'A lot of people' are now sitting on low-priced houses they can't sell because of the Reserve Bank's 'speed limits' on high loan-to-value lending, according to long-time property investor Olly Newland.
Newland, who's also an Authorised Financial Adviser and author, told interest.co.nz that warnings he had made in an interview late last year that the LVR limits, introduced in October, might cause the property market to become dysfunctional, were coming true.
"...The market is becoming dysfunctional. Expensive houses are selling, very quickly, therefore skewing the statistics that prices are rising, and a lot of people are sitting on the very cheap houses and can’t move them.
"I have clients now who are sitting on cheaper houses and they can’t sell them. They can’t get out of them. Especially those who have been doing them up and reselling because the buyers have disappeared and the poorer buyers with small deposits haven’t got the ways and means to find Mickey Mouse ways of getting around it."
The LVR limits were introduced by the RBNZ principally to ensure financial stability, as the central bank was worried about the possibility of our banks becoming badly exposed to any sudden sharp fall in housing values. However, the secondary intention of the LVR rule was to attempt to remove some steam from the then rapidly heating housing market, particularly in Auckland. See here for articles on LVRs.
Recent housing figures have shown that house price growth has slowed somewhat, but that sales volumes have slowed markedly - particularly in the lower price brackets - as would-be first home buyers have retreated from the market believing they won't be able to attract the 20% deposit that many of them would now need.
“I think first home buyers should be exempt [from the LVR limits], whether it is a new house or a second hand house. It should be exempt altogether," Newland said.
"First home buyers should be exempt if you want to keep the [LVR rule] in place – it should be disbanded totally in my view, but if you have to have some sort of control it should be perhaps 10% deposit. I think that would be fair. Ten percent deposit in my view would be plenty to ask for. Twenty percent is too much for the average worker."
Newland said the developments in the housing market subsequent to introduction of the LVR limits were "not surprising at all".
"It is like an interest rate rise in a way. It pushes people out of the market at the low end, it doesn’t bother the people at the high end – to a wealthier person it’s just another bottle of wine and another cup of coffee a week. Whether they have to pay more interest or less interest or they go and get a second mortgage or a third mortgage...it just doesn’t matter. But for working class people it does matter."
The RBNZ last week kicked off what's expected to be a series of interest rate rises with a 25 basis point lift in the Official Cash Rate to 2.75% from 2.5%.
In an article also last week Newland suggested the interest rate rises prompted by the RBNZ would soon be "yesterday's fish and chip paper".
Amplifying on those comments in the interview, Newland said the change from the RBNZ had been "very minor".
"It hardly tinkles the teacups.
"[But] what I find very difficult to understand is why these constant threats about more increases.
Why rate rises?
"We seem to be the only western country that has interest rates where they are now let alone where they might be, under threat. And I think it’s very damaging and will sap some confidence out of the market, which it doesn’t need.
"Don’t forget interest rates don’t just affect property they affect businesses as well. It affects the whole community.
"Our interest rates are crazily high. If you compare our normal interest rates with other countries' normal interest rates, for some reason New Zealand, as long as I’ve been in the business, has interest rates which are twice as high as any other country. Most interest rates in normal times are four or five percent but for some reason we seem to think 8,9,10% is normal – and this is crazy and I don’t know why that is," Newland said.
He reiterated his view that the country will now see a renewal of mortgage wars between the banks as they compete for business.
"It’s happening already. Straight after the announcement of the OCR rise banks immediately started putting their rates up, and only today they are starting to come out with specials again and cutting their rates.
Mortgage war
"So I think what’s happening is that high interest rates will encourage people to leave money in the bank. High interest rates will encourage people not to borrow as much, so the banks will be flush with more money than ever and so they have to lend or go broke so I think we will have a mortgage war coming up before long..."
Newland said he thought the housing market should have been left to "find its own level".
"The prices of property have risen to the level they probably need to.
