The Reserve Bank (RBNZ) doesn't generally say anything unless it wants to say, well, "something".
So, in that regard the actions of our central bank and its Governor this week were a little perplexing.
Bear in mind that RBNZ senior officials are out and about with speaking engagements a lot. Usually there's nothing 'new' in the speeches and these speeches are not publicised. We don't hear about them.
Early in the week the bank gave short public notice that RBNZ Governor Adrian Orr was giving a speech and that this speech would be published on the bank's website.
What was immediately noticeable was that the title of this speech to the Property Council of New Zealand Retail Conference 2021 had been changed from the earlier billed 'The Retail Economy - where have we been and where are we going?' to the rather more focused angle of 'Housing Matters'.
Okay, people can change their minds. But the remarkable thing about choosing to change topics and then publicise the fact a speech was being given was that this speech took place just one day before the RBNZ was to have a major public set piece through the release of its latest six-monthly Financial Stability Review.
So, we had Governor Orr one day earlier giving a speech that was all about houses, when the following day the RBNZ was releasing a document and holding a press conference that was, in very significant part, about houses.
The big 'game' to play, if you like, with RBNZ publicly notified speeches is trying to identify what it is the central bank actually wants to get across. What is the message it is seeking to convey? Because there always is one.
Sometimes this is easy. Back in September there was a fair amount of speculation in the markets that the RBNZ was going to raise the Official Cash Rate by 50 basis points in October. This speculation was affecting pricing in the wholesale interest rate markets.
So, magically, up popped Assistant Governor Christian Hawkesby with a publicised speech.
It took the financial markets probably zero point two of a second to fasten the collective gaze on this bit:
"...when there is a typical amount of uncertainty, and the risks are evenly balanced, then central banks globally tend to follow a smoothed path and keep their policy rate unchanged or move in 25 basis point increments."
Translation? "We will be putting the OCR up in October, but only by 25 basis points."
Message received and understood. Order restored in the markets.
But this week? And the Governor's latest speech? Not so much.
For a start, not everybody took the same message from it. Some took it as the RBNZ kind of absolving itself from blame over the incandescent housing market.
I chose to focus on what I still believe was the intent of the speech - a strong warning about putting all our eggs in the housing basket.
Why do this a day before the Financial Stability Report?
Well, interestingly, us folk at interest.co.nz decided among ourselves that the latest FSR was probably the dullest we can recall in recent memory.
The FSR document effectively painted a picture of resilient financial markets and resilient financial institutions. Yes, the housing market's as overheated as an overheated thing but the financial institutions are well placed to ride out any turbulence.
So, move on, nothing to see here.
Except that anybody who has recently bought a house in a market where prices have risen circa 30% in the past year, and has borrowed 80% of the value of the house, is in a vulnerable position. Vulnerable to any falls in house prices. And, yes, I know, house prices never fall, so let's not get stressed, ay.
But it could just be that the RBNZ is more concerned than usual, right now, about the vulnerability of people climbing into a market that has seen this magnitude of price rises. And this at a time when the RBNZ has begun a cycle of interest rate rises that's already seen mortgage rates rise faster than I expected - with more to come - pushing up mortgage servicing costs by hundreds of dollars a month. And it could be that, rather than seeking to get a message through the financial markets, as is usual for the central bank, on this occasion this was Orr talking personally to the NZ people.
Now, I can tell you, they won't listen, because house buying is not an investment option or choice for New Zealanders. It's an inbuilt drive. Kiwis are wannabe house owners in the womb. I reiterate the comment I heard many, many years ago that for New Zealanders owning houses is as fundamental a drive as sex. Actually, I reckon it's stronger than that.
First home buyers particularly don't look at the housing market in terms of any perception of 'value' and whether houses are undervalued or overvalued. Buying a house is 'stepping on to the ladder', a step towards being a whole person. What it costs is actually immaterial, providing you can scrape together enough money and get someone to lend you a big chunk.
I've been writing regularly about housing for interest.co.nz now since 2013. I don't offer advice because I'm not a financial adviser. But what I can say is that in the past nearly nine years now I would NEVER have dreamed of advising anyone against buying a house at a specific point in time.
And that's regardless of how crazy hot the market might have seemed at any particular point.
The reality is that anybody who has 'waited' to buy in the past nine years will have ended up disappointed to say the least as the housing market has continued to gallop out of view - with one or two pauses for breath along the way.
And Adrian Orr would know not to tell people to not buy houses now. Because he would then be personally held responsible for people 'missing out'.
All he can do is point to risk...
