By David Hargreaves
The retreat of the housing investors seems to be gaining momentum as we get into the shadows of the September 23 election.
Following May figures that showed housing investors borrowed $1 billion (40%) less than in May 2016, the latest Reserve Bank figures for June 2017 show that investors last month borrowed a whopping $1.149 billion - or 48.5% - less than they did in June 2016.
Last month investors borrowed just $1.219 billion compared with $2.368 billion in June 2016.
Last July the Reserve Bank announced a new 40% deposit rule for investors. While the rule didn't formally come into operation till October, banks in fact began applying the 'spirit' of it straight away.
This meant that from July onward the amounts borrowed by investors have been falling - but the retreat does seem to be gathering pace as the housing market shows signs of slowing.
The 40% deposit limits have not been the only factor in play though.
Banks have taken the opportunity of the RBNZ moves to tighten up their own lending criteria, while there's also been 'credit rationing' by the banks as a result of a shortfall between what the banks have been lending out and what they've attracted in through deposits. This 'funding gap' is however now showing signs of closing.
The sharp pull-back of borrowing by investors appears to have created more room for first home buyers - and their borrowing figures have continued to be at around the same levels as last year.
In June first home buyers borrowed $713 million, which was down slightly on the $738 million borrowed by the same category of buyers in June 2016.
The figures borrowed by owner-occupiers have generally been fairly stable too, but in the latest month these also have slumped.
In June owner-occupiers borrowed $3.099 billion, which was down by over half a billion dollars, or 14.5% on the amount borrowed by this category for the same month a year ago.
This is a rather bigger drop than has been occurring in recent times. In May for example the drop in amount borrowed by the owner-occupiers was just 6.5% less than for May 2016.
The overall amount borrowed in June, at $5.097 billion, was down a thumping $1.7 billion, or 25%, on the total amount borrowed in June 2016.
95 Comments
Commissions for real estate agents slipped this year....The latest commissions data which compares registered real estate agents based on performance history, sales and independent feedback, shows national average at 2.07 per cent in metropolitan areas ...
From Aussie, but how long until our outrageous commission structure starts falling?
You can imagine if there's a change of government while the bubble bursts and the country goes into recession - all the current government supporters will cry 'look at what they've done, they've got to go!' (and yet we know how and why we've got ourselves into this position).
There will be a wall of constant criticism of a Labour/NZ1st govt whether there is a crash or not.
National have an army of well paid bullshitters on tap ever ready to pile on anyone that threatens the status quo.,(immigrant workers this week) the Press gallery could be a case study in conformity, such is the lack of diversity in their views.
It just seems bad news after bad news on here , FHB don't buy yet, if you couldn't afford to buy over the last year or two, that's not your fault, and if you had brought it probably would have been seen as very risky now, nows your time and you are very lucky , wait and keep a eye out on the likes of trademe, 2011 cv prices would be a good guide line of prices when affordability was fair, 2008 would b a dream, don't forget this this market has leaped 40% over affordability
Falling investor demand will not be filled by FHB demand, as prices are severely unaffordable for FHBs at this level. Indeed, prices are severely unaffordable for all income earners who purchase as owners occupiers, 10x salary average. This is the reason you see the major fall in sales numbers, as increasingly investors and owner occupiers cannot or will not buy at current prices.
So no, don't quite see the good news here.
A 45% decline is not completely out of order. Consider the current LVR limit of 80%, and the RBNZ's DTI limit of 5 currently being consulted on. These two numbers suggest a VTI of 6.25. The current VTI is in the Auckland area is about 9.6. A reduction from a VTI of 9.6 to 6.25, that is achievable at the limit of prudent lending, represents a 35% decline to reach affordability
There are two things im sure about:
1) There will be no income multiple (overseas investors would buy 100% of Aucklands property)
2) Any significant drop in value will be met by rate cuts
A 45% decline would have interest rates pinned to 0% and property would rocket upwards. The very idea that a Govt. would stand by while property dropped 45% flies in the face of all evidence.
