John Bolton says although there are economic clouds aplenty on the horizon our property market is well placed to weather the storm

By John Bolton*

There is an increase in news stories postulating a property crash.

Prices in Sydney have declined by -7.4% compared to same time last year, and prices in other global hotspots are under pressure.

So what about NZ?

Time to cut through the noise, try and make sense of what’s going on in the world, and explore what could happen with house prices and mortgage rates in 2019.

The Global Story

Let’s start big.

Emerging markets like Turkey, Argentina, Pakistan, Malaysia, South Africa, and Indonesia have borrowed heavily in US dollars, at a time when interest rates were very low.

Over the past ten years emerging-market debt has risen from $21 trillion in 2007 to $63 trillion in 2017!

The problem for emerging markets now is that US dollar interest rates are increasing and the US dollar is appreciating.

Both drive up servicing costs for countries that have US dollar denominated debt.

This will not end nicely.

The US economy is growing.

That’s because Trump is applying lots of fiscal stimulus on top of monetary stimulus.

That is working in the short-term, but will exacerbate the problem when all of this stimulus is removed.

The question for Trump is whether he is building sustainable growth.

With trade-wars and protectionism I doubt it.

Global Politics

The global story at the moment is fascinating and attention grabbing.

It’s like a high stake game of chess.

The impact on NZ really only comes about if the game goes bad.

That’s not likely but still possible.

China is welding a lot more influence in the pacific as part of its pacific belt strategy.

That’s quite visible in the pacific islands but maybe also in NZ?

The US call it debt diplomacy and it has them starting to fight back.

In May, New Zealand was labelled the ‘soft underbelly’ of the five eyes spy network due to growing Chinese influence in politics.  

My perspective of the Pacific Belt strategy is that the goal is to reduce resistance to a more assertive China.

For example, China’s military expansion in the South China Sea and in particular in the Spratly Islands.

Just this week there was a dangerous stand-off between a US Destroyer and Chinese warship that went largely unreported.

Don’t underestimate the tension building up between China and the United States.

Historically China has had a free-ride on a liberal globally orientated US. Under Trump that has changed.

At the same time, we have the US and Turkey dancing around Saudi Arabia’s killing of Jamal Khashoggi (a US permanent resident) on Turkish soil.

The US will care more about its arms deals to Saudi Arabia than international law and this will undoubtedly be covered up or deflected.

The US will continue to wage a trade war with China.

At the same China is having to deal with a non-bank sector that is over leveraged and year’s on mal-investment in infrastructure.

President Xi Jinping is centralizing power to orchestrate a soft unwind of Chinese excess.

His fight on corruption has seen more than 1 million officials disciplined with some high profile disappearances like the Chinese president of Interpol.

Somewhere in the mix Putin is poisoning former spies on UK soil and influencing US elections.

At some point, Trump will wage war (or not far short of it) with Iran as a matter of political survival – he needs a suitable enemy and Iran ticks the boxes.

I also wonder if it’s helpful that Iran is conveniently an enemy of Saudi Arabia.

The UK is exiting the EU, arguably poorly, and Italy isn’t in great shape with a populist party and high debt levels.

None of this is unusual. Arguably, the world is as peaceful as it’s ever been.

It does feel however, that we’re collectively in a weaker position to respond to the next financial crisis.

New Zealand’s egalitarian values resonate strongly with younger generations and make us an attractive country for talent.

The world is rudderless and full of corrupt self-serving leaders, which is getting worse.

We could use our attraction and genuine talent to transform our economy.

We should not be selling citizenship for money or bringing in low skilled immigrants to support legacy low-growth low-wage industries.

If ever there was an opportunity for us to change our future, and improve incomes it’s now, but we won’t.

Markets

Share markets indices are well cooked, property prices are high and over-leveraged, global debt levels are high, and corporate debt yields are low relative to risk.

We have too much debt and we’re poorly investing all this cheap money.

This has started to play out in share markets over the recent months.

The NZX50 dropped 3.60% in one day this month and the market has become generally bearish.

As US interest rates go up and as risk goes up, we can expect liquidity to exit.

That means more sellers than buyers.

Deleveraging (paying back debt) sucks up money and is going to curtail global growth.

Debt fueled growth is fundamentally unsustainable.

We have sucked up so much of our future growth potential to keep the party going.

At some point we have to accept and work our way through this hangover.

With the share market, price-earnings ratios are well above their long run averages.

In other words, share prices are too high. The theory goes that increasing interest rates in the US will hurt share prices.

Low growth (from deleveraging and trade-wars) will eventually translate into poor earnings growth for business.

Both low profit growth and higher interest rates will at some point undermine current company valuations.

I suspect that will be especially true of technology stocks whose valuation bear no resemblance to actual financial performance.

It is therefore increasingly likely we will have a share market correction in the next year or so, but nobody is going to accurately call these things.

I’ve been waiting for a correction for over two years!

