David Hargreaves looks at some issues that need tackling ahead of the next housing boom, because yes, there will be another

How could there be another boom? Surely the current environment is a permanent change for all time.

It is kinda difficult, our institutions want to create compromise level mediums to offer security and stability. So benchmarks get set, and everything gravitates around those. But as we all should have learnt, everything's on a knife edge and can change at any point. There's a tendency for rates to be around a certain level, but they could be 0%, 5%, or 20%.

My prediction: our overlords will be expending most of their energy just holding things together through this period, and no significant lasting change will be sought or instigated.

Hard to believe that some banks are starting to believe that the housing market may have found a bottom.  Perhaps they are ready to join the spruiker brigade?

What these so called experts don't realise is it wasn't a boom, it was one of the biggest housing bubbles in the world. History shows that once bubbles pop it takes a long time (decades) to get anywhere near back to where it was (another bubble). House prices will stabilise at some point but will take many years before we see a recovery. 18 months ago all these experts were forecasting a 3% decline with a flat period of two to three years before another so called boom. The bubble has well and truly popped. 

Surely the days of boom bust cycles are over? Surely Surely Surely!! It would make the RBNZ job way easier if everything was more linear and predictable. Use the DTI, it's a proven tool for preventing these erratic swings. 

Highlighting $87 billion of likely exposed and under pressure borrowing. The moment approaches.

Kaaaaaarrrkkkk.

Rather than permanent 'test rates', David, how about a "maximum initial term" that can't be more than 20 years? Of course the banks would hate it as they'd collect less interest but overall, kiwis would get wealthier, quicker, as a result.

Hello Author, how much housing debt do you have on your balance sheet? 

In this article, are you trying to convince yourself or others who took unreasonable amount of mortgage just because of their greed? 

The housing market in NZ is no way sensible. No one should have to pay more than 10 times their income to buy a house. We need healthy family life in the country to have a better society. If all parents can do, is to worry about how to manage their mortgage on their highly leveraged houses and keep paying all their money to make the banks rich, then something is really wrong with it.

And your article trying to normalise this behaviour by saying that we will be alright is short-sighted.

This high income to debt ratio in a small country like ours is not good for long healthy run of society. 

One - inbound migration is soaring again (and people need places to live).

Amazing to see this same old water-cooler trope still being repeated.

People needing places to live does not affect house prices, unless those people are actively participating in the market and bidding those prices up. There are already plenty of people who need places to live in this country, but they're not contributing to our house price bubble by sleeping in their cars.

The second part of this argument usually goes that even if they aren't buying, they'll be renting, which will drive up rents and make property an attractive proposition for investors. But investors don't buy property for rental income. They buy for capital gains. Nobody is going to be investing in property for the rental income if there are no capital gains to be had.

If we do get another property boom after this one - which is far from guaranteed in any of our lifetimes - it'll be for the same reason we got this one; cheap credit, tax incentives, and loose monetary policy.

I think to say we “are going to be alright” is very premature. RBNZ have stated publicly they need unemployment to rise, we have had almost 20% house price declines with record low unemployment. What happens when the RBNZ get their wish? 

The obvious answer is longer fixed terms, right? That puts the onus on banks to hedge rate risk, and they should be better at that than individuals. Theoretically. Expecting households to carry that risk seems quite mad, really - it’s Kiwi exceptionalism.

If housing isnt used to grow credit (for grow it must) what then is to be inflated?

HW2 will love this article. It will give him hope after experiencing the pain he is currently suffering as his house value (if he in fact has one) continues to drop.

had to go check that this was not sponsored content  --       lowest house sales in forever -- market dropping faster than other major world C  shhh dotn say it -     inflation rampant and showing no signs of significant drops --  interest rates their highest in 15 years and more raises to come 

but here we are -- promoting the next housing boom --  Be Quick 

Now, there's two not-good factors in play here. First up is that about $87 billion of mortgage money has been splashed on houses that are now worth less than was paid for them. Remember, according to REINZ figures house prices nationwide are down 17.5% from the November 2021 peak. Secondly the ability of the people to service those mortgages has not been tested at current interest rates.

The ponzi based "wealth effect" racket promoted by the RBNZ

The Reserve Bank is playing this down. But of course it would. It has caused the current situation with such a rapid rise in interest rates.

Or could the problem have been the RBNZ dropping rates to the floor and giving the banks unnecessary funding with no directive as to where it should go?

Where is IT GUY today

Is he awake yet. Or maybe still at the WAKE

After the 1987 crash then property 89-93   things where very restrained for quite some time, the banks really got burnt, BNZ needed two rescues.

All well said.  Good opinion piece.

Can anyone advise how the test rates work?

Presumably it’s something like:

- assume current incomes

- input all household costs and outgoings

- calculate the mortgage at test rate

- see if income exceeds outgoings

What is the sensitivity on the final point? If income does not exceed outgoings at the higher test rate, does that mean a ‘no’ in terms of mortgage approval? Or is it more nuanced?

Just keen to understand better how the test rate works in practice.

Someones been asked not to write so many negative (realistic) articles about coming cluster ####! 

Seems to me the only decent thing the Gov should do is help those buyers out and limit interest rates to 5% for the term of the mortgage. 