1) I disagree, there's not enough overseas interest to underpin the whole market like that and I'd expect prices to fall to meet local affordability. The multiple is only on the mortgage, so those with equity already built up can still move around.
2) Rates do not work that way, the council budget is split between residents according to their house values. If prices across the city fell by 10%, no ones rates would change as a result. To confirm this, just have a very quick glance at how much the council budget has grown vs how house prices have grown.
3) Governments don't always get a say in it.
Sir I am referring to interest rates very obviously, not council rates.
You can believe the reserve bank will just sit ideally by as we go in to deflation (45% drop in house prices will destroy absolutely masses of money) but I am effectively certain that you are wrong.
It is very clear the RB will NOT set rates to protect house prices. If such a fall has an impact on the real economy via price or financial stability then it will alter rates to extent required to meet those objectives. Or it may provide liquidity to banks. But it will not save people from themselves in the property market.
It absolutely will im afraid. A normal correction of 8-15% wont necessarily tie its hands but anything substantial and it wont have a choice. The reduction in the money supply and the slow down in the velocity will cause inflation expectations to dive. They are mandated to target a band if they didn't cut the Governor would be replaced.
A fall of that nature will not in itself have a direct effect on inflation any more that increases of that nature did. So the RB will not care one jot about house prices falling in that range, and will certainly not wade into the market to rescue home owners.
RB has said the banks can handle a 40% price fall. I will believe that when I see it, but that is clearly the level at which the RB itself sees it may need to intervene for financial stability. But that intervention is likely to be a recap of at risk banks, not interest rate cuts.
Sorry, home owners are not going to get bailed out of house price falls, and its very dangerous for anyone to think that.
The RB stress estimates of 40% are not an establishment of the level at which they will intervene. They are the levels at which they believe banks can survive a 'shock', a major global credit failure for example. The RB will intervene long before this if the decline is gradual enough for them to have time.
A fall of 8-15% maybe wont tie their hands I agree. But thats effectively no change in price, its just normal volatility and wont worry any seasoned investor. A fall of much more than that and money will be getting destroyed at a pace that absolute will cause inflationary expectations to dive and rates to be cut.
The RB doesnt care about home owners specifically but they care about inflationary expectations over the medium term and they know that a fall in house prices reduces spending and destroys money causing aggregate deb to rise too slowly (in their opinion) or literally fall.
Home owners will be bailed out of a major decline, just like any other major failure would be bailed out. Personally thats not how id run things but im not blind to how they perceive things and how they plan to react.
So not only has the interest rate cycle been abolished, income multiples are also irrelevant as there are strange people living across the seas called "Chinese people" who will buy whatever house we build at a premium of whatever % we name on whatever it costs is to build it. They sound like jolly nice people. My guess is, foreign buyers will be out the door at the first hint of trouble, and they won't be back.
The RB have no interest in rate cuts except to the extent required for price or financial stability. The govt doesn't control the interest rate cycle. 60% of bank funding is offshore anyway, so what we do here with the OCR does not dictate the costs of that.
At a 45% drop some of our banks may be bust. Who will be lending all the money that is the fuel fior this property "rocket"?
At no point do i claim the interest rate cycle is dead. The long term trend however is also not dead.
If prices are limited to an income multiple then the yield will be insane and yes, overseas buyers will buy the whole city over time. It absolutely wont be allowed to happen however.
As houses drop substantial value two things occur, a slow down in the velocity of money and a reduction in the total supply of money. Both are deflationary pressures and will force rate cuts.
At 45% down some/most/all banks will be bust, that's true, and that is effectively my point, long before that interest rates will be slashed and she will be off like a rocket.
Your claim that overeas funding will limit the rise is flawed. The marginal cost of borrowing is what drives prices and the marginal rate during rate cut season is the variable rate.