Ditto debt markets.

Bond markets have been in a 30-year rally with falling interest rates, but that is coming to an end.

Excess money supply has seen debt priced cheaply with US Corporate credit margins at 1.85% over US Treasuries compared to over 3.00% during recessions.

Corporates are going to get hit from all angles – obscure politics, poor earnings growth, higher debt costs, and higher discount rates.

Bringing it home – what does that mean to me?

Us Kiwis are reasonably lucky because we are a small low-growth economy with relative stability.

The story I always come back to is the rabbit and the tortoise.

Sometimes it’s good being a tortoise!

It was good to see our Government bank a surplus and not come out with excessive spending promises.

We need a Government that is focused on reducing debt-levels, so we have capacity to stimulate the economy when we really need it.

That should last this current term and at least half way into the next one.

At some point our political parties will start to throw around ‘bribes’ but we’re still a long way off that.

Our share market is also high, but it doesn’t feel that frothy.

Unlike 1987, our companies these days actually do things relatively well.

We don’t have much of finance company sector and most bank lending is on relatively conservative terms.

The NZ dollar has also weakened which further strengthens our terms of trade with the world.

Off the back of the 2007 GFC, our Reserve Bank introduced a core funding ratio which has forced banks to fund themselves far more conservatively and to hold more capital.

More recent LVR restrictions and other credit tightening policies have taken the edge off the housing market.

Whilst other may debate it, I think our banks are in good shape and that will be important.

House Prices

Prices have softened in Auckland especially in higher price brackets.

This will continue with a backdrop that includes global uncertainty, low business confidence at home, as well as changes impacting overseas investors, and generally tighter credit conditions.

Downward pressure on house prices tends to flow down the market as each tier in the market resets its expectations.

My view is that prices in previously hot parts of Auckland are off their highs by about ten percent.

For now, that translates to an unofficial drop of around five percent.

According to QV data which lags the market, Auckland prices were down 0.50% in the last quarter, so 2% annualised.

Expect to see similar news over the next year.

Also factor in that a lot more sales are going to occur in lower price brackets with KiwiBuild encouraging development below $650,000.

That’s not a crash, it’s simply a soft market and fundamentally we still have low interest rates and low unemployment.

House sales volumes have been below long-term averages for years and are still low.

On a per-capita basis September house sales were as low as the GFC.

At the moment, low sales has not transferred to falling prices.

The longer this goes, the more I’m convinced we can ease our way through this with a soft landing.

If you think about long-term property investing, a simple rule is to not over-leverage yourself.

Investors will only lose money if they are forced to sell into a weak market.

Carrying too much leverage in this market is plain dumb.

I’m not worried about house prices.

Yes they are high, but I don’t see anything that would result in them crashing and the long-term prognosis for New Zealand is good.

What about Australia?

It very easy to draw a comparison with Sydney or Melbourne but they are different markets.

Most of the issue in Australia is stemming from an over-build of apartments which is flowing into the market.

Along with that is the impact of tighter credit conditions.

Bear in mind that Australian borrowers have been doing 95% loan-to-value mortgages until recently.

In contrast, Auckland price growth has been flat for two years with tighter credit conditions and much lower building activity.

Mortgage rates

Mortgage rates will stay relatively low.

That said, the cost of borrowing will blow-out when the world tips into its next recession.

We also need to face the prospect of a much lower NZ dollar putting upward pressure on interest rates.

Nonetheless, I still see mortgage rates staying in the 4%-5% range for the foreseeable future.

They will increase slightly off current lows so I find the 2 and 3 year part of the curve attractive.

We are currently getting 3 year fixed rates at 4.39% and 5 years at 4.85%.

Longer term outlook

The good news for New Zealand is that we have favourable demographics, we’re well located and well resourced.

South East Asia has a young population that will become an economic power-house and also drive the next resources boom (not dissimilar to China over the past decade).

But, the emerging markets crisis (from too much US$ debt) means there will be economic pain in Asia before that happens.

New Zealand and Australia are well positioned for the next growth story coming out of South East Asia.

We have an open-economy, free-trade agreements, an attractive business environment, proximity, and a strong agricultural resource base.


*John Bolton is the founder of Squirrel Mortgages. This article was first published in the company's tenth anniversary newsletter. It is republished here with permission.

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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127 Comments

That’s all much as expected.

Flat/stable (Auckland) market for housing to continue for a while yet but medium/long term prospects remain strong - underpinned by all-important structural factors such as demographics.

TTP

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Those demographics depend on high rates of immigration and low rates of emigration. Auckland is losing native born Kiwis so without immigration its population would drop and it only trakes a few empty houses to crash prices below cost of replacement.
Of course immigration is all the rage with the establishment elite who run this country. Hey I'm an immigrant and most of my friends are too but worldwide the move is against immigration. Why because we have been promised too much - immigration will solve our economy and immigrants commit fewer crimes and pay more taxes and you don't need to educate them and they are healthier so less spending on schools and hospitals. The public is slowly getting a reality check - the visible signs of immigration are low paid workers and the demise of training a Kiwi.
A referendum on immigration could set the national target too low and within a few years the Auckland house market will collapse. By collapse not the average changing from $1million to $650k but to $250k - below replacement - it would kill my retirement income but my 5 adult kids would be delighted..

