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By Bernard Hickey
Prime Minister John Key has warned property buyers in Auckland not to expect capital gains forever, saying interest rates could rise some time in the future and they could be in for a "nasty surprise," just as stock market investors have experienced today.
Key was speaking at his weekly post-cabinet news conference after Chinese stocks fell more than 8% on Monday and after Wall St fell the most in more than four years on Friday on fears about China's economic slowdown. He was also talking after Reserve Bank Deputy Governor Grant Spencer warned that increasing numbers of rental property investors and migrants were increasing the financial risks inherent in Auckland's over-valued housing market. See David Hargreaves' article here.
Key said the bank's comments on Auckland housing were "nothing terribly new" and both the Government and the Reserve Bank were already addressing the housing issues in Auckland, particularly around supply.
"If you look at Christchurch as quite a good example -- when supply starts to meet demand then prices don't go up anymore," Key said.
"And, actually over time, and it's one of the things the Reserve Bank didn't say, but frankly they should have said, is interest rates won't stay low forever," he said.
"So when people go buy houses purely on the expectation they are going to get a capital gain, you've just got to be careful they don't come in for a nasty surprise - just like those people who bought stocks recently, and thought they were always going to go up forever, are in for a nasty surprise today."
Later Key said history showed prices never went in one director forever.
"If people think Auckland house prices are going up forever, they are misguided. History tells you that's not normally the case, that the market goes in one direction forever," he said when asked if the global market slump would hit Auckland housing.
"I remember when the dairy payout was $8.40 and people were saying they were going to the moon and when they were down there at $3.85 before the auction last week they said they wouldn't go back up again. The reality is markets go up and down. But, yes, if the international markets remain volatile that obviously has some impact on consumer confidence and can impact things."
'Not keeping me awake at night'
Asked if Auckland housing kept him awake at night as It was keeping Grant Spencer awake, he said: "It keeps me busy at night, because we have been a very busy government when it comes to addressing those issues - everything from special housing areas, reform of the planning laws to speeding up of the process, and you are actually are seeing that. You've got the most construction happening in Auckland now for a decade."
"So there's a lot of supply coming into the market and there's a bit of frothiness about the Auckland market that I think you might see dissipate a bit, actually. Interest rates are very low and that's partly what's supporting the capacity for people to borrow and fund a house, but the banks and the Reserve Bank have stress tested those presumptions and those assumptions are built into their lending profiles and they are very comfortable."
'Banks well stress tested'
Key downplayed the risks to financial stability from Auckland's housing market, pointing to stress tests done by banks last year which showed they had ample capital to deal with a forecast unemployment rate of 13% and an Auckland house price fall of 40%. He said the stress tests showed capital levels dropped from 11% to 8%, which was well above regulatory minimums of 4.5%.
"Yes, obviously there is some more risk if house prices go up but it is at the margins. The overall health of the banking system is very strong in New Zealand," Key said.
NZ 'not immune to global trends'
Commenting later on the stock market slumps, Key said New Zealand was never going to be immune from international trends.
"But overall the fundamentals of the New Zealand market are still pretty strong and some the things that have been driving the mood down in the US, and to a certain in Asia, are less prevalent in New Zealand," he said.
"The second thing to remember is there is a difference I think about what's happening in China with the construction and investment side versus the consumer demand side. Our exporters are much more heavily focused on the consumer demand side, selling food and a number of other products to them," he said.
"Australia's economy, for instance, is much more heavily focused on the infrastructure investment side. So it's arguably a bigger deal for Australia than New Zealand, but yes it has some impact."
Govt wants modest house price rises
Key said the Government's preferred house prices to keep rising, "but at a very modest level."
"You saw a correction in the (Auckland) median house price last month and that didn't keep me awake at night, so no that doesn't necessarily do that."
He said he did not expect a big correction in Auckland house prices "unless people get carried away."
"But I think you run the risk that there's more of a correction if things carry on at the same price."
'No case to tighten migration'
Key downplayed suggestions of tightening migration targets, which are currently around 45,000 new migrants each year, to help reduce demand for Auckland housing.
He said the record high net migration was due more to fewer people leaving to live in Australia.
Asked if the Government should reduce the 45,000 target, he said: "You can do, but only about half of them go to Auckland and quite a lot of them are already existing. And quite a lot of them have gone through our universities and have a job and so you'd have to take them out of that job, and if they are in a skilled area that may actually hurt the construction market or that may actually hurt the development of the economy."
"So, yes it is a factor, but I think the answer is 'build houses' - that's probably a better way of addressing it and we are doing that."
