By Greg Ninness
House prices at the bottom end of the market were rising quite strongly in March, however record low interest rates were helping to alleviate the pressure on first home buyers, according to interest.co.nz’s Home Loan Affordability Reports.
These show that the Real Estate Institute of New Zealand’s national lower quartile selling price was $480,000 in March, a record high, and up 4.7% compared to February and up 7.9% compared to January.
There was also strong price growth in Auckland where the March lower quartile price was up 7.6% compared to January, and in Wellington where it was up 17.1%. In Canterbury it was up 6.9%.
However outside of those main centres the price trends were more mixed, with March lower quartile prices down compared to the start of the year. In Bay of Plenty they were down 3.0%, down 5.0% in Hawke's Bay, Manawatu/Whanganui down 1.7% and Otago down 4.8%. The lower quartile price was unchanged in Southland, with all other centres posting gains.
So the overall trend was for rising prices at the bottom of the market where first home buyers are most active, led by the main centres.
Although the higher prices were not good news for first home buyers, their effect on affordability was lessened by the record low interest rates, which moderated mortgage payments.
In March the average of the two year fixed rates offered by the major banks dropped back to 3.46%, equalling the record low set in October last year.
That helped keep mortgage payments affordable, with the payments on a home purchased at the national lower quartile price of $480,000 taking up just under a quarter (24.75%) of the median take home pay for couples aged 25-29 who both work full time.
Even in Auckland, the region with the highest prices in the country, mortgage payments would take up 39.87% of the take home pay of couples aged 25-29, just under the 40% threshold at which mortgage are considered unaffordable.
However scraping together a deposit remains a major challenge for first home buyers on average incomes in Auckland.
Of course these figures are taken from data that was mostly related to sales that occurred before the COVID-19 lockdown.
If the country suffers a sustained recession once the lockdown ends it will likely push down house prices and unemployment will rise, which will likely put downward pressure on wages.
Where that leaves first home buyers is hard to say at this stage.
Those who are in secure employment with stable incomes may actually benefit as house prices fall.
But those who face an income squeeze because they have lost a job or have to work reduced hours may be forced out of the market for some time.
The comment stream on this story is now closed.
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167 Comments
Yes Housing Sector was up so did stock market, which was up - infact all time high just before the virus SO what is new that we do not know or do we have to throw past positive to create a smoke going future which in realty is otherwise - Part of Propoganda by Real Estate Sector.
richard1965
This is not "Part of Propoganda by Real Estate Sector".
The report is prepared by interest.co.nz. It has been a regular monthly report on home loan affordability for some time and will be a valuable measure as we continue out of Convid-19.
May be not a propoganda but helps to create a smoke.
Yes you're right Richard. Unfortunately most Real Estate Agents have no idea just how fragile the wage earning economy is in this country. We've had a massive hit by a pandemic and so has the rest of the world, with numerous job losses around the country. How does the REA sector think it's going to bounce back if the rest of the working world can't recover so quickly.
CJ0098
Another of your baseless blame comments. Real estate agents did not prepare this report - data was processed and prepared by interest.co.
I'm talking about REA's in general, not this particular report but continue to deflect facts as much as you like P8 as usual. :)
The confirmation bias is strong in this one...
which one? or both?
So you must have missed the two articles on doom in NZ Commercial Real Estate ?
I mean the entire world knows Auckland house prices only go up so we all knew NZ would easily beat the worldwide pandemic
I’m stuck in California in a small town called Sacramento where the streets have been free of cars for over a month but I told my friends I know back in Auckland house prices will be rising
Not only stock market along with housing, many other industries and sectors were doing excellent for themselves like tourism and hospitality and everyone knows past what is important is knowing about the future from here wher no one has any idea with entire world shut.
There is a falsehood in thinking rising real estate prices is a good thing - especially when yield, debt ratios, affordability all out of kilter
Kiwis became such victims of greed that they thought their abuser was their lover
Best quote of the year.
It's odd that if you go back to the 70s and 80s - inflation was the devil that must be eliminated. But inflated house prices...well now then, how rich (on paper) will I be?
Yeah, assets like property arent considered at all by the Reserve Bank. As long as a can of baked beans doesn't go up much in price over time no matter how much property prices inflate as far as they are concerned we have a low inflation rate. I think asset inflation is going to get worse with the increase in availability of bank loans and free money the govt is throwing around.
But will banks lend? I’m talking to mortgage brokers who are saying pre approvals are being rescinded and banks are very conservative with taking new customers on board
I understand the comment, but I think the diagnosis of 'greed' is incomplete and misleading. My diagnosis?: Interest-rate-price-fixing cartel (among which RBNZ is one)+ immigration policy (juicing housing demand and downward pressure on Kiwis' income) + council-imposed frictions shifting supply curve to the left (raising prices). Investors' rational response to price signals and tax incentives (and less-than-transparent private equity markets for funding future NZ startup stars) by having heavy portfolio weighting on housing isn't greed. It's a side-effect of a series of policy errors that sold out most multi-generational NZers. Let's not blame ourselves for being greedy, unless you're talking about authors of those policy errors. Perpetrators of those errors were members of both Labour & Nats (past and present) & almost every party on the voting docket. It would be nice to hold those responsible to account by voting. Too bad there's no party ready to fix the three policy errors that prevent wage growth from tracking with that of house prices.
Agreed, that's what I have noticed too. The reports these days are all about March's statistics, nothing comes out for April.I remember interest.co.nz is used to do weekly report on barfoot and thompson's sales and analyse it. But nothing comes out this month. I know we are still in lock down. But REA mentioned that people would still be able to buy houses by online bidding and online inspection. I'm thinking they only report when market is strong and good. Not so much when it's bad.
The weekly reports were about Barfoot & Thompson's auctions. and they were folllowed by a wrap of all auctions we monitored for that week. The reason these reports have been discontinued for the time being is that agencies have been unable to hold auctions during the lockdown. We will resume these reports when auctions start up again, which will probably be when we go down to Level 2.
Private Viewing for real estate agents allowed - good that housing sector will start moving and only when it moves will it slide as when in freeze mode even the fall was freezed.
Lock-down was a blessing in disguise for the declining house price.
All FHB or anyone looking to get more for their dollar should hold on tight - try to avoid FOMO and wait or see your depoist / equity being wiped out.
Those who bought house specially in last few months will suffer but were not aware of what is comming but now when writing is on the wall and still if some goes ahead should be ready to face the music without sympathy as jumped knowing the disaster waiting.
Gee some main centre price rises were breaking not just the road speed limit but also the speed of sound. Without covid then 2020 would have gone too far too fast thats for sure. A circuit breaker was needed
"main centre price rises were breaking not just the road speed limit but also the speed of sound" then comes the brick wall!
That's part of the fun. The ups and downs, the rough and tumble of life in nz now Chairman Moa, you would not have experienced it in Austraya. For kiwis over there it's ALL down.
Oh yes. No selling signs here at all!
My neighbour sold their house, lucky they managed to squeeze in the auction one week before the lockdown. Their new issue now is they can't take possession of their new purchase due to the ban of tenants eviction .. All fun and game here.
"Gee some main centre price rises were breaking not just the road speed limit but also the speed of sound. Without covid then 2020 would have gone too far too fast thats for sure."
Houseworks,
That's a big 180 degree change from your previous comments and viewpoint.
Just out of interest, what data or new information that came to light caused the 180 degree change in your viewpoint?