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Flat/stable my ass. Absent an external shock, poor performance of unknown degree should be be expected and will continue into the longer term until sane fundamentals are revisited. When adjusted for inflation, Auckland's ongoing annualized drops are even more significant and indicative if a weak buyers market rather than a flat/stable fantasy. In the coming debt shock, we're toast too.

"Carrying too much leverage in this market is plain dumb" Gee wizz, why does John say that I wonder.

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TTP^^ that is not at all what this article states and it is bizarre that you have tried to rephrase it and infer this!!!

He doesn't say flat/stable, he is says a soft market. He thinks in some areas of Auckland prices are down 10% from the highs and that downward pressure will continue.

What constitutes a crash or correction? These are emotive terms that get thrown about. For the stock market a crash is a sudden 10% drop (within 24 hours usually), whereas a correction is a slow price decrease to 10% lower. A bear market is when it continues beyond 10% to 20% or more.

The NZ housing market fundamentals have changed. Immigration is slowing, domestic lending is tightening, global growth is unstable, international lending has tightened, NZ tax incentives are under review for property and some already axed. Recent articles have reported that housing supply has finally caught up with demand and even more recently, that there are more sellers than buyers in the Auckland property market, which is a huge shift in the fundamentals. And finally, the Australian housing markets look to be correcting somewhat, which may affect NZ sentiment if nothing else.

None of this guarantees a drop in price. House prices are sticky down as you have said numerous times and I agree. But to keep touting the same phrases over and over when they are no longer correct is bizarre. It's like you are trying to convince yourself. Plenty of things have changed and are now negative for the housing market, again I agree with you that the market has shown great resilience. Testimony to the almost religious belief that many Kiwis have in the value of housing. However, to distort the situation and suggest nothing has changed and to interpret this article to state that it supports your flat/stable rhetoric is misleading.

Not to mention that this dude's career and earnings hinge on a healthy property market, so alleviating fear of a crash is in his interests.

GN, in property terms (different form the sharemarket) a correction is a drop in values of up to 25%, past that it is considered a crash.

No. What constitutes a correction depends on context, including how much property prices escalated. You can't pick a number out of the air.

Yvil, yeah i've read the 25% = a correction or crash, I can't remember where. And I was googling earlier for anything definitive but came up empty. Do you have any link for any kind of consensus?

1. 10% decline is a correction
2. 20% decline is a bear market
3. 30% plus decline is a crash.

My money having been around the village of Auckland over the last 3 days is on a larger multiple of 3.

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Yes indeed Gingy, The illusory truth effect is alive and well in the mind of TTP. He basically spouts the same comment in every property story.

....and that is the point - it is the same comment every time - almost as if he lacks the ability to actually construct a reasoned, intelligent argument.

I like it when you call me Gingy

TTP is a non playable character

Whatever helps you sleep at night.

I hope the market remains buoyant as my mother will be selling in the next few years. Don't think it will though.

Yes China has had a big impact on the NZ currency because of thevTrump trade war
NZ is basketed with Australia as far as FOREX traders are concerned up here and China is Australia’s biggest export market and is fighting a trade war with Trump
So kiwis can thank the Donald for the weaker NZ$ & hence higher fuel prices etc
The sooner China & US work things out the better
China valued at $183 billion (up 16% on 2016), accounting for 24% of total trade. China remained Australia's largest two-way trading partner, export market and import source. Japan overtaking the US market as Australia's second largest trading partner, valued at $72 billion, up 17% on last year (9.4% of total trade)

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He starts off well pointing out the different risks to the global economy but his ending is far too optimistic than what reality is probably going to deliver. The risks to NZ is going to hit us side on from both China and Australia in the coming years if this next global downturn throws their issues into turmoil. There are risks to the big 4 banks in NZ due to multiple vulnerabilities and issues in the Australian property, banking and derivative markets that will be exposed in this next downturn. Last time China saved the Austrasian region from the GFC but this time they are in a much more weaker and vulnerable position. So is Australia and the NZ Government and RBNZ don't have the same leavers to pull.

Adam
The NZ govt doesn’t have John Key either & for all his faults ( I have a list ) he really is the guy you want pulling the levers when the s-t hits the fan in a GFC

As someone, during the GFC, working for a private company relying on government contracts for 80% of their work, I can say that John Key and National were a disaster during the first 6 months of the GFC. They were still doing their 'line by line 'review' of the books and still had a government spending/employment freeze on while Rome was burning.