27 Comments
It is racist to object to an individual on the grounds of race but is it racist to object to a whole neighbourhood changing "over night"? For one thing it is a normal reaction (based on modern sociobiology). Once people were prosecuted for being gay but gay is a "normal" state for a percentage of the population?
It would be an interesting test case for the Race Relations Office?
'No case to tighten migration'
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Q+A was a ride. Don Brash stood in for Michael Reddell as Michael Reddell doesn't "do work-like things on Sundays"
Shamubeel Eaqub used the F word.
http://croakingcassandra.com/2015/08/24/qa-on-immigration/
"Michael Reddell doesn't "do work-like things on Sundays"
LOL - I don't do work like things full stop - I send the money out under instruction to stand against those that want to be relieved of it. Central bankers never fail to accommodate such egregious endeavour. I suppose, one could hope their mothers hadn't dragged them up so?
Ah... Brash is playing the Nat-Poli tactic -- watch for it people. He'll ask a "question" which is three things rolled together, and a sideways anecdote tossed in as extra.
It's like a barrister asking "Do you kill the man who was breathing air when you meet him?"
There is no actual correct answer because it's not a single point, it's just phrased to look like one.
Was the man breathing air? Do you kill him? did you meet him? if you met him was he breathing? Did you say no, does that mean you didn't meet him? why not? When my mother, bless her, makes an appointment she keeps it, and that's a point of honour, and honourable people don't go around just killing people, isn't that right? No? are you saying nasty things about my mother or are you trying to tell the jury that honourable people just up and kill people. What dishonourable things to say, no wonder you missed your appointment. What you keep your appointments, so you kept you appointment with the victim and you killed him, and you admit that he was still breathing when you met with him.
Got love "Nat-talk"
Someone on kiwiblog commented that Key would be a brilliant poker player. In a tight spot he adopts a dreamy teenager persona?
And I always thought what was happening in the opposition of politics (of course they would oppose National, that’s their job actually apart from everything else) but it was a bit negative about out place in the world. So we played a bit about whether people coming here was a good or bad thing whether people should invest here was a good or bad thing, or whether we have a trade agreement with parts of Asia was a good or bad thing, but actually in my mind, the reason that I want to say yes to those things is because they are the opportunities that reflect our opportunities to both get wealthier (which is all about what you can do with that money) and then ultimately the oppurtunities for Kiwis. I’d like New Zealanders to feel (after my time as Prime Minister) they have become more confident outward looking nation more multicultural.
http://www.tv3.co.nz/CAMPBELL-LIVE-Monday-September-22-2014/tabid/3692/…
What the __ is he talking about? What about downside risks?
Hmm of course he's used to gambling in short term punts in the markets, in effect leaving the table after a short term win before the odds catch up with him. You cant do that with a nation as well and leave it in a decent state. In effect he's up against someone who's ace with maths, stats and takes a long view so he/we are in for a loss. of course if he's buggered off to Hawaii when it all goes south and leaves us with it he wont be around to take the can.
"And, actually over time, and it's one of the things the Reserve Bank didn't say, but frankly they should have said, is interest rates won't stay low forever," he said.
Does john Key seriously think our economy is in a position to raise interest rates? is he delusional? Why haven't the fed lifted rates? .....they can't.
He's a quintessential supply sider. He will believe in order to boost growth, all one must do is be upbeat and summon the confidence fairy. He is part of a long lineage.
"But though men have the power to purchase they may not choose to use it. For when confidence has been shaken by failures, capital cannot be got to start new companies or extend old ones. Projects for new railways meet with no favour, ships lie idle, and there are no orders for new ships. There is scarcely any demand for the work of navvies, and not much for the work of the building and the engine-making trades. In short there is but little occupation in any of the trades which make fixed capital. Those whose skill and capital is specialized in these trades are earning little, and therefore buying little of the produce of other trades. Other trades, finding a poor market for their goods, produce less; they earn less, and therefore they buy less; the diminution of the demand for their wares makes them demand less of other trades. Thus commercial disorganization spreads, the disorganization of one trade throws others out of gear, and they react on it and increase its disorganization.
The chief cause of the evil is a want of confidence. The greater part of it could be removed almost in an instant if confidence could return, touch all industries with her magic wand, and make them continue their production and their demand for the wares of others..."
http://www.bradford-delong.com/2011/08/alfred-and-mary-marshall-and-the…
"says RBNZ should have said interest rates won't be low forever" It is Govn's job not the RB's to interact with and advise job public, despite that the attempts by the RB to put up rates should be signalling this is the case.
Longer term not low forever tells me JK doesnt understand the new world of post peak oil, or the debt mountain, bigger than the Great Depression's.
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