By David Hargreaves
It's risky, perhaps, to be passing judgement on the effectiveness of the latest round of LVR restrictions before those restrictions have even officially taken effect. But, what the heck, I'll have a go.
While the, now three rounds, of loan-to-value restrictions have each differed significantly in terms of what the measures contain, they have all had the same October 1 start date. Therefore, it is possible to make some early and meaningful comparisons as to what the initial impact was and is.
In 2013 when LVRs were first introduced by the Reserve Bank, there was a furious build-up of activity in the housing market, with soaring sales volumes, ahead of the October 1 date. Thereafter things went pretty darn quiet, which suggested the LVRs were having an impact. But it is worth stressing again (because the RBNZ always glosses over this one) that by late 2013 it was clear that the Reserve Bank was setting itself to hike interest rates - and this it indeed did with four ill-starred rises during 2014. It's difficult to measure things in isolation but these rate rises must clearly have had an impact coming on top of the LVR moves.
In 2015 there was again a sharp rise in sales activity ahead of the introduction of round 2 of the LVRs. It needs to be pointed out though that in 2014 there had been a marked slowdown in the market ahead of that year's general election, so the spectacular rise in sales volumes looked all the more spectacular, coming off a subdued base.
Round 3 is different
So, to LVRs round 3. There's been a couple of differences to note around the introduction of this one. Firstly the explicit announcement of the move came a little earlier, in July, as against August for the previous two. Secondly, the banks actually applied these latest restrictions from pretty much the day they were announced, so we've not had the kind of run-up and anticipation that we got for the first two LVR introductions.
What to make then of the August housing figures from the Real Estate Institute of New Zealand?
Well, there certainly hasn't been the rapid build up of sales that we saw in both 2013 and 2015. However, if we consider that the banks effectively applied the new rules from late July, then we should expect to see the dampening impact of this action coming through.
What we've seen is an August market with prices and volumes bubbling along reasonably - but, crucially with very low volumes of stock coming on to the market.
It looks to me like a 'wait and see' market. It certainly doesn't - with those low volumes of houses for sale - look like a market about to turn down. Not with the daffodils in full bloom.
Peak impact already?
I'll stick my neck out and say that we have just witnessed the peak of the impact of these new LVR measures. If I'm right, what we can expect to see is that a wave of buying activity will sweep into the market along with spring and then 'up she rises' again.
It has seemed to me that the RBNZ wasn't massively optimistic that LVRs3 would do much to slow the market. And I think they were right. The failure of LVRs2 to slow things down to anything like the degree the RBNZ expected caught our central bank out badly. It felt it had to do something, so it grabbed for the LVRs again because this is a macro-prudential tool that it already has Government-sanctioned and ready-to-go. But I suspect it probably felt at best that it might get the market to draw in breath for a minute. And I think that was it in August.
What the Reserve Bank will console itself with though, is that the move will shore up the banks' position in respect to mortgages held by investors (a 40% deposit on a property means the property can decline in value A LOT before the bank is inconvenienced).
This, on top of the way the original LVR 'speed limit' from 2013 hugely reduced (the RBNZ reckoned by about $20 billion) the amount of high (above 80%) LVR lending on the banks' books, will see the financial sector in a much stronger position to handle any significant housing downturn that may eventuate.
RBNZ happy enough
So, come what may, the RBNZ is likely to be reasonably satisfied with its efforts to promote financial stability. Then of course early next year comes the likely introduction of debt-to-income ratios. And it's this measure that the RBNZ is now obviously pinning its hopes on to control financial stability risks into the near future.
All in all then, I think everything is in place for another pretty busy and buoyant spring and summer period in the housing market.
The latest household financial statistics release from the RBNZ for the June quarter showed two things: Firstly, household debt (now at 165% of household disposable income) is continuing to rise to hair-raising levels. Secondly, the AFFORDABILITY of that debt mountain is looking pretty good! Courtesy of ever-falling interest rates, loan payments are currently consuming just 9% of disposable income on average. As some means of comparison, that's exactly the same figure as of December 2000 before the last bull housing market kicked off. At one point in 2009 the figure nearly hit 14%.
More room to borrow
What that tells you is that we've plenty of room to keep borrowing yet. That 165% debt to income figure is probably going to look small by this time next year. How high could it go? Well, I suppose the real question is: Do we want to know?