Pardon me mate but where did I make a 180? Do you think I am now agreeing with you and the agended majority here... collapse, meltdown, lines of unemployed and if you are lucky you can get a job digging drains with a govt shovel on shovel ready projects. No. Btw I am happy to be having a different perspective to your good self.
"the agended majority"
Just out of interest, what do you believe is the agenda of the "agended majority"?
Is a person without an agenda a person at all?
Hi Chinaman1. Is that Chinaman 1? Or Chinaman Won, that's the agenda of the CCP
Rising house prices are celebrated, but rising fuel prices are loathed.
We're actually quite narcissistic when it comes to 'property' (perhaps for the last 15 years or so in my opinion). The latest valuation is used to fuel the ego and is evidence that millenials need to stop being so happy eating smashed avocado.
I notice share investors console themselves with the comment "it's not a loss until its sold" and they tell property investors this too by changing the word 'loss' to 'gain'. Is that your observation too Mr Observer
I'd have to understand the point of your comment before providing an observation. Unfortunately it appears to be garbled.
How attached is your ego to the price of your property? (perhaps it is, otherwise you wouldn't have felt obliged to attempt a garbled rebuttal to the post above).
And I'm a property investor by the way - so if you want to paint me with the 'share investor' brush then you might be carelessly mistaken.
It's an observation IO dont get too hung up
Haha nice troll! Enjoy your day.
"Rising house prices are celebrated, but rising fuel prices are loathed."
Beneficiaries of rising house prices:
1) Existing owner occupiers who are approximately 60% of houseowners
2) Existing property investors
3) all those with vested financial interests - media, property developers, property mentors, real estate agents, mortgage brokers, etc
Losers of rising fuel prices:
1) car owners and other users of fuel
Greg: you write "Those who are in secure employment with stable incomes may actually benefit as house prices fall."
Stating that house will prices fall is pure speculation and therefore not factual or neutral reporting. Is Interest being swayed by its commenters? (see also Gareth's piece on removing LVR's)
But there have been some house price falls.
In Bay of Plenty they were down 3.0%, down 5.0% in Hawke's Bay, Manawatu/Whanganui down 1.7% and Otago down 4.8%.
Wait for the market to open.....
Pity those who are still hopefull that house price will rise and forcasting that will fall is speculation.
If have bought a family home for long term within your budget with jobs or business still intact than have nothing to worry or have bought ages ago when price was much less otherwise be prepared as standing at the edge of the cliff and tsunami of Corona may........
Nzdan, TTP will be here shortly to give everyone a lesson about Palmy North.
Didn't John Cleese tell everyone the bare facts about Palmy several years back?
Not just John Cleese, I've done my time in Palmy North working at the hospital. I probably had more fun poking my eyes with a fork than living there. PN is a grown-up version of Balclutha.
PN makes Hamilton look like a thriving, cosmopolitan and cultured metropolis.
That's ok Fritz, enjoy Auckland with all the others and the diabolical traffic jams... its THE topic of conversation when/if you get to work. And dont even ask Aucklanders about the traffic problems getting to their coromandel baches, oh no.
Ah, are you a Hamiltonian HW? I always assumed you were an Aucklander.
I don't have much in the way of traffic to worry about, bought a place last year close to a good train station.
Yes the tron, the poor cousin of auckland, but actually it's a great place. Each to their own eh. We have got an Auckland property so I go there quite often and know it fairly well.
I'm not a big fan, but it's not without it's good points. The council and private sector have done some nice work along the river.
The 'central city' is a bit of a second-rate dive.
At least it's got a fairly robust economy. And it's not far from Auckland :)
As you say, each to their own.
You seem to know the area and Hamilton cbd very well Fritz
That's insulting to Balclutha....
Did TTP buy in Palmy?
If so, then they might experience the potential financial pain of their recommendation to buy property. If their property price fell 15%, then they would be experience some loss in their financial net worth. The magnitude of loss would depend upon their current LVR (round numbers used for illustration purposes)
1) current LVR of 90%,
i) property price of $1,000,000, mortgage $900,000, equity of $100,000.
ii) 15% price fall means property price of $850,000, mortgage of $900,000 and NEGATIVE equity of $50,000 (a loss of 150% of their equity). New LVR is 106%.
2) current LVR of 80%,
i) property price of $1,000,000, mortgage $800,000, equity of $200,000.
ii) 15% price fall means property price of $850,000, mortgage of $800,000 and equity of $50,000 (a loss of 75% of their equity). New LVR is 94%.
3) current LVR of 70%
i) property price of $1,000,000, mortgage $700,000, equity of $300,000.
ii) 15% price fall means property price of $850,000, mortgage of $700,000 and equity of $150,000 (a loss of 50% of their equity). New LVR is 82%.
4) current LVR of 60%,
i) property price of $1,000,000 mortgage $600,000, equity of $400,000.
ii) 15% price fall means property price of 85, mortgage of 60 and equity of 25 (a loss of 37.5% of their equity). New LVR is 71%.
5) current LVR of 50%,
i) property price of $1,000,000 mortgage $500,000, equity of $500,000.
ii) 15% price fall means property price of $850,000, mortgage of $500,000 and equity of $350,000 (a loss of 30% of their equity). New LVR is 59%.
Due to these possible unrealised losses and fall in equity value, perhaps they won't be able to realise their dream of buying in Ponsonby when the opportunity is available.
Yvil, The banks removal of LVR's is a desperate measure to try prop up the housing market. It shows that they have nothing else to help that situation. It's unlikely that they'll be able to drop mortgage interest rates any further to increase house prices.
CJ1099
No.
LVRs were specifically introduced in 2013 to help cool an increasingly over-heated market. That situation clearly no longer holds true so their purpose is no longer required.
LVRs (effectively an adequate deposit) have presented the bigger hurdle for FHB rather than loan serviceability. With housing affordability likely to improve with a falling market, the removing of the unnecessary LVRs will remove this hurdle and enable more FHB opportunity to purchase a property over the coming months - isn't home ownership what has been wanted? With the fall in house prices those FHB who are well positioned in terms of savings will have opportunity to buy a better priced property without the LVR hurdle.
I acknowledged that other potential FHB will not be in a position to purchase a FH due to employment issues. However, there are numerous who will have secure jobs and be able to do so and this allows them that opportunity unless you wish to continue to deny FHB that opportunity.
For this reason this monthly report is valuable now and over the future - however, not surprisingly you joined the chorus in criticising it.
So you are suggesting that just as the market is about to tank (according to all the banks), FHB's should get in there while it's tanking and just take the hit on their equity.
That's some solid financial advice there.
But let's just imagine the market doesn't tank. FHB's will then have to compete directly with investors, who already have property portfolios and capital (from untaxed capital gains) behind them. So FHB's will not be able to compete and again be screwed. Plus according to the RB's reports, the LVR's have dramatically enhanced the resiliency of the banking sector. What do you think removing them is going to do? The problems are just starting and will be ongoing for years, removing something that makes the financial sector resilient right at the start of a crisis is foolish.
blobbles
The possibility of home ownership is going to improve for you over the next few months or so with lower house prices, historically lowest mortgage rates, and lack of LVR hurdle and you are still not happy.
No, I am not happy that they are removing the things that enforce banks to continue to make sensible lending decision and as a result, ensure the long term resilience of our financial systems. These same rules also make it easier for FHBs to get on the market as they do not have to compete with investors.
Historically low mortgage rates are a huge distortion that could easily flip around to be very high interest rates as banks factor in forward risk into their lending. If banks are told that all restrictions on their lending will be taken away, it encourages them to lend to anyone and creates a huge moral risk that lending is risk free to them as it will always be backstopped by the government (and by extension young people paying taxes for the next few decades).