If you feel that banks simply dont have the ability to loan the money then I will direct you to a BOE document that explains how money is created in modern banking systems.
No. Who knows where interest rates will be in 5 or 10 years? Why do you assume a current trend must continue? The rate of interest has varied over time considerably, is that variation now at an end?
A fall in house prices does not mean there will be be general deflation in an economy. It's simply an asset price bubble, which bursts. The price of that asset falls. There are plenty of examples of asset prices busts which have not led to general deflation.
Marginal cost of borrowing is irrelevant. Banks cannot offer lending at less than its cost of funds. If offshore funds come st a higher cost than OCR then the lending rate must reflect that cost in excess of OCR
And if banks go bust that is likely to have wider adverse impacts which may trigger OCR reductions, but last time i looked banks with seriousy impaired balance sheets tend to REDUCE their mortgage credit, not go on a lending spree.
I dont know what rates will be in 2 years let alone 5 or 10. What I do know is that whatever rate that is, it will not be so high as to force property prices to fall dramatically.
A substantial fall in house prices absolutely means there will be a general deflation. It has occurred hand in hand in every economy where major declines have occurred. It is also mechanically understood in full. A significant fall in prices cause debts to be paid down and aggregate debt falls. Some loans dont get repaid and get written off. Both off these forces destroy money and reduce the general supply of money, promoting deflation. The loss of perceived value reduces spending in the economy and velocity falls deflating prices further. Its debatable about this been negative or positive long term but Reserve banks are currently of the opinion that its bad to have deflation.
Asset bubbles that burst almost always lead to rate cuts which is why you dont get deflation which is my point, rates would be cut.
The marginal cost of lending is not irrelevant, its the key factor. The cost of funding on variable rates is effectively the cost of borrowing from the reserve bank so offshore funding is not marginal rate for a new loan.
If banks go bust? My point is that banks will not go bust, rates would be cut long before they go bust. The merits of this can be debated but that is the openly stated response to a deflationary risk.
60% of current bank funding is sourced offshore. OCR does not set the the offshore cost of funds. Unless banks will fund their mortgage lending wholly from documentic funding to which OCR applies, which implies a massive drop in mortgage credit, the required offshore funding to make up the 60% needs to be at the offshore rate.
I think it's very, very dangerous than people with a material exposure to the property market think "heads I win, tails you lose" on the basis the RB will bail them out via interest rate cuts, and that interest rate cuts will if there is material financial instability (ie banks are under serious stress) be effective to maintain prices.
Marginal loans will be taken out almost entirely as variable loans and so can be funded in full from the reserve bank if needed. Because of this the variable rate tracks very closely the OCR, while fixed rates can be more divergent. Each new loan made by a bank creates a deposit and that to can be borrowed back (domestically) to balance the book longer term.
I don't think this is as much a political problem as a people problem. The seeds were probably planted in 1987 and we are only now at full maturity. There are things both national and labour could do/could have done to fix the issue but have chosen not to but the root cause is some flawed decision making around debt and investments.
Both - but Key was quick to realise Kiwis liked capital gains (lots even though he knew it was un-sustainable) so he groomed his support base around that philosophy. When the game was up he jumped ship (notice how when capital gains gone from housing market, JK was gone and off to get knighted)
Here's the keys Bill...good luck.
He basically played on people's instincts towards greed for political power (if you want to simplify things)
And yet, a lot of those that have been played are still unaware of the fact because they are trapped in the greed paradigm and haven't realised it yet! (They probably will if/when this all turns sour)
John Key (NAT) created the super city and then Len Brown (LAB) cut in half the land supply of Auckland.
Land prices shot skywards so fast that anybody could buy land and do nothing with it and make a killing.
National don't fix the problem, because they aren't the ones causing it and doing nothing benefits their voters in the short term.
Labour don't fix the problem, because they cynically win votes in Auckland mayoralty contests by causing the housing crisis.