For now all I can see is rising house prices and increasing unaffordability for first home buyers.
As I see it, it's now pretty much entirely up to the Government as to what, if anything, it wants to do about the situation.
70 Comments
Cool. I'm not a property investor and I don't really understand the mindset particularly well. However, if I were a cashed-up property investor at present, I would be taking a more conservative approach and keeping my powder dry. The opposite seems to be the case (if the media is to be believed) and the investors are charging ahead like there's no tomorrow.
So what do they know that makes the seemingly obvious risks benign? Is this purely based on their intuition? Do they have any risk tolerance whatsoever? It would be fantastic to be able to interview one.
Hi JC, I'm a property investor (and also a business owner and employer). I think the biggest difference between an investor or business owner and an employee is the willingness to take risk. Most investors and business owners know that real risk exists, they get as much information as possible to minimise the risk then THEY TAKE ACTION, that's the biggest difference in my opinion
More like risk is evaluated relative to other things. With a fundamental lack of housing even if the property market tanks there will still be rental demand. While this may look pretty poor if you bought a median house and got median rent, the reality of the matter is that I purchase lower quartile houses and get median rent. Realistically after accounting for mortgage interest and depreciation offsetting tax, I can get a net yield (after expenses) of about 4.5% which is lower than my mortgage rate. Inflation will increase the proportion of rent relative to invested capital annually.
Capital appreciation is just a bonus that allows me to purchase additional property in the same setup as above using leverage. I do not ever intend to sell property because I am a hoarder (emotional attachment to the titles in my folder).
I initially elected residential real estate because I was able to get the most leverage for this category of investment. As with all investment if the market tanks I intend to purchase more residential real estate because I believe that fundamentally demand exists for Auckland real estate. It is my opinion that Auckland is still slightly undervalued because we should be looking at the median income of those interested in living in a developed English speaking democracy with a stable government and world class views, as opposed to the median income of those who just happened to be lucky enough to be born here.
I believe that if it looks likely that the greens and their cohort will win an election we should liquidate stocks and real estate assets ( although I personally won't ) inorder to have liquid capital with which to purchase real estate as soon as they trigger the recession that they want so badly.
Oh you will sell your hoarded real estate one day, and at a huge loss, because you don't truly understand the drivers. But you think you do. so the loss will be even more painfull, perhaps even enough that you will throw yourself off a bridge. Without getting technical, it is as simple as something I was taught when I was 15. TANSTASFL. There ain't no such thing as a free lunch. An immutable and timeless law the property investors thing doesn't apply to them. Clowns.
Yet again you miss the point, there is a difference between great works and great design. Yes, great design is timeless, but it is also egoless. Greed and ego go hand in hand, so greed and ego are mutually exclusive of good design. And macro symmetry is always a power play.
J.C ... all the above great advice from the investors is practical and very real -- the difference between investors and people like Scarfie is Guts and whether you have it or not once you learn the business ...
The basic rules Yvil mentioned work in an appreciating market that has a consistent lack of supply ( thanks to Auckland city council) that helps lowering a lot of the risk .. the rest is calculated downside and informed decision which one develops after good self education and building the ability to possess a mind set that can deal with fear and work your business through ...
The rest will grow with time and patience - clever investors know what to buy and check their sums and never get attached emotionally to their properties ... it is stock just like any other ... not much different from raising a cow ! Milk and Meat
If you are afraid of debt ( in large sums) and cannot sleep the night thinking about ways of paying your mortgage, then property investment is not for you. Investors think constantly about finding ways to borrow more to buy the next one ( next cow) ...
Faint hearted people who are dreaming of a crash and doomsday don't have and won't have a clue of what this all means or what it is about .... they just site on the sideline and cry Wolf!!
Those who are naive enough to have believed some economists and preachers back in 2000 - 2003, and 2010 and didn't get into the market ( because of doomsday or unsustainability !!) are now chewing their toes . Some have now Joined chicken littles hailing for the sky to fall or even silly enough to believe the Green leaders who want to bend the trees so their followers can reach the fruit ...!!
I learned this from my accountant throughout my journey: Everyday is a good day to buy a property .. go figure
Investment is simple if you know what you are doing and it's done properly. Just like any business that has rules and traps to avoid.