Over the past decade the RB has painted themselves into a corner by trapping themselves into ever decreasing interest rates in a failed attempt to generate inflation. This has caused a massive distortion in property prices that needs to be unwound. As they have stress tested banks to be able to withstand unemployment of 13.2%, a drop in GDP of 5.5%, a 40% decline in Residential housing values along with a 35% decline in the Commercial Property values, the banks should be able to take the economic hit and still be fully solvent. Instead the RB is relaxing all lending rules at the first sign of trouble. This shows that the RB is either self interested (i.e. the managers either own a lot of property) or their previous stress tests are somehow flawed. Which is it I wonder?
blobbles
You have often posted about how everything has been against FHB; things are now turning in your favour so start to look at the positives.
Leave the banks to worry about their lending. Banks have a vested interest in ensuring that they make sensible loans - they don't like risky loans and shareholders require that they are prudent. It is for this reason that banks have had a high serviceability requirements of lenders. And don't let people spook you about subprime mortgages as on-selling mortgages is not a feature of the NZ financial market.
Forget competition from investors as that is always going to be there, and if investors are getting in then it strongly suggests it makes financial sense to do likewise.
Leave Orr and the RBNZ with all their expertise to manage the economy as they are more astute than you and I as to the implications of the future.
If you are really serious about wanting to be a FHB and have been adversely affected by house price inflation and high LVRs, then you need to focus on what these implications and opportunities mean for you.
Leave others to scaremonger, blame and make excuses - those who do are never successful.
Yeah, pile in FHBs and watch your equity evaporate! Again, that seems to be your logic? Throw those FHB's under the bus to prop up already over valued houses, yay!
Leaving the banks to worry about their lending and removing all restrictions is akin to leaving the fox guarding the hen house. The horror stories coming from banks of the last few years should have taught you that. Having worked for 2 of them, once in the retail lending space right alongside the heads of the lending departments, I can tell you the people who used to be there who had scruples, were thrown out a long time ago. Hence the need to regulate bank lending.
Calling Orr etc astute considering their lowering of interest rates over the past decade which has caused a huge house price bubble and financial system risks... the very thing they are mandated to stop. OK, let's not question our officials at all because apparently they are astute? Particularly when they have shown to be incapable of solving a problem and trying to do the same thing over and over and continually getting a failed result. That's not astute, that's captured in group think and not particularly intelligent. As a result, I will continue to question their motivations and their intelligence.
Blobbles
I find your comment "Having worked for 2 of them (banks), once in the retail lending space right alongside the heads of the lending departments" very, very strange.
You say this, but you argued (blobbles | 24th Mar 20, 3:52pm) that mortgage holidays - a long established and well-known bank facility - was "free money" which is clearly incorrect which seems in conflict with your claimed experience.
Read closer and understand the context - the March 24 announcement came out with limited information. It appeared that the government was going to defer the loans for 6 months and pay the intervening interest cost. It appeared this way as LRH's are already available in the NZ market, so why would they need to announce anything if the products are already available? Later it came out that they would implement standard LRHs as per each banks policy, so not much change then. Why did they announce it with the $6.25 billion Business Finance Guarantee Scheme? I think this has confused everyone, yes even me. By the look of their announcement it appeared they would underwrite LRHs, which they may still do.
I understand a mortgage holidays reasonably well. As an IT person I built the backend system that do all the calculations which go into making lending decisions. Which meant I had to know all the calculations that go into loan decisioning. I was one of the ones who set up "computer says no" for a major lender in NZ. One of the biggest factors in lending decisions is a risk weighting factor, controlled by the head lenders, which changes depending on various features of individual loans.
For LRH's, interest continues to be charged - fine, but I am arguing that they will potentially be extended forever, potentially/probably with a government back-stop. The reason being that loans are already far too large is because house prices are far too high. Hence banks (knowing that they will be bailed out by the taxpayer, even if it's 80% bail outs, which the government seems to be leaning towards) will be thinking really hard about how they can leverage this to make maximum profit. That means more lending to anyone they can.
By removing LVR limits, this gives banks the leeway to lend to even more people who may not be able to afford it. The government and RB are throwing the kitchen sink at the problem without even modelling potential effects (you will not there is no modelling done in the removal of LVRs, just grand assumptions that everything will be OK). The potential for moral hazard is growing by the day.
Bobbles
No. It was quite clear and especially so for those who had some knowledge of mortgage holidays.
Why did the Government announce them? Quite simple to most - they were under writing increased bank exposure by encouraging mortgage holidays. I would expect anyone with rudimentary bank experience in lending would know both of these facts.
Yeah, I mean what's not clear about: "The package will include a six month principal and interest payment holiday for mortgage holders and SME customers whose incomes have been affected by the economic disruption from COVID-19." They mix up business loans with residential mortgage loans in the same sentence. They then go on to say they will fund it with $6.25b... which goes to whom exactly? It continues with "The specific details of this initiative are being finalised and agreed urgently and banks will make these public in the coming days." Banks already have LRH policies... which then didn't change? Again, why did they need to announce this, they should have said "All banks have LRH options which you can use during this time".
You can't seem to understand that the government underwriting risks on loans will lead to riskier lending. I would expect anyone with rudimentary bank experience in lending would know that fact.
P8 - I don't believe the market is in FHB favour until it drops by about 30% or more. And that might take a year or two. So right now, its far, far, far, from a buyers market (in my opinion...)
IO
Any drop is in the market is in FHB favour. To say that it needs to drop 30% to favour FHB is baseless.
RBNZ figures show that in the past three years there were over 75,000 FHB mortgages (120,000 people?) so there are many FHB who are currently in a position to afford homes - or are close to doing so - and will gain from any drop in the market.
However, I accept that FHB - like the rest of us - need to see what the market will do.
Would I rush out and buy a FH or investment property tomorrow? No.
Would I wait for houses to drop by 30%? No. This is inconsistent with bank estimates and banks have more expertise than you and I and have considerable vested interest in ensuring that their estimates are realistic.
Following the GFC house prices did fall by about 10% - from memory about for a year or two - so did provide an opportunity to buy well.
What should determine whether to buy a house or not will be being able to afford a house; trying to pick the bottom of the market is difficult. All of last year the majority of posters on this site were claiming "wait, wait the bublle burst is coming"; if it wasn't for the unpredictable Convid-19 they would have been severely disadvantaged.
Yes banks have expertise at making record profits during booms then asking for help when it all falls to pieces. To follow their advice would be daft.
And just remember what we're seeing isn't just a COVID-19 induced recession (potentially depression) - it was caused be excessive debt creation in a low interest rate environment in an economy that was showing signs of weakness for the last 12-18 months.
The 2/10 yield curve inverted mid last year from memory - at that point I started reducing risk. I didn't sell up because of COVID-19.
And FFS, would property investors in NZ please stop refering to the 10% drop in property prices during the GFC....its quite meaningless. Look at history (like 100 years). Look overseas. Take notice of other markets to see what can happen. You're all stumbling around in the dark trying to give giving each other high fives, with thinking warped by confirmation and recency bias.
Removing LVR is not designed for helping FHB to buy their first home. Simply, they are just not qualified unless they have some other sorts of collaterals.
P8, You're certainly lacking experience in the wider world aren't you! LVR restrictions are standard practice now in the Western world as a result of the Global Finical Crisis, you know the crisis that you didn't really experience because you were too busy having your property prices shoved up by John Key and China. Yes they were introduced at a much later stage here because to try and slow down the market and stop it from becoming unstable all together.
