,000 to pay for his Freemans Park apartment.
"It wasn't that his mortgage was a whopping $500k plus that was scary," Bennie says.
No, the doozy was his advice was to not worry about the cost of Auckland housing but to 'just take the leap'. This don't worry the market will always go up [belief] is classic bubble behaviour," he says

500,000 mortgage!!! What a huge sum of money!!!
In my view someone with a 500,000 mortgage is heading for a fall.
Fast.

500k at 4.5% over 30 years is about 580 a week. Probably not much more or less than rent.
Try the bank mortgage calculators, plug in your household income, & you could borrow 700k to over a million with 2 incomes.
Anyway, this is only one driver of prices.
The fall comes when/if mortgage holders lose their jobs, or tenants, or foreign buyers can't transfer their money.

What does the amount have to do with it? Depends on their servicing capability, period.

For some, the payment on 500k would be 30% of after tax income, pretty comparable to rent. In other words, no worries.

talk to young people buying in Auckland most would have that size or more, my head spins when they talking those numbers as if it is nothing to worry about, because house prices in NZ don't drop so they tell me.

Shameful article by the Herald. What does the subject do for a living? Oh, he just happens to be a real estate agent! Quelle surprise.

http://www.nzherald.co.nz/property/news/article.cfm?c_id=8&objectid=1157...

Not the full story?

The article merely says he worked for his fathers Real Estate Agency. Doesn't says he was a RE sales agent. Might simply have worked in the back-office

Bear in mind - Auckland RE agents have been creaming it for the past 5 years. If he was a sales agent he should have been able to pay cash, yet this guy had to use $30,000 from kiwisaver plus a $520,000 bank loan plus a helping hand from his father to buy a $680,000 apartment

In other words - not the full story

I think that the onus is on the Herald not the reader to fill in the gaps. The article below appears 3 days after the article above:
http://www.nzherald.co.nz/property/news/article.cfm?c_id=8&objectid=1157...
and if still in doubt, try this:
http://www.realestate.co.nz/profile/agent/324544

An apartment with the whacky Unit Titles Act as a governance mechanism, 30 years week in week out of payments, 4.5%pa now, what later? So so much money that could be used to start a business or saved, now bet on a long punt. In the long run, deflation, you are screwed, especially when your building committee didn't quite stash the $100,000s needed to fix the building up. In the off chance of ongoing inflation, interest will shoot up. The icing - you can have deflation and relatively expensive money together. That's my view, shoot me, but I've seen a few of these uppy and downy and unexpected thingys play out in my time.

Oh Lorde it is hard to be humble, when perfect in every way.

Singing adds fuel to Awkland markets I hear, Sings for her super.

Oh Lorde!. Oh my word.! Oh dear!. Should have bought a couple of rentals?.

Cannot go wrong with Houses. Must be a record, for one so young. Cash too, all cashed up. Better than money in the Bank?. I ask myself,

http://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=1157...

I am surprised she brought there, with her money she had the choice of all of NZ or elseware. and as a musician you would think she would like some privacy

Alter ego.... Is this what u really believe..?? Is this your view..??

My view is totally distorted by others.
I am not an economist, nor a banker, nor a politician.
But I can see their true worth and what they have achieved.
Nothing, worth having. Nothing worth fighting over. Nothing but debt.

Here is some other worthy contenders. Don't you just love em.

IPO. or is that just short for Gamblers Unanimous.

Or has a Ponzi, simply been renamed.

http://www.marketwatch.com/story/new-face-of-payday-lending-set-for-ipo-...

Here is some other worthy contenders. Don't you just love em.

IPO. or is that just short for Gamblers Unanimous.

Or has a Ponzi, simply been renamed.

http://www.marketwatch.com/story/new-face-of-payday-lending-set-for-ipo-...

But it is not compulsory to participate in an IPO. Therefore those that do participate, do so at their own risk.
As a side note, if you allow others to manage your funds,and allow them to chose an IPO, then that is also a risk.

It is quite amazing how many people do not understand the ramifications of a payday loan, nor an IPO based on that premise would bring.

I was just trying to warn people that must be totally and worryingly desperate for a piece of the cake.