John Key was in power for 9 years. In that time all he did was suck up to China, flood the country with immigrants and left the country with one of the worst housing crisis the country has ever seen. Apart from these things there is nothing good I could attribute his leadership with.
No thanks, we do not want his type of leadership again!

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None of the overseas issue could effect NZ or its banks and destabilise our bubble. Yeah right...tui.

It is wishful thinking - in reality no one knows - and that is something that politicians / business leaders are all to aware of but are desperate to avoid having to acknowledge. It would;d be refreshing if people would just say - I don't know.

Nobody says this.

Averageman
I agree with you that nobody knows how much GFC2 will ultimately hurt NZ
I know that NZ is seen as a stable government & population with good legal system & a transparent economy
For example Chinese migrants love NZ for all those reasons and a lot more
Once the next generation of faster planes are in service travel times will be slashed & NZ will be doubly attractive even more than now.
Basically NZ has an extremely bright future on the planet

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Crikey, a magnum opus. Perhaps a bit too sanguine? I agree we are probably in a better state than most, but these downturns seek out hidden problems and expose them. Like the big builders going bust recently, in a building boom.

My guess is we will see more strikes. Three years ago they were pretty much unheard off. Lower currency leads to inflation in imported stuff like petrol, and with the government being flush, who can blame the teachers for asking for a raise? Ditto, everyone else. Nothing can stop this groundswell, except unemployment. So, expect strikes followed by unemployment. Seventies redux.

Yes - don't underestimate social instability as a catalyst to something broader and more destabilising - something which is ignored in this analysis. Does this lead to full blown socialism or xenophobic populism gaining a foothold in NZ. The right understands to appeal to peoples emotions (or more accurately fears) - the left appears to appeal to logic and reason. Unfortunately appeals to emotion or fear appear to win.

Well NZ petrol is more tax than product & the government should be reducing its tax percentage or at least removing one of its taxes off fuel while the $NZ is being devalued along with its Aussie currency tied to the Trump trade war with China

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But what of the known unknowns?

We have no read on the amount of household debt relative to household incomes (we only have aggregate household debt). How many houses are spending more than 60% of take home income on the mortgage? How many could service the mortgage if one of the household earner loses their job? To answer questions like these we would need a comprehensive consumer finance survey. The last one was done in 2000 or so.

You can hide so much by not knowing or not bothering to ask (read wilful ignorance). .

"the cost of borrowing will blow-out when the world tips into its next recession." Really? Like '08 when it went to an effective real 0% or lower? More likely that will be done again. There's nothing else left to do....and why it was done last time.

Liquidity, lending and the cost of money may be a lot different in this next downturn. Hence interbank lending rates and risk premiums could go up.

You could be right; and if you are, it's not interest rates that will go to zero...it will be asset prices....
My suggestion is that given the alternatives, a lesser of two evils will be tried....again.

bw, Adam, I have asked JB the exact same question, here is his reply:

"Thanks ****.
I was referring to credit spreads or the risk premium over government bond rates. Depending on what happens these could blow out significantly and increase borrowing rates by 1% to 2%.
That would translate to banks paying a lot more for wholesale debt.
Cheers JB"

Let's just say that Government Bonds fell, and even went negative in the secondary market (Germany) last time. To suggest that won't happen again in a Recession, or more probably if a Depression hits, is unlikely.
The commercial lenders will have to keep their customers solvent, and that won't happen if interest rates rise. Banks will lower the cost of funds to their stressed clients to keep non-performing loans off their books, and to do that the Government(s) will do likewise. In our case, Adrian has told us as much.
" Depending on what happens" we'll all see in due course!

Exactly my thinking BW but I'm happy to hear counterpoints

Point is BW it has been done already along with massive printing of fiat currency
The whole world e Con omy is addicted to no or ultra low rates
No guarantees more of the same will do much after GFC2 which is a far bigger debt bubble than before
The biggest in history when it finally bursts
Good luck & ditto to me too

Excellent piece. What he says agrees with what I said yesterday of much of Auckland property down 10%

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I think, as an editorial policy, interest.co.nz should publish every writer's biography at the top of the story, not at the end. Thus:
By John Bolton, founder of Squirrel Mortgages. This article was first published in the company's tenth anniversary newsletter. It is republished here with permission.

You mean self interest abounds.

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Also a bit optimistic about 'the next resources boom'. Pretty late in the day to be talking like that.

There will be a 'financial correction', and it may well be THE crash - you canna'e control panic in full flight.

There will then be a war - China vs the US, others pick your sides. Putin knows this andf I reckon he's picked China.

The only worthwhile input possibility for NZ, is to demonstrate a sustainable way of living well - which is what every other leader (and cognisant nation) is looking for. The old growth paradigm kills us all off, and we all know it. What folk are unclear about, is the alternative. How about we show 'em?

People who crave power will never want to knit their own socks. I wish they would.