CM, If your question is genuine (not sarcastic) you will find the answer by googling a graph of property values in your area. Look at the last 30-40 years, not the last 3-4 years. You know property roughly doubles every 10 years (our grandparents bought a house for $30'000 40 years ago) and look where the current price is vs the long term average.
Example, Hamilton house values have gone up insanely in the last year, are they overvalued ? Not in my opinion because they have been flat for so many years before.
Perhaps it was genuinely sarcastic.
I'm no economist, and I do tire of people wheeling out selective examples of house price purchases from many years ago as evidence of whatever argument they are peddling. I would be interested in someone making a comparative graph with the following information:
* Average house prices over the last 30 years in Auckland
* Average household income in Auckland over the last 30 year
* Average wage in Auckland over the last 30 years
* Amount of average household income it took to service the interest on an 80% mortgage on an average Auckland house for that time
* Returns a similar investment in the sharemarket would have produced over those 30 years
* Anything else a boffin believes would make the graph usable.
Fail that, if someone can direct me to that information, I could attempt to make the graph myself.
For the record, my particular grievance is not that house prices are too high, but that they are completely out of whack with incomes.
Of course house prices have by far exceeded inflation or wages, you can complain about it or use it to your advantage, up to you. You do make an excellent point in your 4th question: it doesn't take anymore of your average income to service the much bigger loans for today's expensive houses because of the much lower interest rates, that is reason #1 for house prices going up.
I could also tell you exactly when house prices will stop rising but I will keep it to myself and now get busy doing things in the property market rather than talking about it. I wish you the best (no sarcasm)
Thanks for the best wishes, but I'm doing alright. I own a house, which I use primarily as a place to live. If interest rates doubled, house prices halved, or both, I'd still have a house, and I doubt the bank manager would even register my existence. But since the whole house price malarkey is not about me, that is beside the point.
The real issue is that we live in a society where security and stability are tied into home ownership. Rampant speculation is making home ownership in our largest city seriously unaffordable for people which are required for society to function, such as nurses, teachers, street sweepers, supermarket shelf stackers, and really anyone not earning $150K+ a year. (and to be blunt, those earning more than that are not really required for society to function).
Now, as you say, I could use the unearned income from my house to "my" advantage, but given that what we are gambling with here is people's shelter, stability and overall social cohesion, to do so offends against my sense of right and wrong. Is there anything which I can do to stop you from using it to your advantage? No. Is there anything which I can do at all about the situation? No. So I post comments on an internet forum instead.
It will be a blood on the floor. Sooner or later. What we need is a economic slowdown.
Banks are great to give you an umbrella when the sun shines.... when it starts to rain they will take it away very quickly.
With the level of debt the moment of people loosing jobs will have catastrophic consequences.
Yes, I know - NZ economy is doing well. But look what is happening globally .... it is not that flash.
... if you take away the stimulatory effect of an ongoing record migration into NZ , the growth rate is less spectacular ...
It's just that compared to our peers in the OECD , the NZ economy is less shabby than theirs' ....
... it's kind of 'like having a banquet table loaded with rat sandwiches .... the Kiwi rat sandwich has the slight advantage of having had some rosemary and a little garlic added to it ...
DTI limits set at 5 times will take out a very large number of property 'investors' before the ink sets. Setting limits on interest only loans would also point the market in one direction. The RBNZ / government have a choice ,however the outcome will inevitably have the same sad conclusion.
The number and value of new loan approval continues to soften. I would look for this trend to turn around before concluding the market is taking off again.
http://rbnz.govt.nz/statistics/c16
Pre LVR rule update approvals are still in play at the moment.
Simon, although the C16 data has some flaws. On a 13 week comparison, approvals have slowed from 12.1 percent last year to 0.6 last week. The value of mortgages (some of which can be explained by the transition to properties ex auckland) has slowed from a phenomenal 30.7 percent to 2.0. Given this is rolled off 13 weeks,it is very likely that this will continue to head south in the coming weeks. What happens when people, or those remaining can no longer afford high prices Simon.
I'm surprised these figures aren't in negative territory. You may have forgotten that the corresponding period last year we saw a massive increase in approvals for people wanting to beat the oncoming 1 October LVR's. The fact that we had any growth compared to that given the banks have already been implementing the new restrictions since July just shows there is background enthusiasm to purchase. That said, there is a real lack of buyer activity right now so I believe that we will see the current wait and see mode continue for a few more weeks then we'll have a mad rush through till December.