The whole point of LVR's is to reduce risk exposure to the banks by NOT lending too much money to people who can't afford to by their mortgage loans back. So you can carry on believing that the banking system and property market here is rock solid, while the rest of us get out money out and off shore as quickly as possible.
Quick question CJ099 ....you mention in your post ".....while the rest of us get out money out and off shore as quickly as possible."
When you say "offshore" where were you thinking ? ....as I was thinking the "other way round" and want to get some funds back here to NZ.
Thoughts ?
Well CH it depends on your situation, if you're an expat like I am you can keep savings in your country of origins account such as the US, UK etc... Most overseas Western banks won't charge you fees for maintaining your account if you have an existing savings deposit. Though I believe the Ozzy banks will still charge you an annual fee for keeping your account open if you're not residing in the same country (Not sure if that's changed).
And the nice thing about it is your money will have a government savings guarantee to a certain level. Example US $250,000, UK £85,000. Where NZ government will currently guarantee your saving to a big fat zero amount. Well the may introduce a NZ savings guarantee, it was meant to be this year, could be in 2023 who knows....
Thank you CJ099 ....that makes sense with cash and the "no protection" of said funds in a NZ (oops Aussie owned) bank, cheers CH
You're welcome CH. You may want to do some online searches to offshore banks in the UK and US, see what their criteria is for allowing you to set up an overseas account. Savings interest rates will be as low as ours, I should imagine for most but at least you money will have the benefit of that countries government savings guarantee. Though saying that, make sure they don't have any hidden loop holes that might exclude you if you're not a citizen and or that you're living overseas. I would strongly advise checking that and get it in writing to ensure that you're covered with living overseas. Oh and make sure they have a "toll free international phone" number so you can contact them more easily. :)
Last tip, though I'm sure you're aware. When transferring your savings use a regulated currency exchange service company as a go between, to get a much better currency exchange rate the your average bank. Banks generally don't provide good currency exchange rates and they often charge extra fees.
Good points raised CJ099 and I have got them covered .... I am in the US residential property market and have a property there that I want to sell and bring the money back to NZ.
Fortunately, the property is in a great area for Government jobs etc - in fact one of my former tenants used to work in the White House, only 8 miles away and met Donald J. Trump ...but that's another story ! So I watch keenly with interest what's happening in the NE of the USA, esp. the Washington DC area ...it's such a huge market over there and every state, city, county etc has a different story.
As you mention, there is no gaurantee that your money is "safe" in the banks in NZ ! ....they don't call the NZ financial markets the "wild west" for nothing ! You would think a country, such as NZ and an economy with a banking system as "robust" as they say it is, would offer depositors a "gaurantee" like other countries ....this country is just so "biased" towards property, they don't even want you to keep your money "safely in the bank", but go out and buy property ! ..... it will be it's downfall in the end.
Have a great evening !
sorry dp
CJ099, the point I was making is about journalistic neutrality and integrity
Yvil, read the whole statement in context. What is your problem?.
"If the country suffers a sustained recession once the lockdown ends it will likely push down house prices and unemployment will rise, which will likely put downward pressure on wages.
Where that leaves first home buyers is hard to say at this stage.Those who are in secure employment with stable incomes may actually benefit as house prices fall"
Questioning Greg's neutrality and integrity.
The median New Zealand house price, ending March 2020 rose in percentage terms at the fastest rate since 2006. In dollar terms it has never risen at a higher rate, irrespective of LVRs . At no time did the RBNZ show concern . To encourage a FHB , your daughter, your son, or grandchild into this market, based on affordability reports , would be deeply troubling. The only question any existing home owner should be asking, should I sell.
cowpat
"The only question any existing home owner should be asking, should I sell."
And live where?
A home is a place for families to live. It is not a financial investment that one sells and buys as the market fluctuates.
Short term fluctuations in house prices are not uncommon. During the GFC my home and a couple of rentals fell by 10%; so what - same house, same rental income.
A couple of years later capital gain on the rentals; an investor (or FHB) buying in the dip would have made great financial sense.
"During the GFC my home and a couple of rentals fell by 10%; so what - same house, same rental income."
Income oriented property investors are focused on income and not capital gains or net worth.
Owner occupiers are in a very different set of circumstances from income oriented property investors. Typically:
1) the home is their largest investment
2) they derive no income from the property to offset the mortgage payments (so very different to income oriented property investors)
3) the gain in the house price is paramount to increasing the net worth of the house owner (and their future financial security at retirement)
I saw an property buyer pay a high price for their property. If they were an owner occupier using an 80% LVR, by my calculations, based on probabilities, it will likely take them 15 years to get back to their initial deposit. That is essentially ZERO return for 15 years, (and the owners will likely be in NEGATIVE equity for an estimated 7 years). That equity value will be the basis for upgrading their house in the future or downsizing for retirement. So the size of their retirement fund potentially takes 15 years to recover, and is being eroded by inflation.
Take an example (numbers kept simple for illustration purposes here)
A) PEAKER
House price currently $1,000,000
Mortgage $800,000 (80% LVR)
Equity $200,000
House price falls 10% to $900,000
Mortgage $800,000
Equity $100,000 (fall of 50%)
B) TROUGHER - waits and purchases house at $900,000 (after 10% price drop)
House price $900,000
House deposit $205,000 (initial 200,000 plus some interest income from bank)
Mortgage $695,000
So lower mortgage, lower debt servicing payments.
It would have been better for them to have deposited the initial deposit into the bank and rented, until house prices were more attractive (i.e trougher).
"A home is a place for families to live. It is not a financial investment that one sells and buys as the market fluctuates.
Short term fluctuations in house prices are not uncommon"
The property price risk in certain locations is now very high for some recent owner occupiers buyers - such as Queenstown. Imagine a possible scenario for a recent owner occupier buyer there:
A) Peaker
House price currently $1,000,000
Mortgage $800,000 (80% LVR)
Equity $200,000
House price falls 20% to $800,000
Mortgage $800,000
Equity is ZERO (fall of 100%)
Now how long will it take for that owner occupier to get back their initial equity of $200,000?
The owner occupier's future financial security at retirement just took a massive hit and may take years to recover. If they had instead deposited the $200,000 into the bank this would have been the possible scenario
B) Trougher
Deposit: $205,000 (initial deposit $200,000 plus some bank interest)
House price $800,000
Mortgage $595,000
Lower mortgage, lower debt payments for the NEXT 30 YEARS ...
For more on peaker vs trougher (it should be titled valuation matters as timing does not matter) - https://www.irvinehousingblog.com/2008/08/11/timing-does-matter/
Here is an actual example of a PEAKER.
Purchase: December 2006 purchase price $164,500
Sale: December 2019 (after 13 years of ownership) - sale price $140,000 or 15% below their purchase price.
https://www.qv.co.nz/property/56-romilly-street-westport-7825/1055725
Some mathematics
purchase price $164,500
LVR 80% mortgage $131,600
Equity deposit $32,900
Sale price $140,000
mortgage $131,600 (assumed to be interest only for illustration purposes)
Equity value $8,400 - loss of 74%. (which excludes the payment of interest and sales commissions of may another $3,000 -$4,000)
Now they look to upgrade or downsize - what can they buy using that $8,400 to use as a 20% deposit (assuming no other additional funds)?
That one purchase decision has potentially severely jeopardised their future financial security, and their ability to upgrade. (or in the case of downsizing, resulted in a vastly smaller amount for their retirement funds)
CN, I haven't seen peakers and troughers mentioned on here for ages but I am a committed trougher and was mortgage free before hitting 40!