Barring external/internal events... As long as we are prepared to keep growing our population at current levels, nothing much will change until people start losing their jobs. Rising costs of living continues to divide the country between the "have's and the have not".

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Real Estate.co.nz, currently 13,855. More vendors than this time last year. What about buyers? UM-NO.

Heaps. .. bhsl,zs,expat. ...

Reality is that if property prices are down in Auckland and no one is buying, then investors will always have tenants!
Prices are irrelevant if you aren’t selling and if prices are attractive then get in, if the figures stack up.
Property investors that are financial will always do better on this type of market.
ChCh market is the one ai would be investing in , stable prices and opportunities aplenty!

"Property investors that are financial"

That one statement encapsulates so many of my thoughts on the literacy of your typical residential real estate investor.

"If price are attractive get in"... you mean those incredibly rare situations where you *might* be lucky and find a property with a 3.5% gross yield in Auckland.
Jeez, hold me back!!

Not an unreasonable assessment. Upward phase of cycle due 2021/22, and I don’t expect any major changes in house prices before that in the larger centres. Until then, anyone forced to sell for whatever reason could lose out. In the long run though, the biggest losers are those too doom and gloomy to enter the market at all.

BHSL - You keep going on about the upward cycle starting in 2021/22. Can you please tell us how the upward phase of the cycle is going to occur from those dates. I am really interested to hear your reasoning on this and why you believe prices will start moving upwards again around this time. What forces will be driving this? Sounds like you are going off Ron Hoy Fongs property clock but I want to hear it from you. I have a far different opinion to this which I will reply with once I hear your side of things.

I’m in no mood to get into another big debate with a DGM today. I will say though that I had to google Ron Hoy Fong just now as I didn’t know anything about him.

Ok, no debate then. Lets just hear your reasoning behind this. You post these years up all the time so please just a quick few points on your reasoning. Thanks

Don't expect anything rational from BHSL. His mentor TTP hasn't told him why the market will be taking off in 2021, just that it will. That is good enough for BHSL, should be enough for you as well. Don't ask too many questions Adam B, cults don't like people to ask questions.

There are plenty of global risks at the moment, which are getting a lot of coverage in the media. These risks are real, and as a small economy NZ has exposure to this. But the mistake that many here make is to conflate the likes of the US and emerging market economies with the NZ economy. NZ is not China, Australia or America. You folks also seem to think that the fact interest rates are already low means that NZ has no capacity/tools to deal with another GFC, which isn’t true. People won’t sell NZ property for cheap unless they are forced to. In terms of whether vendors are likely to be forced to sell - NZ’s economy has sound fundamentals and Orr has signalled interest rates are likely to remain low. DGMs overestimate inflation in the medium term. Moreover, there is very much still a shortage of housing in our larger centres and rents are rising faster than inflation. While net migration is falling, it is still very high. KiwiBuild will result in more lower quartile houses, but not many net additional units (unless the government makes the most of Universal Development Authority legislation next year, which it won’t). The economy is cyclical and softness won’t last forever - looking at past trends (DGMs absolutely hate to learn from the past - “this time is different you know”) 2021/22 is when the upward phase is due (although upswing unlikely to be as dramatic as 2010-2016)

You should subscribe to Peter Schiff’s YouTube podcast - he is your Roy Fong.

And there you have it folks. The upswing in 2021/22 is based on extrapolating a graph of the past cycle into the future. What could possibly go wrong?

And like clockwork, a DGM emerges from the woodwork to demonste their inability to learn from the past. Good luck with that, sunshine. Those graphs you speak of are actually pretty informative things - but by the time you learn to use one (if ever) it’ll no doubt be too late.

And how is that a DGM - you are making an assumption that the past predicts the future - it does so until it doesn't and then what happens.......

Thanks for the response. I promised not to debate so won't but I agree and disagree with many of your statements. I made a lot of money buying near the bottom of the last cycle then riding the credit wave and plan to do the same this next time as well depending on how it all unfolds. Fingers crossed. Long term I'm bullish on Auckland property.

BLSH and Agent TTP are sheepishly void of factual response on how the coming debt crisis can be avoided. Since the stage was was set by QE, BLSH leveraged up, TTP began selling houses (pulling the "wool" of others eyes). Both have lots of wool in the game for others to succeed in "ramming" home the point.

Skin in the game vs no actual experience...

Would you rather learn from an experienced chef (skin in the game) or from someone who has read a lot of cookbooks but who has never cooked?

Good point. Chefs learn from burning their creations. These two Clowns have never experienced true financial losses. Have you? While following the flock, its been easy to use others money to bring ones dream forward in time. The cost of which will soon be known

Going by the quality predictions of some of these "experienced" commenters, I think I will take the cookbooks please.

Hey Walnuts, have you got a good recipe for Xiaolongbao? I love those and really hard to find good ones in NZ.