David H you re correct no amount of action will help till government act and John Key has made it clear as mentioned in an article in the same website that he is not in favour of any action, more so on overseas buyer and has openly said that is in favour of protecting speculators and will do anything to see that the house price does not fall. So what do you expect.
PM by default has the power in any country and if that power is working to boost, it is hard unless outside event spoils the party (Which will and when it happens will be disaster) .
In any other country media and journalist would have grilled and criticize the government for its so open support to speculators (in the name of protecting mum and dad home owner - Fact is for mum and dad home owner it does not matter if the house price is up or slightly down as are in for long term and in the long term even if the house price fall will correct). It is the speculators who will have problem if the party stops and this is whom John Key is protecting as he sees himself in their place and can identify more with them than the average kiwi who is struggling.
A drop in values matters a lot to people who have purchased their first homes in the last 12 months and have mortgaged themselves to the eyeballs to do so. What happens when that person loses their job or has to move to the other side of Auckland to get a job. While you can make an assumption that the general market will have moved it is still going to be a bitter pill for them to sell a house and come out with less than they went in with.
This happened to my daughter when she bought at the last peak. Sold nine years later for less than the purchase price and that was after some significant upgrades and improvements. A real struggle for them with a demanding new business and two small children. They have bought again but right back below where they started.
I think this current bubble should have been nipped in the bud three years ago with central bank tools and severe restrictions on immigration and foreign money generally.
It's too late now, there is no satisfactory way out and it is our young Kiwis that will be the ones to suffer. It does make you wonder who "our" government is working for.
It is not a good situation, next election will be a fight between the rich and the poor and is a very dangerous situation and is getting worse day by day.
Current government is playing with the social fabric of NZ and if something happens, it is them to be blamed.
They already know this. Why do you think they have been seriously fiddling with privacy laws, domestic spying laws etc? They are not doing that for any alleged terrorism risks. They know the real threat to them will be domestic in the form of many generations of anger at having their hopes and dreams stripped away from them in what seems like forever just to protect a massive housing bubble. Example: I highly doubt any OBR event will go down peacefully.
Did you see this one in the US;
You don't want to see one of them mate !!... so be careful for what you wish for ... ! You will be the first to hide under the bed if they arrive here - God forbid !!
So we now move from silly conversation to the absurd conspiracy theories only the world's idiots would believe ....eh?
So the gov is busy stripping us from our rights eh?? and busy spying on us ?? yeah yeah right!! so why don't you try moving to N Korea, Middle East, South east Asia, maybe even East Europe for some rights and transparency !!!
The next election will be between those who have their minds open and aware of the era and the world we are living in -- And those who either don't know what is happening and just following blindly, cannot comprehend the world today or still living the daydreams of last century ....
Who can be identified as Poor in NZ today and who falls in the Rich category .??.. poor in what? ... in money or brains? .... There is only a small number of people who can actually be identified money rich, not enough to fill one electorate .... there are thousands of people who are "Brain" rich and going by very well with their everyday lives ....
The next election will be about common sense or the lack of it - not about idiots calling for riots or preaching for revolt !! ..... Oh, be careful, big brother might we watching ...lol !!
Social fabric breakdown, yes the pitchforks will come out. I see more and more divisions. A few years ago we had high quality investigative journalism from John Campbell in the evenings. Now we've got inane lightweight banter from the likes of Mike Hosking who's so disliked that there was a petition to have him removed from the air,
I think the problem that Key's got is that they haven't just screwed poor people this time. Its the middle class and upper middle class who are falling down the rungs.
If I was an Amercian right now I'd be voting for Trump in protest. It'll be interesting to see how the next NZ election pans out.
http://www.nzherald.co.nz/nz/news/article.cfm?c_id=1&objectid=10724160
not worried about his poularity?
not surprised, we have never had a serious threat or problem mostly eggs or mud defaced signage, the odd brick through a window
But some of the anger manifesting could bring us into a new era. Would not be surprised to see another queen street riot. might surprise our new residents that every now and again in peaceful NZ people rise up
http://www.teara.govt.nz/en/photograph/35112/queen-street-riot-december…
http://www.nzhistory.net.nz/queen-st-riot-auckland
Shame ...... !!!
So is this what you would like NZ to be seen as ?? I would have thought that you wouldn't like us to witness this shame and would hide it away rather than posting it !!