Making it worse is what Governments and Banks and slime bags do...not me.

Debt is easy to get into, getting out in one piece even fractionally is getting harder by the day and it is only the 16 of Jan.

By the way...Happy New Year.

Some people will steal anyone's money. Fractionally, or whole hardheartedly.

Some people are slaves to debt.

A little balance is all I ask.

A little interest is fine. To a point. I think we have gone beyond that.

Stitching up others is not my bag.

I wasn't referring to you.
From merriam-webster.com (online dictionary)
- 'used to refer to any person or to people in general'

It is a common term.

I was not taking it personal. You, I do not from Adam.
I was just getting another point across...while I can.
My ego has altered not one jot, as has my views on the ones causing all the debt.
I believe Swiss Banks are going to change all that in a trial.
No more over leveraged debt, Just a little one on one. Not multiple errors, multiplied.

I shall support all that, and leave all Aussie and Fractional Reserve Banks for dead... how about You all?.

Any takers?.

Well the Swiss in general don't count for much these days do they?
Too busy massaging their Schublig to fight any wars.
US did them over like a dogs dinner, post 9/11 along with most other tax shy nations.

Back in 2000, Dallas Fed president Robert McTeer suggested that our economy’s ills would be rectified “if everyone would hold hands and buy an SUV.” And for the next 15 years Fed policies did the unimaginable in the name of (indiscriminately) stimulating growth of any kind possible. And if epic mortgage finance Bubble financial and economic maladjustment was not enough, the past seven years have seen the type of financial folly and egregious wealth redistribution that tear societies apart.

The bottom line is that Bubbles destroy and redistribute wealth, though the true effects are masked for a while by inflated securities and asset markets – along with resulting unsustainable spending patterns and economic activity. Regrettably, years of policy mismanagement, gross financial excess, deep structural maladjustment and the most imbalanced economy in our nation’s history will now come home to roost. At this point, I cannot confidently forecast how quickly the bust will unfold. I do, however, believe this process has begun as Bubbles falter at the “Core of the Core.”

http://creditbubblebulletin.blogspot.co.nz/2016/01/weekly-commentary-cra...

I cannot confidently forecast how quickly the bust will unfold. I do, however, believe this process has begun as Bubbles falter at the “Core of the Core.”

Oops!!!!

...the Dallas Fed met with the banks a week ago and effectively suspended mark-to-market on energy debts and as a result no impairments are being written down. Furthermore, as we reported earlier this week, the Fed indicated "under the table" that banks were to work with the energy companies on delivering without a markdown on worry that a backstop, or bail-in, was needed after reviewing loan losses which would exceed the current tier 1 capital tranches. Read more

"all is well when it comes to bank energy loan exposure" but, but, the likes of Profile says shale is not a worry!!! its still profitable, um. "it looks like at least 18% of some banks commercial loan book are impaired,"

18%????? holy cow, also plus hedge losses? I wonder who is taking the hedging losses as well and how big? is it these banks? Lets say the hedged price was $65 a barrel, now the loss is $35 a barrel (is it indeed that bad?). It also makes sense for the driller to produce as much as he can while the term of his hedge lasts?

That is one interesting piece, to go with the others, thanks.

mark-to-market suspended - clever aren't they - don't worry boys

Yeah heaps of FHB's have a lazy $150k sitting around, cause it's so easy to save while renting in Orcs.
Equab was one of the last bears still standing, and if I recall correctly in the FHB/Rentor category as well. So if he is thinking of buying, you can be sure the dumb money is pretty much tapped out!

I wonder if all Awklanders fit into the top 1% with their assets, now that the houses have been blown up beyond all proportions...or is it just a fallacy on paper.

Top 10% maybe....otherwise.

Richest little traffic jam in the whole wide world, perhaps, judging by the Remuera Tractors idling along.

The % amount is quite small.....It almost makes one feel rich and munificent, bailing out the rest of the country. Every Farmer should be satisfied with their lot too.

Here is the little gem...to help you decide.

http://www.bbc.com/news/business-35339475

You need over a million to crack the top 1%, you can check your ranking here...
http://www.globalrichlist.com/wealth