Yes, a good analogy Yvil. So many to choose from when it comes to these people -

- Blind squirrels. If they find a nut one day it’ll be pure coincidence.
- Broken clocks. Right only twice a day, and not due to their own acumen.
- Backseat drivers. Yapping away but they’ve never changed a gear in their life.
- Skinny chefs, never to be trusted.

BLSH, still dodging my question from the other day? I'm still waiting on your fact packed analysis. Put your best foot forward, debate with the DGM and demonstrate some acumen.

Why shouldn't nz be conflated with the rest of the world? We are a tiny trading nation totally interconnected with it

'cause wheeze duffrent.

Did you even read my comment? “These risks are real, and as a small economy NZ has exposure to this.”

Hi BLSH - Cycles I believe are so overlooked. I think we can all agree that WHATEVER our belief's some sort of proof can be sourced to back it up. In 1976 I was educated about cycles by an investor friend, I thought it was to simplistic and ignored it and stuck to ' some sort of proof can be sourced to back it up' my belief's.By 1983 I had witnessed the effects of so called 'cycles' and gave it a go. After owing property through a cycle it's hard to ignore them and have learned to trust them. Before DGM's get to carried away with data/facts listen to this - at any time there are always reasons to expect gloom, wars, oil shocks, inflation, credit problems, earthquakes, and endless supply. Life carries on and problems come and go as do cycles. Of course there are problems ahead but nothing that won't be dealt with. Property does go down but it goes up much more than it goes down so is it any wonder it is a popular asset class. So I agree that the start of better times for property are late 2020 early 2021. By the way in Alexanders latest column that some of you dislike the average housing cost as a % of household income in 2008 was 16%,lower than I thought but the really interesting fact was today in 2018 it stands at 16.4% !

Shoreman, the following graph outs the likes of yourself, Agent TTP & BLSH as having been sucked into believing how the next twenty years will be the same as the past. House prices pretty much correlated with the CPI until then end of the last century. From then, several events led to the money taps being open big time. Credit creation in the the last 18 years have been truly phenomenal. Now interest rates are at 60 year lows and even multi century lows in other countries. Where to from here once the next crisis is unleashed - I ask you.

Scroll to graph two; http://briefingpapers.co.nz/house-prices-relative-to-inflation/

"The acceleration in the relative premium after 2001 coincides with President George W. Bush increasing the United States’ fiscal deficit which flooded the world with financial liquidity. That made it easier for New Zealand banks to borrow offshore using the cash to fund housing purchases"

RP -We could debate for ever I guess it's best we check in 3 years time and history will be the truth. All I know is that 35 years ago I ignored unneccessary biased negative comments about the future and just got on with it. I've been through 4 'Cycles' and everyone had bad things on the horizon. Life goes on problem get resolved and people make money. I'm sure you have some interesting points and don't want to disrespect your views. I guess my end point is if I had been guided by you or similar I would not have stepped out and made choices in the face of adversity and not be in the position I am in. I suspect we are similar ages my millions are in double digits how about you ? Let's both note this date and we can confer in 3 years time ! Regards

Agreed.

Dare to mention that the economy is cyclical and that we can learn from the past and you’ll soon be accused by a miserable DGM of “blindly extrapolating past trends and believing that the past is a guaranteed predictor of the future”.

uh-huh, yes indeed. The next twenty years will deliver the same gains as the past. So sayeth BLSH, the Oracle of Papamoa ;-)

BLSH if you admit that there are cycles... then you must also acknowledge that within a cycle there is a downturn phase? So why all the references to DGM's? Isn't being bearish just a natural phase of economic cycles... aren't bears just acknowledging one of the phases of that cycle? You can't have it both ways... either you acknowledge cycles and that being bearish sometimes and bullish other times is part of that cycle... or else you don't believe cycles occur?

I am sure we can agree that many investors are bearish too soon and others bullish too long. Timing is notoriously difficult but nonetheless, if you believe in economic cycles, then you would acknowledge the nature of up and down turns and bearish or bullish sentiment.

I don’t just admit that there are cycles, I embrace that there are cycles and learn from past trends. In terms of Auckland’s property market, the peak was in 2016, and the trough is likely to be 2021. NZ property market tends to moderate and plateau, not crash. One crash in ‘75 and a correction in ‘09. As evidenced by the responses to my comments above, DGMs refuse to learn from the past. Mention past trends and they react like data is voodoo and learning from it equates to blindly believing that the past is a guaranteed predictor of the future (see responses to my comments above).

My philosophy is that property prices go both up and down, but that the overall trend is very likely to be positive, as it has been since records began. DGMs hate this outlook.

DGMs are bearish 100% of the time come rain or shine, based on nothing more than emotion. They overestimate the severity of any price downturn and hope for a catastrophic crash due to a combination of jealousy and a desire to buy on the cheap. It’s bloody annoying and this site is rotten with em.

BLSH so DGM = is the property equivalent of the stock market permabear?