Is that what we are ...? A country of pissed up idiots rioting in the streets ??? ..... Who would respect these idiots and eventually their country anymore ?? ... just like the old days - these idiots only gathered disgust and shame from the rest of NZ and went home with few wraps around the ears ...
If that is the best that people can come up with then some tough love is certainly in order !
Springbok tour of 1981. Government and NZ’ers have differing opinions on human rights and Apartheid. Arguably the largest instance of civil disobedience in NZ’s history where protesters without a doubt had the moral high ground. Some regard this as a defining event in our nations history. The government responded by unleashing a violent paramilitary “Red Squad” to suppress the discontent. I’d say that with todays GCSB and SIS allowed to spy on NZ’ers the government suppression would be much more effective.
Eco bird – Watch this, you'll love it! Its John Keys stance on the nation defining issue.
Effective revolution and the building of a strong culture becomes less likely as every day passes and as each plane load of immigrants arrive. NZ has gone too far down the path of multi-culturalism for its people to rally. A level of collective consciousness is required that only a shared history can provide. This has been one of the main objectives of mass immigration and democracy, human rights laws and so on to so atomize society that resistance is impossible to the relentless drive toward a bland society where everything has been reduced to the pursuit of idle pleasure and consumerism. Inevitably the inequality gap widens and the people sink slowly into a morass of self destructive pleasure seeking (P epidemic?) to dull the pain and temporarily break the relentless feeling of ennui. War and revolution will be a thing of the past but something else will be gone too, a future worth living and fighting for.
Why the almost global but narrow view that you must borrow money from a NZ based bank to buy property?
Is it not possible that this is a fence to stop local fools stumbling off the cliff? Especially the young and vulnerable. Let the hot money flood in, then let it all burn down and mainly cashed up foreigners will be the losers along with a few stretched out local fast Eddies . My take is that the RBNZ is not remotely interested in the fortunes of property buyers of any sort, but they are very interested in banks being able to weather a gathering storm and the LVR measures are that buffer.
Thats exactly right.
LVR won't make any difference but attract even more money into NZ (will result in higher NZD and then RBNZ will lower rates even more).
The idea is to use as little of your own money as possible to buy properties as long as rent covers mortgage repayment. People have plenty of cash in their overseas bank accounts ready to be shifted and used to "bump up" their LVR here.
On top of that New Zealand house price is still cheaper compare with other crowed parts of the world, and migrants love here for all the reasons thats been taken for granted by Kiwis.
NZ will be an expensive (luxury) country to live in as it has been under valued in the past.
Scary thing is now days you won't have to sell the house to access your capital gain on your rental, revolving mortgage allows you to swipe your eftpos card and utilise the equity. As long as the rent is paid and cover the interest payment , no wonder less people are selling.
The property market will grind to halt (along with the rest of the NZ economy) when they introduce LTI...Once that is enacted any shabby rental will just get shabbier as no one will have access to credit...compound that with 40% LVR... My LTI is about 7 so if it goes to 5 I cant see me getting anything from the bank other than a cold and maybe a free pen.
If you sell a property and pay tax on the sale then it can count as income. Use your tax return to prove it. Do this in a year in which you were planning to buy 1 property and instead buy 2, 1 to replace the sold one and the other because you wanted to buy 1 more.
The way I understand the law If you want to offset the tax you pay somewhat then "sell" another property at a loss to a family member and buy it back off them for the price you sold it to them at. ( You'll then want to hold onto this property for a very long time before moving it again because selling it would result in a profit based on the latest price at which you bought it). I'm not a lawyer and am just speculating about this.
Hypothetically:
30-March: Sell house A which you purchased for 750,000 for 1,500,000 to trust/relative Alpha. (income of 750,000)
1-July: buy house A back from Alpha for 1,500,000 (Alpha has 0 tax liability because sale price = purchase price). Additionally buy House B for 3,750,000 using tax return to prove at least 750,000 of income.
30-July: Sell house B to Alpha for 2,750,000 (loss of 1,000,000 to offset future tax when trading property)
15-August: Buy house B back from Alpha for 2,750,000 (Alpha has 0 tax liability because sale price = purchase price)
Maybe use multiple entities and not end up holding everything in your own name to achieve the same effect without the whole thing looking like it could be a sham.
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