"And I think the market should gently flatten off and have small increases of a few percent per annum, which is the way the capitalist system works. I think the major rises may be behind us but if interest rates go up they’ll be passed on and they’ll end up as costs and push prices up again because we still have immigration, we still have pressure on housing, we still have people coming to the country from overseas, we have all the same pressures as before," he said.
60 Comments
"... first home buyers have retreated from the market.."
Won't all these people still want to enter the market at some stage? Surely the number must be growing by the day. What will hapen when the flood gates open and they are allowed back into the market? Maybe, if (when) house prices start to decline the RB will minimise the impact by reversing the LVR policy to allow buyers back into the market as needed.
Where are Ollies clients that can't sell cheap houses? Not in Auckland I assume.
So by cheap he means auckland properties between 485k (the cut off for welcome home loans where a first home buyer only needs 10% dep), and what 700k??
Granted, 485k will not buy much these days in auckland, you would need to be going to highly undesirable areas for stand a lone houses. It would buy a decent apartment though, which is within the welcome home loan rules.
Certaintly not the story in areas like palmerston north where the cut off for welcome home loans is actually higher than the median house value there, 300k. Prices will just rise until there is nothing left under 300k, likely over the next couple of years esp as equity rich auckland investors cotton on and buy investment properties in the sub 300k price bracket there.
Why are NZ's interest rates so high relative to all other developed countries?
We have a stable government, good overall economic prospects, no significant percentage of citizens living in poverty.
Why do we allow non-resident foreigners to buy our property, which boosts house prices, which boosts other prices, which gets our OCR bumped up? That has to be a double-loser for most NZ-ers?
Surely we don't have to wait for another major earthquake before we get lower interest rates again? Or are we waiting for the 2nd GFC before we realise that we cannot afford to re-destroy our economy again with (relatively) high interest rates?
Is NZ a victim of Globalisation? Our Govt & Reserve Bank no longer has true independence.
I agree, what oily means is the bottom end of the market, that isnt cheap, its x2 over-priced.
The LVR is doing exactly as predicted stopping the FHB over-paying which allows the seller to in turn over-pay and the next seller etc.
I odnt know about collapse and I hope not but if it stops the mad speculation via every increasing debt I am all for it.
regards
My parents bought their first home when the banks would only normally lend 50% of the purchase price (of course house prices to incomes were a lot less then). Back then, the housing market seemed to work just fine with an LVR of only 50%.... Of course any home will sell at the right price... Olly and his friends dont seem to understand this and blame the LVR?
Aaaawww, diddums, Poor old property shark cant shylock naive suckers into a lifetime of debt servitude and lock up the gains for himself!
Just because his rentier bank mates got spanked for eating all the pies while rates were low and were told to spit it out.
And now the bullsh** statistics can't be used to fudge and obfuscate reality anymore, the emperors choice in clothing is on display and all we see is fat cat flab.
Suck it up princess, the rich will always fire their dubiously gained dosh around with scant regard just because they can, the 99% aren't all that starry eyed any longer.
Bring on bitcion et al, let us be free of the tyranny.
ha what a joke. Sitting on cheap houses that they can't sell! Looks to me that Olly needs to re-adjust the meaning of the word cheap. Something that is cheap will sell. If it's not selling it aint cheap. Sit tight first home buyers and wait till the sellers meet the market - as they must (increase interst rates will also help our first timers as more pressure comes on to dump).
This perspective has always amused me. There are people that actually think that those without their own house sit and drool at those with more money and much less style. Perhaps you're simply reinforcing the theory that money and arrogance goes hand in hand? It's world happiness day pal, look into it and you might learn a bit about life.
Try not to be one of many, who are twisted by anger, despite it being world happiness day.
Perhaps try yoga?
Or perhaps try not blaming 'other people, govt, the system, the baby boomers, the younger generation, the dad that never paid enough attention, the lotto shop that keeps dishing out the wrong numbers etc etc'
SK :-)
Umm... world happiness day was my reference - perhaps try creating your own? Or are you devoid of ideas and that's why you speculate on housing? Personal attacks are unnecessary and I'll report that - my father's very ill and a comment like that is unacceptable, smiley face or not. As for all your assumptions, there's a saying about that.