I'm mostly in agreement with you re; cycles and also the long term upward trend for property values... but not sure I agree regarding "DGM"s.

I think this particular peak/"upturn" has been so huge, so pronounced and ultimately so political, that it is bound to make many wary of an equally huge correction. Admittedly, there isn't a history of major crashes in NZ property but there are probably times when it is more advantageous to buy than others. I think a lot of what gets referred to as "DGM" sentiment is more about values and politics than actual jealousy. There is a lot of bitchiness and mud that gets slung around on this site and in comments sections in general, it's easy to dehumanise someone when you are behind a keyboard and infer emotions and offenses. I'd like to attend a interest.co.nz get together and see if folks were more civil to each other in real life!

There is an idea. David, when will you be sending out the invites to the interest.co.nz commenters Christmas function? Don't forget to book two rooms one for the bulls and one for the bears. You will probably only need a broom cupboard for the bulls, so won't cost too much. Looking forward to my invite.

Haha, good idea. I’d probably be more civil in person, no promises though. DGMs would outnumber the bulls 20 fold at this thing. You’ll no doubt stand out as the ginger chick. I’m easy to spot myself - I’m the one with a big black beard!

"But the mistake that many here make is to conflate the likes of the US and emerging market economies with the NZ economy. NZ is not China, Australia or America."

Facepalm central station.

Ashley Church told him.

Mr Church alway talks about how the Auckland market goes in cycles - 3-4 years flat then doubles kver 5 years... then 3-4 years flat. So it's "due" to kick back into life in 2021/22 according to Ashley's genius.

He must have an incredible regression model running in the background.... either that or no basis whatsoever.

Going by our last exchange, you haven't entered the market either.

What did I say to suggest that?

You said you haven't bought or sold property.

*have never sold a property

BLSH knows that if he did, IRD would likely assess him for CGT under the intent provision.

So you have a dog in this fight, just like TTP. And unlike me.

Where did you buy?

First in January 2011, North Shore. Many here aren’t in the market (or don’t have investment property), but still have a dog in the fight as they want their first place cheap. You should buy in Tauranga, it’s the Gold Coast of NZ you know.

Too optimistic. Economists never factor in Black Swans, even when obvious risk.
NZ is too dependent on Chinese flow of speculative capital, which is going out now.
China is not as impressive as most think and its debt is NOT manageable.
NZ thus far has been lucky. Trump and oil is curtailing that luck. Things turn fast and the turn is now.
What is a good market - sales or prices, and for whom?
Prices drop about 3 years after sales drop. ie now. And crash is too dramatic. It takes 3 years for them to go down 20% and that is why we are half way now, in Auckland at least. When median is $750k in Auckland, we will be at bottom. Not til end of 2020.

Agree although I think the bottom may not be here until 21/22. It has the potential to be a longer down trend and longer flat market at the bottom depending on what the central banks and governments do to get us out of it all.

I'm picking bottom of the market in 2020. I think prices in Auckland could fall a further 5-10% through 2019.

Great overview JB, to the point, knowledgable, and well balanced. Love your work!

Preaching to the converted. - what else should you expect.....

This website is infested with doom and gloomers. He isn’t peaching to the converted.

There's plenty of bear-ish comments in his article if you switch your blinkers off for a moment

I was referring to the poster (Yvil) - they are the converted.

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Seriously, all around us there could be a nasty collapse, but somehow or other it won't affect us? Pull the other one, mate, it has bells on it.

So in summary what Mr Bolton has outlined , is that Auckland has lost about 65 Billion of its housing stock value over the past two years , roughly a quarter of New Zealand's GDP, and in the same period added another 30 billion in mortgage debt when interest rates have never been lower.

That has future oops written all over it

Yeah its been a speculators paradise. What levers other than hyper inflation, destroying all retirement savings, are left. The old people with savings wanting food to stay the same price are a big lobby.

Don't forget guys... The majority of Mortgage brokers, Bank economists Real Estate agents, Builders, over leveraged investors and anyone else with an invested interest in the market will always talk it up. In fact, I believe its against the rules for any bank economist to be talking the market down.

Where is DoubleGZ these days?

He has a quite room next to JLR.

moved back home and left the wreckage of the mortgage bubble behind him...

Perhaps he's actually Augustine Lau?

Hi GN
He probably departed on a flight the day after Ecobird flew the coup. I took a trip to Auckland over the weekend and saw several of NZ's first attempts at shanty towns... Dare I say the first 'two little pigs' built better properties and the owners were attempting over $1,000,000. No buyers, high debt, plots bought for silly money and all bank funded...

Goodnight New Zealand.

When I started my business in 2007 things were already starting to change. What was noticeable was the number of businesses that were closing down one by one. That was coupled with a number of companies being liquidated, which went on for some time. Many IT companies disappeared (I believe because of a lack of work).

Just because you don't see what's going on doesn't mean things aren't happening. If companies disappear then their spending and their employee spending disappears.