It can make an absolutely huge difference to the trajectory of your economic life.
Good for you Gingerninja.
The peakers and troughers is a good reminder.
It highlights the importance of that one major purchase decision and impact on the future trajectory on people's financial futures.
Same asset, different purchase price, different financial futures.
Hard working owner occupiers should not be collateral damage when there is a large presence of property speculation, and property price risks are high.
At some point, property prices will reach more attractive price levels (nearer trougher prices) in some currently highly priced locations (such as Queenstown, Auckland CBD, etc). And that will be the price at which owner occupiers should buy (and the property price risk is much lower).
Printer8 , unfortunately you struggle again with what I have written . Clearly a homeowner, does not by definition live in a house (or many houses) that they may own.( I use the term "own"loosely. ). From your own admission, this is clearly your case. You are clearly a man of housing wealth. Confusingly, you indicate that buying a home as a rental can be viewed as a financial investment for capital gain , yet the same home as a place for families to live , should not be viewed as a financial investment. I would state that we own no rental properties, not have any intention of doing so. I wish you well.
Cowpat
It is really quite simple.
First house is a home. Second and subsequent houses are investment properties.
Cowpat
Re: I am “clearly a man of housing wealth”.
Just to clarify, as previously posted I got out of rentals in 2016 for lifestyle reasons. Also as previously posted, wife did purchase a rental 12 months ago (cash) as TD rates were heading south and yield was far better and a niche property requiring little work with tenant or property maintenance.
As I posted around mid-February, I battened down the hatches seeing early the risk of current carnage. I am cashed up, sitting patiently, appreciate that there is still much uncertainty and lots of downside, and will look at options as they unfold.
Anyone still in denial mode that house price will falll is either ignorant or stupid.
Can argue, how much will it fall but not IF.
Best case scenario is 10% to 15%..... So can understand where it may end if things get out of conyrol from here on.
Also market will fall is not speculation at this stage but analyzing/ reading the market.
You miss the point alittle. Any good journalist produces articles based on facts. Any projections into the future are by definition not based on facts and data, therefore such projections or predictions should be clearly stated as such. A good journalist cannot let his own opinions cloud impartiality
Also calling people who disagree with our opinion "ignorant or stupid" shows not only rudeness on your part but also narrow mindedness of differing views that will serve you poorly.
Am just stating a fact that anyone who seem to be an expert or kniws about market and denies that housing market is and will be hit in current environment is either Ignorant or Stupid and if someone takes it personally finding themselves in one of the category than cannot help.
Nothing wrong or rude with tge statement that anyone who feels that housibg market will not suffer is either Ignorant OR Stupid as I cannot call them intelligent.
It is like saying that their will be no loss of Jobs or business will not suffer or many will not have to face hardship both socially and economically in this scenario.
I have said myself on Interest that I believe house prices are more likely to drop than rise for the rest of 2020 and I'm open to other views. Your total refusal to accept any other opinion that your own (i.e house prices rising) shows how terribly narrow-minded you are. Furthermore calling people who don't agree with you "ignorant or stupid" is low class and rude despite your desperate attempt to say otherwise
In that framing, it means that the assumption that house prices will continue to rise is also speculation.
Yvil - perhaps it could be framed differently, but come on!
I don't think any credible economist or commentator thinks prices won't fall.
The only question is by how much.
Exactly like in September 2019 nobody thought house prices would rise by March 2020, people don't seem to learn.
That's a very poor comparison.
Cannot argue or have some discussion if someone is not ready to face the reality that worldover things are falling apart and if you say that person is either being ignorant or being stupid is termed as rude.
So best to ignore.
Yvil,
Is property
1) a 6 month game? or
2) a long term game? (say more than 5 years?)
3) other?
Property may be a short term game for property traders. Short term property price projections would suggest a short term focus on property. Very few people (as percentage of population) are property traders.
For owner occupiers, and property investors, property is a long term game and not an object for speculation.
Exactly.
So provided you are an investor - not a speculator- you shouldn't be too worried if prices dropped 10-20% in the next year.
Potentially you might be a bit worried about your income though.
"Potentially you might be a bit worried about your income though"
Such as those who purchased recently investment properties using high amounts of debt for the Airbnb market in tourism reliant locations such as Queenstown. These owners might also be worried about their ability to repay the bank, or even negative equity ...
Yep.
Or those who own Auckland CBD apartments, whether Air B and B or not.
And those who have bought off the plan developments, where the developments are currently still under construction ...
CN, I agree property is a long term investment (I have been investing for 25 years) but your comment has little to do with stating a future direction of price, as fact.
You state that it is speculation to forecast that prices will fall.
yet your view (validated by result) was that stye would rise, itself a forecast based on experience and analysis.
Surely, such method is exactly what the reporters on interest and elsewhere are employing.
Helicopter money is coming!!!!!!
https://i.stuff.co.nz/business/121205189/finance-minister-not-ruling-ou…
I think you're on the money... it's a total waste though imo and will cause more pain later for a bit of short term relief. Will Grant give with one hand and take with the other as he did with the wage subsidy that was taxed in the employees hand lol
It will be good though like handing out $750/week for a period of six months across the ditch;)
PS: Much needed for FHB’s and those lost their jobs.
Yes short term relief, also less stress and mental health until economy recovers to full strength.
Straight on the mortgage.
Certainly the smart move for recent buyers, deleveraging ASAP is the smart move on an individual scale.
Smart move in general. I make one lump sump payment each year to the mortgage, can do 1 payment up to 5% mortgage balance P.A. without being charged extra fees.
It may not be the best move for "the economy", the economy needs us to spend every last dollar we can locally to prop it up. Going to be interesting seeing this play out. Timing really sucks for us, but at least we both have secure jobs (for now at least)
Yes, if 50% of say $5 billion "helicopter money" gets put towards debt then it's $2.5 billion worth of stimulus effectively printed and burnt.
They could give out helicopter vouchers instead. Redeemable at a set of NZ retailers. That would be a better way of ensuring that the money goes into the local economy.
Depends how limited the list of retailers are.. too limited and its really just a big handout to those retailers, (don't need any new stuff, but these vouchers are only good at Noel leemings/harvey normans etc.. guess I'll buy a bigscreen TV then sell it on trademe for cash..) too loose and it's pointless limiting it, may as well hand out cash. Eg if the supermarkets are allowed, then the weekly food shop gets put on the card/vouchers and the money that would have been spent there goes on the mortgage/savings.
That's a good idea, how achievable is it though?
Its not achievable unless all businesses, especially locals, have the opportunity to participate. Otherwise, big box stores like Warehouse and Mitre 10 will gobble it all up while SME's may not have the online capability or supply infrastructure and will miss out.
I'm not convinced the handout is a good idea to start with, but if it is, then giving vouchers or otherwise limiting where it can be spent is not a good idea About the only limit that makes sense is not giving it out in a form that be spent overseas easily, ie a debit card type thing that can only be used in card present type transactions, and even that has limited effect as it just substitutes for other spending.
"About the only limit that makes sense is not giving it out in a form that be spent overseas easily,"
Allowing the money to be spent offshore would be really dumb. I am holding my breath about jacinda and grant getting that one right.
"how achievable is it though?"
Already implemented in China recently.
https://www.reuters.com/article/us-health-coronavirus-china-retail-idUS…
Add an expiry date (say 12 months) to the coupon to encourage spending.