On housing the choice is two completely arseholic main parties or voting Winston who has never looked so good.
Investor specuvestor bubble was started by Cullen putting up the tax rate (envy tax). People started loading up rentals to offset that tax. Nat has done nothing about it though, other than put in the 40% minimum equity.
Shows how heavy specuvestors were loading on cheap debt, chasing tax free gains.
depends if its a speculater driven bubble, which many suspect it is.
When the capital gains turn to losses as we are starting to see the speculaters look for a fast exit and pop the bubble
this explains it quite well
https://people.hofstra.edu/geotrans/eng/ch7en/conc7en/stages_in_a_bubbl…
You are simply speculating that it its speculative investing. The idea that investors will sell in to losses flys in the face of all logic. Showing me a simple chart of an idealized bubble bears no relevance unless you can demonstrate that interest rates will rise to historically typical levels.
So maybe the slowdown in house prices is mostly due to the introduction of the 40% LVR ?
Maybe it's not all because of the Chinese money ?
The 40% LVR was introduced by the RBNZ but it had to be approved by the government.
The government also put into law that any foreigner buying property has to have a NZ bank account and an IRD #, which is a strong deterrent to money laundering.
Maybe the government DID a few good things to curb house price inflation ? (I'm hunkering down for the anti-government onslaught)
Agree those were all well targeted changes. Just think it took way to long, and didnt go far enough to prevent the damage/ bitterness against foreign and domestic speculation.
Add DTI of 5x or less, foreign ownership ban, empty house/vacant land bank tax , compulsory cap gain tax on any property that has claimed income tax offset, and tax loss ring fence. But that would hit Nat's core membership to hard in the pocket.
This will be the crux of the election. Vote for the many (most kiwis) or vote for the few (banks and leveraged specuvestors).
Big effect - and what we're seeing now is just phase one, which is to stop any NEW house purchases by NZ-based Chinese on behalf of rich Chinese from China.
Phase two is the big sell off - this is because Chinese residents cannot send out more than $10k USD from China without being investigated, and they must sign a declaration that it isn't use for housing. So what happens when these $1M mortgages can no longer be supported by the NZ-Based Chinese' incomes, or if the rich Chinese from China wants to recouperate his investment? Remember, 50% of something is better than 100% of nothing. Watch out for the big sell off in Howick, Botany, Dannemora, Flat Bush next year.
Does this mean Fiona Li and Harcourts were likely helping Chinese buyers violate Chinese law, I wonder?
http://www.msn.com/en-au/money/homeandproperty/solved-the-mystery-of-au…
Short Supply....well maybe...like an Aussie..clap trap.
Those rules about oversea investors needing a IRD no and nz bank account, what was that going to do , oversea kiwi fruit workers get those thing easily, they need them, but I agree LVRs slow investors down but wasnt Auckland already at 30% and only outside Auckland last year went from 20 to 40% and at the time Aucklands investors didn't go down hardly and outside Auckland when up, Away that aside they thought property had got to far and did the LVR changes and think of dept to income so here we are, prices coming down investors dropping out, the big question I guess is will they change the LVR, if the waited for say a 20% drop would they be happy and leave things, ok they change it by 10%, how many investors are already underwater, where are interest rates, the risk takers are probably out of the game to prices lift, would help people with good cash flow, I can't see LVR,s ever been changed tho , they made a point, it a business like commercial
@O4; You're largely correct. Thought just to clarify; the big problem for local resident Investors is that they need to raise deposits based on their individual property investment purchases. They can no longer borrow based on their existing portfolio which is what is really stopped local Investors.
Even if the banks lowered their LVR rates to 20% for Investors. I still think it would be unlikely that most of them could afford to borrow unless they could borrow based on their portfolio, which is extremely high risk for the banks. Mainly because the NZ market is now in decline due to the absents of top end foreign buyers.