There is one difference with interest rates being low. Those interest rates had a lot of companies and individuals under pressure. The banks and RBNZ didn't care.

As the markets keep falling then start to look for companies closing down.

i would have thought the opposite, low interest rates and available debt kept some companies going when they should have folded and made room for stronger companies to grow.
that has been the downside of QE, some companies have got lazy and not become more efficient or developed new products as directors became risk averse and steady as she goes.
this will not be pretty if we have another downturn as some companies that should have gone will finally disappear and the even the so called strong ones will be hanging on by there fingernails.
you can see a lot of that in the immigration debate where many many companies coming out saying they cannot get (the low wage) workers they need

" It's not like last spring or the last 10 springs. You're a very gutsy man if you go to auction now. It isn't what the property is worth, it's more how much you're prepared to give it away at."
https://www.afr.com/real-estate/sydney-drags-auction-clearances-to-sixye...

I took a trip to Auckland over the weekend. There is no housing shortage, while I felt for the homeless, there are hundreds and hundreds of empty homes that can never be sold because the debt to purchase land and develop is so high that many of the 'one off' developers will depart and leave the wreckage with our banks.

There is nothing other than a major housing crash on the horizon. Sorry to be the bearer of such bad news on a Sunday evening, but it's going to be horrific. I'm signing off interest.co.nz now for a few weeks so hope everyone has a good Christmas.

Nic, you have a good break and enjoy Xmas.
Maybe look thru a few open homes as you are truly an inspiration for all the property bears!

You too TM2

This is going to make Anglo Irish Bank' collapse look like an afternoon tea party at Buckingham Palace.

I find it pretty sad that there are people here wanting and waiting for a property crash. The reason ? I'm all cashed up but there is still no way I would hope for a crash to try and capitalise on other peoples misery. Our society is full of envious assholes, there was nothing stopping you buying a house and making your way up in life just like everyone else that has already done so.

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Of course not, every 25yo on a $50k salary has easily been able to save the $100k deposit to buy a house in the 4 years they've been out of uni, while paying $300/week in rent. Simple as.

Our society is full of enviousoblivious assholes.

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The problem (51 y.old?) Carlos, is that it should never have to go to this stage. We had our warning, along with everyone else on the Planet, in 2008, and to allow the local residential property market to 'escape' again in 2012 was negligent.
Our former PM Key, did two things : (1) Told us in 2007 that property was a time-bomb waiting to explode in our faces, and (2) having said he'd quarantine the problem if he got elected chose to do nothing about it. In fact, by his own words, he encouraged the excess by admitting that it was only 'property prices rising and increase immigration;' that kept our economy afloat during his tenure.
If those two things evaporate, which one way or another - they will, then what's left? Overpriced milk and bugger else all!

More like $150k deposit. You would struggle to buy anything livable within an hour's commute from the CBD for less than $750k.

Sorry I don't see your problem, my first job paid $9800 a year and you can still pay $150/week in rent. Are you living at the Ritz ?

As I said, completely oblivious.

Perhaps take a look at the $150/week rooms on trademe. 90% of the are sharing a room (not a house, a room), and the other 10% are either out in the wops, or a 1 of 6 flatmates in a boarding hose type setting.

That is correct, its called "Flatting" thats what you do at age 25. You don't seriously expect to be able to rent a whole house by yourself on only $50K a year do you ? Yeah I was lucky and avoided the flatting stage but a mate of mine bought a house and rented out the other 3 rooms and has ended up in the same financial position. Its called compromise.

Wow. Such disconnect. Not worth bothering.

I'm all cashed up but there is still no way I would hope for a crash to try and capitalise on other peoples misery.

The accidental benefactors are always the arrogant ones.

So misery only happens to the people who lose money on their house investment?
Those who are locked out of home ownership aren't allowed to be miserable about the fact that housing ownership has been made exceptionally difficult?

Sorry but my position in life is no accident.

Those who own MR2s in later life aren't normally synonymous with savvy investment knowledge.

As someone with an MR2 rotting away in the garage i'd have to agree. Must get that thing sent to the crusher.

Most of the issue in Australia is stemming from an over-build of apartments which is flowing into the market. [...] In contrast, Auckland price growth has been flat for two years with tighter credit conditions and much lower building activity.

His argument is that we will have extra-high cost rents and will be attractive to young people?

I think young people will decide they don't want to pay really high prices on old housing. Soon Auckland's demographic profile will become Adelaide-like, with property values to match.

And potentially worse if Aussie house prices collapse and ours don't... $650k for a dogbox in 'Kura, or AUD$500K for a decent house on the 'burbs of Brisbane? and better weather and job opportunities?

Does anyone here realize that the property market has grown over the last 30 years, to 500% of GDP?

Bit late in the flurry but just wondering who amongst us here has recently bought a property for investment purposes? And if so what your reasoning for the investment was or is?

.