Coupons are better than cash handouts - as the wealthy just save the cash handouts and don't spend the amount received. (Know people who received cash payments from the government in Hong Kong and they just saved the amount, rather than spend)
Yes I agree with this money, as haves will take more advantage than have not’s and that’s the reason Grant initially not liked this idea and we ended up with wage subsidy.Grant said today will subsequently implement this deposit programme (lollies) I guess closer to election coming September.
The should be giving it as cards spendable on goods and services only, not cash.
More than Helicopter money to all is better to give wage subsidy to employees and relief or some money to small and medium business / sector who are and will struggle for some time to come like Trave and Tourism, Hospitality......
I think it's a good idea. It's 'our' money after all.
Income tax cuts can't be sustained, fiscally, over the next few years.
So helicopter money is the next best thing.
A one time 'fiscal hit', that gives people money. Many people will spend at least some of it, boosting the economy.
Cool, how much debt we need to pay off in the future? Hmm, Feel sorry for the next generation. High taxes, high housing price and high cost of living. Time for the young people to leave New Zealand to look for other opportunities.
It's the same or worse in many other countries.
Yes and no.
Australia and the USA are different in that although some of their big cities have high house prices, others don't. So people have greater choice.
Tax? Overall not much different when you weigh everything up.
Cost of living? For most things, NZ is hideously expensive.
And before the likes of The Man 2 has a go at me - no I am not going to bugger off overseas. Nz is my home, and my family are settled here. There a lot of great things to cherish here too.
But cost of living is not one of them, so it's totally understandable why people leave.
ohhhh car parts !!
You mean more 15yo 3 series Beemers/Mercs lowered into the weeds on big shiny chrome wheels out my way? arrgh!
everyone is saying that removal of LVR is RBNZ's way of propping up house prices .. here's my take on it - it's them effectively putting a safety net to cushion the fall instead starting with the lower-quartile houses as mentioned in this article
say an over-leveraged investor had to sell one of his properties - this gives the tenant a chance to purchase without having a hefty deposit. even a couple on minimum-wage (provided their jobs are secure) can purchase a house for $400k (using back of envelope calculation of ($18.90 * 40 hours * 52 weeks) * (2 people) * (5 times income) plus government grants etc) ... So would be applicable to South Auckland houses with a price tag of $500k to $600k when they actually bought it for $300k 10 years ago .. this is a scenario I see happening where investors will sell these types of properties first if needing to readjust their portfolios
But they could already do that anyway? All the removal of LVR restrictions does is enable more people to take out high LVR lending
exactly my point .. a couple on minimum wage would not afford a $600k house (and would be very unlikely to have $120k in cash as deposit) .. but they can purchase a $400k house with little deposit due to removal LVR restrictions
They could still purchase a $400k house with little deposit. The only time it would have been a problem is if their preferred bank has exhausted their limits of high LVR lending, being no more than 20% of lending with 20% or less deposit.
With the removal of the LVR limits, this will mean they no longer potentially join a queue of other low deposit/high LVR borrowers.
We can speculate to the cows come home as to how the market will react when the lockdown ends and yes some of the comments have merit ie especially with market segments that are clearly impacted by the coronavirus ;but,i i believe with the exception of God Almighty no one really knows exactly how its going to pan out,industries have already had redundancies these individuals have lost their spending power to purchase items currently manufactured or created by others still currently employed ,not to forget debt to be serviced ,export demand and employment fears.
i reckon once the dust settles 3-6 months we will be able to gauge how this will impact house prices,it will i believe be a very different market to pre corona virus one.
.
it will really be interesting to see what the herd mentality will be like, do nothing-wait and see ,sell junk ,cut costs and save like crazy or panic.
Well, apparently the commenter "alittle" knows exactly how house prices are going to fare and if you disagree with him you are either "ignorant or stupid" (his words above)
Yvil, you commented recently that after some remedial work , you placed your house on the market,(unfortunately just prior to lockdown), suggesting the market had got a little ahead of itself. Do you intend to continue with the sale process ?
Yes I do
Yvil,
1) Just to reconfirm, you're looking at selling now?
2) If so, what information has made you change your views?
3) how long have you owned the property in question? just trying to understand the purpose / goal of the original property purchase - was the property in question purchased as a long term hold for long term rental or as a short term renovation (or small infill development perhaps?)
4) where is the property located? (perhaps in some tourism reliant economy such as Queenstown? and the market outlook there has substantially changed in the past month)
Here was a comment made 20 days ago
"by Yvil | 3rd Apr 20, 5:59pm
Hi CN,
1) My view on house values became bearish when I thought there was a real chance CV would spread into NZ and the government could shut borders and enforce a lockdown like in other countries. I concluded that many kiwi businesses would hit the wall which means many layoffs, loss of income for business owners and many employees which would lead to very few buyers and many sellers as some would struggle to meet their mortgage payments.
2) My view changed again when the NZ government introduced significant employee subsidies and the RBNZ lowered the OCR to 0.25%, gave banks an 80% guarantee for new loans, provided support for businesses with mortgage holidays and pumped significant money into the the economy with bond buybacks (= quantitative easing). These interventions negated many of the downsides of point 1) in my opinion.
On balance, I think there is still downside for house prices but not a collapse, maybe 10% which to me is not reason enough to sell my house. I hope that explains my views"
Reporters sound upbeat when house prices go up. Rising house prices without wage growth are a curse to our economy. NZ house prices are a giant vacuum sucking all productive money out of the economy. Already last year people were not buying new cars because the money was going to pay mortgages and rents. Thanks for lighting this fire, too, Adrian.
A reminder for all potential owner occupier buyers and current owner occupiers - choose your scenario and act accordingly.
Which will the owner occupier regret most:
1) missing out on future potential gains in equity?
2) potential loss of their savings invested as the initial deposit for purchase of the house or even potential negative equity?
For owner occupiers, a reminder of the impact of leverage (it amplifies property price changes both on the up and down):
Scenarios of financial impact of leverage on equity, assuming an 80% LVR for owner occupier, for a recent $100 property purchase, $20 initial deposit, mortgage $80.
A) Scenario - property price rise:
1) property price rises 5% to 105, mortgage 80, equity 25, so 25% gain in equity value from 20.
2) property price rises 10% to 110, mortgage 80, equity 30, so 50% gain in equity value from 20.
3) property price rises 15% to 115, mortgage 80, equity 35, so 75% gain in equity value from 20.
4) property price rises 20% to 120, mortgage 80, equity 40, so 100% gain in equity value from 20.
5) property price rises 25% to 125, mortgage 80, equity 45, so 125% gain in equity value from 20.
6) property price rises 30% to 130, mortgage 80, equity 50, so 150% gain in equity value from 20.
7) property price rises 35% to 135, mortgage 80, equity 55, so 175% gain in equity value from 20.
8) property price rises 40% to 140, mortgage 80, equity 60, so 200% gain in equity value from 20.
9) property price rises 50% to 150, mortgage 80, equity 70, so 250% gain in equity value from 20.
10) property price rises 100% to 200, mortgage 80, equity 120, so 500% gain in equity value from 20. (i.e if they believe that the property price doubles every 10 years)
Remember, the owner occupier must be able to hold on under ALL economic environments (including any potential significant reduction in household income).
B) Scenario - property price falls:
1) property price falls 5% to 95, mortgage 80, equity 15, so 25% loss in equity value from 20.
2) property price falls 10% to 90, mortgage 80, equity 10, so 50% loss in equity value from 20.
3) property price falls 15% to 85, mortgage 80, equity 5, so 75% loss in equity value from 20.