And we all know that Foreign Buyers pushed up the Auckland market massively. Here's the proof: When the IRD brought in the registration requirements for overseas Investors. That caused the Auckland market to drop by -10% for Oct 2015 to January 2016.
This did put off a lot of Foreign Buyers as they didn't want to register. But the ones that did register carried on buying but at a slower rate and Auckland property prices continued to increase.
It has only been since China slammed the breaks on capital flight that has really affected the Auckland market followed by the Ozzy banks restrictions on lending to local investors based on their portfolio.
What we need to do now is let the market bottom out to more affordable levels.
When has the RBNZ ever cut much lower than where they are now, they should have thought of this on the way up by lifting, now they are no help, making things worse, they now have very little movement and mighted have any say to, I guess by doing the LVR,s not interest rates they targeted investors which it must have been those figures that they had that had them most worried
Yes. LVRs have been a huge success IMO. I've been impacted by them in my small way.
There was a lot of pooh-poohing of them on their introduction, that they would be ineffective. In particular by Olly Newland in articles on here, and by plenty of commenters. I guess he could argue other factors have put the breaks on.
Maybe non-bank lenders will fill the gap eventually, but that sector is so small now compared to Olly's 1980s heyday - that IMO it would take a while to ramp up, maybe they will be in place for the next boom part of the next cycle.
Definitely, they were spot on , they stopped now we wait because with them gone prices will slowly come down because the average joe is miles under these prices, the RBNZ won't want prices to drop to much , a bit risky, but they should have thought of that 2 years ago
The only people I see winning in our current situation are the banks. Who would want an 800k mortgage ? Id rather live in a caravan park than have a mortgage like that hanging over my head for 30 years. Banks should start a trend and sell branded rope nooses to be worn as ties to the poor bastards who are betrothed to them via their 3 bedroom shitbox in AKL.
Its really the inevitable end game with financialisation of the economy... as resources hit limits we rely on pure financisation to mask the fact we have hit limits ... debt on debt on finance ... promises, promises.
Growth is debt - the system mandates that aggregate DEBT must keep growing to avoid collapse. Capitalism only works if the future is bigger than the past.
Averageman right on, interest rates should always be low, even 3 to 4%, helping fhb , home owner occupied,investors, commercial, everyone. Lifting interest rates don't help owner occupied if house prices go mad, LVR and DTI is such a great way, pushes savings up, helps balance, takes out a lot of risk, helps the ownership renters balance and supply and damand , LVRS at 40% at the same as Commerial is the right thing to do, both being business related, fair fair fair love it ya and I'm a investor, long term, not a flipper, and boom busts are a pain, u don't know if you're coming or going, hard to plan
Penfold, I'm picking once this housing correction is over, say 2 to 4 years from now and hopefully only 30% not 50% but my forecast would have to be 50% for the top end and 20 to 30% for the low, but if the RBNZ see,s the light about leaving the LVR,s where they are and having the DTI at about 5 to 7x , I would think these booms and busts we keep having every 10 years will slow right down, because we as a country would have a fairer less risky balance
In 2008 at that correction the interest rates were fortunately at 9% and slowly went to 4%, about a 5% drop at the banks and the market still stayed down for a least 4 years, the RBNZ is at 1.75 now and nz isn't going to zero, if anything the banks mighted change at all, no help, just hope they don't go up a little
1967 , 1977, 1986 , 1997, 2008, all years I think were housing correction, 1967 went to 1974 with big drops, all times government did what it could at the time but still prices went down and stayed down for 4 or more years approximately, I course it could have been worse, all the figures for 2014 to now are miles over those other corrections except 1967 AND THE RBNZ IS AT 1.75 now, ok they stayed low to help the farmers or keep the $ as low as possible , whatever, but that mean they need to try other things, so far so good on turning the correction but with overseas investors gone and local investors losing there fat in it , ever if they didn't sell ANYTHING the market will drop to affordability and LVR will b a distance memory
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