They were very quick to throw all sorts of money at Contractors during covid and all happily accepted. Most say that was their best earning period ever. Additionally like I have said before, the covid bail out money that went to businesses continued to flow even when those businesses were far exceeding expected profits. 

Whenever I bring this up people moan that they would not be bailed out if their investments tanked. That is fair, and such arrangements should not apply to those who purchased property as investments during this time. But please remember for a lot of these people a home is not an investment, it is a place to live, and they got shafted by the Government response and RBNZ's incompetence. 

If you don't think we should help these people then I certainly hope you are not someone who benefitted from Covid bail out money... 

Test rate at 10% minimum, essentially removes the need for a DTI.

It would be interesting to see a breakdown of the immigration numbers. How many of these are students? or "low skill" workers. Are there really that many that would be in a position to buy an overpriced NZ home at these interest rates? 

I'd suggest there's a bank that has had their warning lights flashing for over a year now but they haven't been able to see them because the lights are the same colour as their branding.

Which bank had the highest DTI stats, lowest stress rates, an inquiry into risky lending standards last year and is only now stockpiling provisions for a rainy day?

If monetary policy in terms of loan to income ratios, minimum deposit %, and/or unrealisticly low interest rates mean that taking on debt to gamble on increasing housing prices is a strategy that out performs any other form of investment, then why should we be surprised when people gravitate to this form of investment.

You cant complain about the effects while convienently ignoring the causes.

As many commentators will know, I'm an advocate of the median multiple to give a snapshot as to how affordability or not a market is, or to put it another way, how dysfunctional or not it is.

But when you look at the multiple, you need to know a little about how it works, and what 'sins' it can hide.

1) Is that it is based on total household income, which used to be one income earner. Now it is two income earners per household or more. This distorts the multiple in favour of a lower multiple compared to past years, but in the present things are getting worse.

And 2), which is part of what the present stats. also show, is that many people are being forced into smaller and smaller homes, just to make them more affordable. This tends to also artificially lower or keep the multiple from rising as much as it should compared to past years and disguises the fact that the amenity value is falling.

The trend is still to 'shoe box in the middle o' road.' Or at least a tiny home. 

"it's true to say that nobody will be facing interest costs 'much' more than they were tested for".

I'm not sure that's true and I'm not sure rates have peaked.

A couple of things. 

"...our central bank along with all others around the world got caught out by inflation..." - this is an extremely poor characterisation of what happened. They decided to willingly ignore inflation for over a year, using each others "transitory" statements as their own justification for not raising.  Call this what it is - they abrogated their responsibilities and completely mishandled the situation in what should be described as a shambolic decision leading us to the edge of financial disaster.  This is very different from being "caught out" and it's past time we stopped describing it as such.

"But that's probably going to be down to good luck rather than good judgement" - correct. But the last word should read "management" rather than "judgement".  And again it should read more like "But that's probably down to good luck, that the utter mismanagement of inflation by central banks as inflation started to rise, hasn't led us to financial calamity - yet. Though the ongoing banking crises in the US and others around the world could tip us over."

The reliable dependable broad property cycle tells us that the downside has 15 odd years to go in real money terms

But the biggest bust will occur when people finally realize that the climate crises is existential. When it is evident that we must scramble for survival - assets are valueless. "It won't happen" I hear. OK atmospheric CO2 is rising and worse CH3 is inexplicably rising and the ocean temp is accelerating and an El Nino is developing.

Just thinking out loud here- if you print money the amount of money available increases.(The value of money decreases at this point but is not obvious straight away) Things to buy do not increase in number so their value eventually increases. This "new" money enters the system by being "borrowed". Low interest rates in the years preceding lull the unexpecting into a false sense of security. This "new" money was drawn down by New Zealanders for, more or less, uncontrolled spending. Controlling what this "new" money was spent on was the crucial, all important step that was missed. The lending (the entry of this newly created money) should have been strictly controlled and channelled into productive expenditure first and foremost. By missing this step the RBNZ and the NZG took their hands off the steering wheel. We now have "inflation". Of course we do! To my way of thinking some control needs to come in NOW. Laws controlling borrowing/spending as opposed to using interest rate rises to do it. Channel money away from house buying etc and into productive assets/incentives but not by raising interest rates which snuffs out not just discretionary spending but necessary spending and hamstrings businesses / necessary productivity- but by laws governing what borrowed money can be spent on. This will stabilise things. People will be forced to delay their house buying etc and encouraged to save and buy in a more durable fashion. Those that have mortgages will be reprieved and given time to consolidate. Money will be diverted into productivity. Societies focus will shift from the individual to getting NZ on a firmer footing. My family and I farmed though the 80's, 90s and beyond. We were up to our eyeballs in debt. For decades the Bank Manager would make his yearly visit and say "we'll give you one more year". It was very stressful and I always felt a bit sorry for our kids. "Christmas is going to be a small this year."...they always remind me of this! However! As a result of these years they all quietly resolved to resist debt and today none of them have debt. They all have their own businesses. If I told you the name of one of them you would know it. So the hard times taught them some valuable lessons. 

That graph certainly proves all the Labour liars wrong, who always try to blame high house prices on the nats.

Labour normally spend like made and cause conditions for house prices to go ballistic, just general bad management of the economy whenever they are in power.