4) property price falls 20% to 80, mortgage 80, equity is zero, so 100% loss in equity value from 20.
5) property price falls 25% to 75, mortgage 80, equity is NEGATIVE 5, so 125% loss in equity value from 20.
6) property price falls 30% to 70, mortgage 80, equity is NEGATIVE 10, so 150% loss in equity value from 20.
7) property price falls 35% to 65, mortgage 80, equity is NEGATIVE 15, so 175% loss in equity value from 20.
8) property price falls 40% to 60, mortgage 80, equity is NEGATIVE 20, so 200% loss in equity value from 20.
Here is an actual example for owner occupiers to learn from (if they choose to)
A) Purchase: December 2006 purchase price $164,500 (CV was $106,000 at the time, so price paid to CV was 1.55)
B) Sale: December 2019 (after 13 years of ownership) - sale price $140,000 or 15% below their purchase price. (CV was $150,000, so price sold to CV was 0.93)
https://www.qv.co.nz/property/56-romilly-street-westport-7825/1055725
Some mathematics
A) December 2006
purchase price $164,500
LVR 80% mortgage $131,600
Equity deposit $32,900
B) December 2019
Sale price $140,000
Mortgage $131,600 (assumed to be interest only for illustration purposes)
Equity value $8,400 - loss of 74%. (which excludes the payment of interest and sales commissions of say another $3,000 -$4,000)
Now they look to upgrade or downsize - what can they buy using that $8,400 (less after sales commissions) to use as a 20% deposit (assuming no other additional funds)?
That one purchase decision has potentially severely jeopardised their future financial security, and their ability to upgrade. (or in the case of downsizing, resulted in a vastly smaller amount for their retirement funds)
CN, you should put the alcohol away and go and sleep it off!
Why would you post such an example when it is not even remotely possible?
"when it is not even remotely possible?"
Can you please expand and clarify what you believe is "not even remotely possible?"
The Man 2
In the absence of any response, here are some key assumptions made above:
1) do owner occupiers buy with 80% LVR? Yes
2) could property prices fall 15% from current price levels? Yes. (Just think about Queenstown)
The net impact of those two very possible assumptions is a 75% fall in the equity value of the owner. Very very possible.
What could be the impact on a home owner of property price falls?
Some economists have forecast property prices to potentially fall 10-15%.
What would be the impact of a property price fall of 15%, on a owner occupiers financial net worth? The magnitude of loss would depend upon their current LVR before the price fall. For owner occupiers, choose your current LVR and look at the potential impact. (house price used for illustration purposes only)
1) current LVR of 90%,
i) property price of $1,000,000, mortgage $900,000, equity of $100,000.
ii) 15% price fall means property price of $850,000, mortgage of $900,000 and NEGATIVE equity of $50,000 (a loss of 150% of their equity). New LVR is 106%.
2) current LVR of 80%,
i) property price of $1,000,000, mortgage $800,000, equity of $200,000.
ii) 15% price fall means property price of $850,000, mortgage of $800,000 and equity of $50,000 (a loss of 75% of their equity). New LVR is 94%.
3) current LVR of 70%
i) property price of $1,000,000, mortgage $700,000, equity of $300,000.
ii) 15% price fall means property price of $850,000, mortgage of $700,000 and equity of $150,000 (a loss of 50% of their equity). New LVR is 82%.
4) current LVR of 60%,
i) property price of $1,000,000 mortgage $600,000, equity of $400,000.
ii) 15% price fall means property price of 85, mortgage of 60 and equity of 25 (a loss of 37.5% of their equity). New LVR is 71%.
5) current LVR of 50%,
i) property price of $1,000,000 mortgage $500,000, equity of $500,000.
ii) 15% price fall means property price of $850,000, mortgage of $500,000 and equity of $350,000 (a loss of 30% of their equity). New LVR is 59%.
NAB, the owner of BNZ in NZ, just reported their results.
Here is something worth thinking about in terms of their house price assumptions
1) Base case - house prices fall 10%
2) Severe downside case - house prices 30% over 2 years. - " House prices would fall 20.9 per cent this year and another 11.8 per cent in 2021"
Page 20 - https://www.nab.com.au/content/dam/nabrwd/documents/reports/corporate/1h...
Meanwhile the public in NZ are being reminded that there is an underlying housing shortage in NZ by the property promoters and those with a vested financial interest.
Hi Greg,
from mainstream commentary, it appears the most common base assumption is that interest rates will remain low for over a year. However, the next important determinant of debt and loan availability and its cost is whether the global system of liquidity is kept fluid. I have severe doubts on this, as substantial portions of the global credit system (esp bond market) are under water , ie have no return % rate and also substantial portions are junk and are being down-graded to junk rapidly (see Italy today). No matter what fed does and other central banks, the banks actually lending the money have criteria that will tighten at precisely the point when demand is hit. Loans to the housing market will then, surely, decrease and this will mean fewer loans and lower prices. There has to be severe debt also that the bond market will keep taking on government debt when many governments will default (see Turkey and Argentina for starters and Italy is also broke) . The oil market turmoil indicates that the world credit system and demand management is in chaos and this is likely to continue. We are not even in the second quarter yet, the virus continues to infect MORE people per day, even in USA where Trump thinks things are getting better. Most economic commentators forecasting 25-40% drop in OECD GDP. Incomes service debt. So, defaults will inevitably rise and this will impact credit ratings of everything, including all banks and individuals. the whole system rides on debt and this debt, in my view, will become more expensive and harder to get in collective terms. Aus is particularly vulnerable in this respect and particularly in relation to they hyper leveraged investor rental market. Hence I see the big 4 banks having trouble with the equity soon.
Prices were rising in last 4 months to end of March because interest rate cuts were loaded on to fire market.
Unless credit is continuously goosed in this fashion, velocity of money falls.
IE unless credit increases exponentially, the credit market loses power.
Are people seriously stating that the goosing of rates 2013-20 will continue?
Plus that people will have confidence to decide on taking on extra debt in current climate?
And that banks will not tighten criteria?
Sorry, not going to happen
Unless credit is continuously goosed in this fashion, velocity of money falls.
How does velocity of money fall with a reduction in the money supply?
Velocity falls with an increase in money supply.
How does velocity of money fall with a reduction in the money supply?
With a larger fall in GDP, of course.
Very true.
Albeit that was not what was being argued by Mike.
True. Sounds like he's an Austrian.
Not falls, rises more slowly re money supply.
This is Prof Keen argument by way
Also, velocity been falling (taking into account int rate cuts) since GFC because banks choose to park money back in central banks to get risk free return
No. Money velocity (in the US) has been falling since the GFC as a result of the expansion of the FED's balance sheet for exactly the reason I outlined above.
V = PY/M
It gets all a bit whack trying to think about things endogenously which is what Steve Keen has been failing at for 20 years.
The thing ya gotta understand with Steve Keen is that he has very little evidence for the things he promotes.
Do you agree with my argument as to why prices will fall?
It amazes me how the politicians and the reserve bank seem to do everything in their power to keep our house prices artificially high. First they lowered interest rates as far as they can and now they, it seems to me, created money out of thin air. It would have been very painful for everyone if they hadn't I agree. Oh, and they've loweres the LVR too.
Two phrases spring to mind though: if it seems too good to be true it probably is and there's no such thing as a free lunch. Surely they're going to eventually run out of tools to prop the property market up and then it will be very painful for future property buyers?
....and, what goes up must come down.
Yes, like house prices, that's why house prices are still about $20'000, like over 30 years ago, because every time they doubled in prices, they subsequently halved again.