... weirdly enough , it was the somber faced bureaucrats at the United Nations General Assembly who ordained March 20'th as " World Happiness Day " ...
They decided that happiness is good , and ought to be promoted by governments around the world with public awareness programmes ....
... maybe they think we need " Happiness 101 " as a school subject !!!
Twats !
I keep hearing from you about these phases PIs are supposed to be experiencing, I've been investing in property for 12 years now and have not experienced any that you describe. If I was to make my own list it would be:
Phase 1 - income increases due to rent payments.
Phase 2 - massive capital gains allow for and/or/either massive income increases or huge 6 figure sums clearing debt/buying toys/improving lifestyle.
Phase 3 - retired multi-millionaire at 32.
Perhaps we should all become property investors and retire at 32?
And congratulations on your success (seriously).
The early 2000's onwards have seen the biggest run up in NZ house prices in history. My opinion, is that it won't continue. Someone trying to replicate your experience today is likely to be stuck with a low yield, rising interest rates, and a stagnant or falling real property value. There are always exceptions, but this will be the average outcome.
Others will of course have different opinions.
National have successfully (or willfully) ignored the problems with NZ's property market. The RBNZ however seem to have the will to do whatever it takes. If they weren't having an effect, Olly et al wouldn't be complaining about it.
While we have a growth focused, market based economy inflation in most things becomes systemic (especially finite things like land). There may be small ups and downs but the general trend is always up unless the whole system fails, or changes. People in 1990 said "houses can't go higher", then they did; people in 2008 said "this is the end... houses will never go up again", then they did. Also consider the artificial land constraints imposed by councils and lack of building supply competition... property values will only keep going up.
Your attempt at persecuting PIs just smacks of tall poppy syndrome because you wish you'd taken the same hedge. I've got no problem with you and your ilk whining at the govn, council, etc but if you stop and think about it PIs and developers contribute to the supply of houses (rent and own) and are helping alleviate the problem.
No TPS here, I congratulated you on your success in the above post. Sure it is a bit antagonistic of me to refer to the phases of dealing with grief, but no more antagonistic that most of the property investors who comment here.
At a certain price the income derived from an asset is insufficient to meet interest repayments, a Minsky moment - the NZ property market hit it's head on the ceiling in 2008 and managed to avoid any major correction in values. A nasty bruise is starting to form on the market's cranium again at the moment. The average kiwi family can't afford the average kiwi house.
Anyway, here I am in 2014 saying "real house prices could go higher, but won't". Just an opinion.
I think the point that ZZ is making is that the existing stock of apartments is generally going to be cheaper that the new builds because it just costs more to build them now. I take your point on supply though, the supply of apartments has always been more flexible so you wont see the capital gains in apartments that you do in houses or land.
PIs on here get nothing but open hostility so it's not surprising that they reply in kind, just human nature. Thanks for your opinion, my views on the future of Auckland house prices are well known, I'd just ask you, is that what you think will happen or what you want to happen? And are you referring to Auckland or the other cities and provinces, because the next few years are going to be very different depending on where you are, in my opinion.
... well said Mr notaneconomist ... there is no easy solution or " magic bullet " to fix the problem ....
There's a multitude of factors which need addressing ...
... but it ain't happening under the current crop of busy body bureaucrats .... and there's none on the horizon who'll do anything tangible to reset the market equilibrium either ...
Change , as ever , only occurs at a glacial pace in NZ .... probably not even as quick as that !
Hi steven, contributions like building consent, network growth charge, stormwater contribution, development levy and stormwater discharge 'contributions' are generally paid after the building(s) are erected. The council simply withhold the building and/or resource consent(s) until they are paid.
Are you perhaps under the impression that free markets make people greedy, or that people are not greedy in centrally planned economies?