GorddonHeko you sre correct and that future you are talking about in not far away unless already on.
GordonGekko
"Greed, for lack of a better word, is good. Greed is right, greed works." LOL
Especially given they shaft savers old and young to in order to enrich their own portfolios. Heaven forbid the market be free to stand on its own without transferring wealth from savers.
I just brought my first home in Auckland in December - price has risen 3-5% since. I was thinking to myself its actually a good thing if prices drop 10-15% then I've got hope to get a second property in 3 years time! Cause otherwise I never would! Sucks that I brought but got to look at the glass half full!
Where did you bring your home from?
Hi Thinker. I bought in November, for a sharp price. At least 5% below valuation.if we assume it's value increased 5% since then I am up 10%.
So I am not worried if prices fall 10-15% in Auckland, as they are likely to do. Even more so as I had a decent deposit (I wouldn't feel as comfortable if I only had a 15% deposit)
And if they fall 50%?
Great news!
https://mortgagemanagers.co.nz/blog-posts/anz-now-allow-low-equity-prem…
Today ANZ have changed their policy and will now allow the low equity premiums (which are a one-off fee) to be added to the loan amount even if this means the overall lending exceeds 90%.
From today (24th February 2020) they will allow low equity premiums to be capitalised into the loan.
For example: Where there is new lending of $450,000 against a property value of $500,000 the lending is 90.00% of the property value (90% LVR) and would therefore attract a 0.75% low equity premium (LEP) so that equates to $3,375. Although the total LVR would be greater than 90% when the LEP is capitalised (90.68% LVR), the LEP remains unchanged at 0.75%.
These are all gone: CGT, LVR, FHB dep, OCR down, relax banks CAR, no Dep guarantee, all relief measures were directed for RE industry, NZ newest economy back bone.
As 'RE' played big part in NZ F.I.RE economy, got it? - PM has promised no one should sell the house just because loosing job/s & in highly leveraged position by banks 'prudent lending practices' as for this country shall bail you out, no matter what - when should you be in the position to sell it, merely due to covid19.
The AirBnB started to flood the market. It's clear RBNZ directives+govt? is to spend spend spend. Saving? NO! - NZers/Kiwis - Please, do understand if you want to save jobs in; tourism, hospitality ,hotel/motel ,restaurants ,airlines ,educations, seasonal workers, small business/retails etc. - your every $ contributions really matters to 're-start the economy'. You must channeled your effort to buy into more REs, OZ Banks in turn 'will loan more' for those business in needs, using the 'housing/land/property' assets as guarantee with a handsomely inflated valuation for your reward. So do your bit - Let's do this, spend anything you can recapitulate all your asset means, joint venture, shared capitals that can be turned into cash, then bring it to 'OZ banks' then apply for home loan. Your option to do it only in 12 months! before foreign buyers tap being opened again - warning! - you've been encouraged.
Reflexivity was a word and idea proposed by George Soros to describe feed back loops in finance and in particular assett prices. Another term for it is balance sheet inversion. Basically it means that the liabilities side of the balance sheet is unstable and high volatility events are likely to swamp the credibility of the assett side of the balance sheet. As everyone knows leverage is your friend on the way up. Your enemy on the way down. The question is then...Has the RBNZ stress testing, stricter lending limit requirements and strickter capital ratio requirements been enough to cushion the economy from the impact of a pandemic induced housing down turn? Was this a considered scenario? I seriously doubt it. Housing debt and associated assets are a massive part of the NZ economy. They underpin the whole building industry. And the building industry is a huge and highly inefficient part of the NZ economy. I doubt there is anything the RBNZ can do to prevent the fall. Lowering deposit ratios might stall the decline a little but unless they step in and start buying houses with printed money...
Positive price feedback loop on the way up, negative price feedback loop on the way down.
Did COVID-19 cause the music to stop?
Building a buy and hold property investment portfolio is being sold by many as a panacea for those looking to fund their retirement, and those who have insufficient savings for retirement.
1) That is fine in the beginning of the property price cycle when properties have sufficient yields to have positive cashflow and be positively geared.
2) Then this attracts a number of new property investors (and lenders who have financed them) who drive up property prices. It also attracts property traders who buy, renovate and resell for profit. It also attracts capital gain oriented investors. Some residential property investors become residential property developers by adding new dwellings to their properties with vacant land (typically a house on a large section).
3) The higher property price allows aggressive property investors to revalue their property portfolios and then borrow more money to maximum allowable LVR's (aka recycle equity / equity release) to use as a deposit on the next investment property purchase, typically financing with interest only loans.
4) repeat steps (2) & (3) above a number of times, until conditions in step (5) are apparent. Note that interest rate declines since 2006 / 2007 has allowed steps (2) & (3) to go on a lot longer.
5) Property prices continue to rise to the point where properties financed on maximum leverage and interest only loans become negatively geared and have negative cashflow.
6) Capital gain oriented investors with high income levels continue to purchase investment properties even though they are negative cash flow. Property traders continue to buy properties to renovate, and resell for profit.
7) Meanwhile as property prices rise rapidly, owner occupiers and first home buyers have a fear of missing out and feel compelled to buy or they will miss out.
8) Those cashflow oriented property investors unwilling to buy at negative cashflows then buy in areas with higher rental yields which allow properties to be positive cashflow - this has likely driven up property prices in former high yielding locations - for Auckland property investors, first the move was to Hamilton, then other areas further abroad - more recently it has been Hawkes Bay, Kawerau. Kawerau has been one of the locations with a low price point for property investors - since 2014 the average property price have risen 95% - now imagine the impact on that with leverage. For property investors with 62,000 of available capital to put down as a deposit, they can still buy in the Wairoa district (lowest price point) with current 65% LVR's.
9) In their search for returns, and as LVR'S on residential property become the same as commercial property, some residential property investors start venturing into commercial property investments. Increased investor demand for commercial property drives up prices, particularly for those at lower price points.
10) Then something unexpected causes the music to stop ...
There are a lot of property investors who were aggressive and used those equity release / deposit recycling financing techniques which led to the positive price feedback loop. This led to rising property prices, which then led to FOMO (& panic buying), and fierce bidding competition at property auctions.
Meanwhile the media and property market participants, property market commentators with their vested financial interests, further fueled rising confidence and property prices. This led to a belief that property prices do not go down by much.
In order to "win" at auctions, owner occupier property buyers were taking on very high levels of debt (& high debt service ratios). The high debt service ratios left very little room to maintain debt payments if there was an unexpected decline in household income in a recession (such as job loss, fewer hours worked for wage earners).
Now that economic conditions have changed, some highly leveraged owner occupier households are experiencing unexpected declines in household income causing potential cashflow stress, and taking a mental toll on households.
The objective for highlighting the higher risk levels, was to inform owner occupier households of these potential risks, so that they could prepare themselves and avoid putting themselves in a potentially vulnerable position, and avoid the associated mental toll on the family.
Information for owner occupier buyers to consider
There is a potentially huge imbalance between effective supply and effective demand in certain geographical and segmental markets in NZ. This is despite the underlying housing shortage as the public is frequently reminded by property market promoters.
The longer the economy is disrupted (or an extremely slow economic recovery), the more businesses are unable to survive, and the more people become unemployed, then this increases the probability of larger price falls. The offsetting factor is government fiscal and monetary policy measures. Regardless of how low interest rates go, if highly leveraged households are unable to meet debt service payments after the mortgage payment deferment period expires, then some highly leveraged households may be forced to act.
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