Of course people are greedy. That is an immutable, universal, consistent and utterly predictable fact, like gravity. I think you've mentioned you are an engineer - Consider whether an engineering approach would be more likely to be successful if it worked with the force of gravity, or if it ignored the force of gravity, or if it worked against it. Certainly, gravity is not always helpful and some engineering challenges would be easier if gravity could be abolished at will, but that's not the world we have to work in.
That is the whole beauty of free markets - they work with human greed, rather than pretending that it doesn't exist, or trying to suppress it. The point is that both buyers and sellers are greedy. Buyers want to pay as little as they can; sellers want to sell for as much as they can. It's the interaction between them that leads to the discovery of a price. The problems come when Government interventions upset that balance. Anything that benefits one side, will disbenefit the other in equal measure. That's what we're seeing here.
Against gravity, what pray are buildings? planes?
They work against it but that way we get a functional service.
The problem with a free market is, the playing field isnt even and actions of individuals can seriously impact others or even the very society we have.
So just like sending criminals to jail we have to control those without scruples and that can be successful.
regards
If the playing field isn't even, then it isn't a free market. Once again you are confusing liberty with anarchy.
On the gravity analogy. Which is most likely to be effective and efficient: An irrigation system in which water runs downhill; an irrigation system which assumes that water runs uphill; an irrigation system that requires water to be transported from downhill to uphill?
Free market is unfettered market. Those with big reserves and estabished portfolios and experience will be "playing with the wind". Those without, against the wind.
To counter that bias and turn the shark tank into something a bit friendly for the majority of the population to play in, a free market is often fettered, into a not-free-market. This is done to level the playing field. So a level playing field is never a free market
I'll throw in a couple more immutable, universal, consistent and utterly predictive facts, like gravity... ( Ms de M... u r the poet.! )
People will always game the system
Unintended consequences ( higher order effects).... will tend to give us worse outcomes.
So there are lots of people who play to win, and to hell with the rules,.... they game the system
And there are lots of rules, formulated by leaders who should be wiser, that lead us to a worse place as as result of higher order effects... ( unintended consequences)....
Quite right MDM, you cant change human nature. Investors are successful people who have excess money to their requirements so logically look for somewhere to park and protect that money. In NZ the most logical place to park that money is in residential houses, the individual has not made it so, the system has. If the system makes it more logical to park that money in, say, the NZX then it will go there. The system defines the game, investors just play in it.
not everyone is greedy.
Often for those short on funds, getting more is sensible.
For those with enough or excess funds, prudent investment is reasonable. Thats why they have enough.
Who throws away (or spends everyone elses) money? people going broke.
just because you're not aiming to go broke doesn't make anyone greedy.
It seems clear that LVR’s and interest rates are turning would-be first home buyers into renters. At the same time foreigners are buying property that New Zealanders simply couldn’t afford anyway. Perhaps this is the new norm. Who else was going to buy the Crafar farms and Hotchin’s 39M house if not the Chinese. Moreover, as long as the would-be first home buyers aren’t paying off debt towards a home, they’re putting their money in the bank (what little they have after paying rent) and spending their incomes to increase GDP rather than increasing the debt:GDP ratio. Its great because if there’s a banking crisis then the would-be first home buyers fat bank accounts will shore up any ailing bank’s balance sheets during the bail in phase. Perhaps this is Nationals plan, everybody's a winner! :-/
Rather than bleat about it, Perhaps Olly should go sit down with some reputable economists sometime and learn why NZ has higher on average interest rates than other OECD countries - one of the many issues is everyone wants to be like him and borrow to buy bloody investment properties (at the expense of the first home buyers), and have someone else fund them. That someone else is a foreigner and they expect their pound of flesh ( as indeed do the few that actually save in NZ).
people can and will pay it. good reason.
but then there is also the RBNZ and other interference deliberately pushing it up and removing competition. lower capital cost would result in more projects being worthwhile, thats more demand and more jobs (which we can't have because that might make inflation go up, and we could have that)
From what I understood from this interview, Olly knows more about practical economics than an army of academics who only understand theories, having never got their hands dirty or tried to scratch a living out of the real world.
And it is indeed "bloody" lucky that investors do buy a lot of cheap homes, (now made unafforadable thanks to the RB meddling) because they end up mostly as rentals for the less well off - which is better than them living on the streets.
Whether investors are Kiwis or foreigners, they are doing wonderous work by providing homes for the less well off, who have been shut out of the market by the clueless, well fed, over paid and well housed bureaucrats who go to bed every night, never having to worry where the next meal or the next dollar is going to come from.
The housing market has been dysfunctional for over ten years. Houses that are not selling are by definition not cheap. LVRs should not affect a rational market. If a prospective house-owner is unable to save 20% of the house value then they will probably struggle to pay a mortgage.
First home buyers are the most vulnerable to market rate shifts (shallow portfolio, easily overleveraged) - the publicly announced reason for LVR limits. also increases the likelyihood of speculation.
As for the low end investors......WHO DO YOU THINK THEY WERE REALLY AFTER? HOW ELSE CAN PEOPLE BE FORCED TO FIRE SALE THEIR PROPERTIES TO THE BIG BOYS WITH THE VULTURE FUNDS?
NEW ZEALAND'S CHEAPEST NEW HOUSE STILL FOR SALE
Couldn’t agree more with the item on dysfunctional housing market.
I have (I THINK) New Zealands cheapest NEW 3 bed home for sale - very well insulated, double glazed, heat pump etc. Lined double garage with sleepout.
Nice garden, nice area in Bulls - Rangitikei. 20mins to Palmerston / Wanganui. 5 mins to the airforce base.
But very little interest at $170,000.
One offer, and that on hold until they can sell their house
Well over 4,000 view on Trademe.
http://www.trademe.co.nz/Browse/Listing.aspx?id=629086317
The low end market is just about dead.
I always enjoying hearing Olly's opinion because he is always so disfunctional towards a successful ecconomy yet often where the money is, short term.
Take Interest rate rises. History show us that successful ecconomies have a savings backbone where people put money in the bank and in return receive 'risk free', returns to live on.
Olly's not in the minority when he promotes by-passing sustainible savings and moving straight to debt based profitering as a means of becoming financialy secure.
These wealth generating scheme's are great for participants who have enough skin in the game to bypass long term borrowing, but for people who struggle to get 20% deposite, these unfortunates sign up for 30 years of servitude, paying people like Olly upfront profits to maintain their living indulgences and their bank per week around 30% more than an equivilant property would cost to rent.
I guess Olly grew up listening to Jom Morrison and The Doors. "I just want to get my kick's before the whole s%$thouse goes up in flames".
You guys obviously havent tried to sell a really cheap house recently.
Mothers house in Dunedin. GV 130K Valued by a Registered Valuer at 115k
Best offer, from a potential Landlord 100k. next best and only other offer 93k
Reasons for no first home owners being able to buy! The insurance companies
No insurance no loans.
Why no insurance you ask. House still has scrim on the walls and they required it to be fully lined before insuring it. Landlords can do something like that then rent it as they are holding it for the long term.
Us as owners (3 siblings) have no desire to line out a house to only possibly get the money back.
So another house that could have possibly got a low income earner onto the housing market goes begging
True - the market for first time buyers has dried up. Give it a coupole of months for the govt to realise it before things change. (hopefully)
But to be honest, so much of our housing stock is of such low quality it needs to go (I'm not saying your mothers house - I haven't seen it.) but scrim scrim doesn't sound great.
But until we reconize that there are ways of building cheap, good quality & warm houses, people will still buy the cheapest out there becuase that's all they can afford.
With the rental WOF looming, it will be better to bowl many old homes & replace with a "Tuffbuild" type home. 3 bed R3.9 $85,000 inc GST & building consent.
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