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An acquaintance bought a house in South Auckland a few years ago (2014-15 I think?) just as the market flattened and looked like it would tip over, and he watched its "value" drop to the point he was bordering on negative equity. He was very stressed about this and worried what would happen once the minus sign showed up.
I asked him some questions, such as:
- Are you under any financial strain to repay your loan? No.
- Did you buy this house as a home, or as an investment? A home.
- Are you planning on moving to another town? No.
- Is your job secure? Yes.
So from all this I assured him there's no reason to worry, and eventually the market would pick up again. If you bought for yourself to live in the house, and you can cover the repayments there's really no need to be worried about it.
You'll be fine.
Disclaimer: Not a Qualified Financial Advisor, personal opinion only and so on.
Perfect. Except for one suggestion - "eventually the market would pick up again" Time frame is crucial.
If he was 25, then he stood a better chance of benefiting from your view than if he was 65. As the saying goes, "No point being right, if you're dead"
And it does happen. Ask anyone who bought into the much referenced Tokyo property market in 1987. Last I saw, if they are still solvent, they could still be waiting to hit break-even. (PS: My employer's company house in Roppongi ; purchased 1975, was in the books for $40millon in 1986. In 1991, it was still in the books, but valued at $4 million)
So the biggest factor in any risk strategy it - Time.
The market doesn't even need to pick up again ever, if the answer is you bought it as a home not an investment. Why because as long as you live you need a home to live in. If you move, all homes will be cheaper so if you buy up will actually owe less since the difference between homes will be less, if you buy down then you will have a loss but your total owing will go down. Banks aren't going to recall your loan as long as you are servicing it, or put you in a position where you can't afford the repayments since they will be the big losers if you go bankrupt with significant negative equity not you.
Here is analogy, say you bought a phone from a shop, and the next day it went on sale, you are no worse of then than you where, you just feel bad that you could have got a better deal.
the saying i love is people telling me there house made x in the last year so i ask the following questions
how? if you sell it where will you live then? are you going to sell and move down to a smaller house?
if you are buying as a home it is irrelevant how much it goes up and down until its time to move
unless like many you start using as a credit card and top up that load for a new car
Houses are like index funds, the market does all the work for those who bought in and people will continue to buy whether it's an upturn or a down turn.
I don't know about tomorrow but what I do know is that there is only one direction for properties. People can cite US subprime and Ireland but have they not recovered and are currently in their new high in terms of market valuation?
As always, it's the optimist that makes the most money.
That begs the question, is it poor DGM or DGM poor- in which order should it be?
Crypto is like index funds, the market does all the work for those who bought in and people will continue to buy whether it's an upturn or a down turn.
I don't know about tomorrow but what I do know is that there is only one direction for crypto. People can cite 2013 and 2017 but have they not recovered and are currently in their new high in terms of market valuation?
As always, it's the crypto optimist that makes the most money.
That begs the question, is it poor mortgage slave or mortgage slave poor- in which order should it be?
Yes indeed. Just because I can afford something however, doesn't mean I want to pay the asking price. Everyone has their limits. Current thoughts are it is better to spend 50k on a holiday per year for 20 years, than $1 mill on a shack. This of course might change, lets see what happens!
Do you enjoy life “out of the system”? In my 20’s I thought I’d love to retire early but now I’m in my 30’s if I won lotto tomorrow Id keep working at the same job I like (but don’t love).. Albeit I would go down to 4 days a week.
For me if I make my community a little bit better every week/contribute a bit then that’s enough meaning. Most people do this through their work but there are other ways for sure.
It is a good question and one that a lot of thought went into. You think you'd keep working and you do for a while. Then you think wtf am I doing here when I could be doing any number of other things. Once you stop working 9-5 and start filling your day with things you enjoy, you wonder how you ever had time to work. For example gym, golf, hiking, reading, spending time with your kids, visiting family/friends, the options are endless. I spend some time trading crypto too so perhaps that can be considered "work".
Most jobs don't make the community better other than paying tax in my opinion and my job certainly didn't. For me, I contribute more than the average person through tax and plan to get heavily involved in community through my kids schooling when she gets there.
Plus there is always the option of going back to work, its a great market for potential employees right now and I'm not ruling anything out in the future.
When did you get into crypto out of interest and what coins? I've got predominantly bitcoin and eth with a sprinkling of alts. Eth and BTC feel safe long term to me, the others are speculative bets.
Also in my 30's and have been in for almost 2 years and done pretty well but only this year really invested more heavily. I've made more this year in crypto gains than my salary (right now on paper at least). The thought has also crossed my mind about early retirement one day - although i'm happy with my current job I don't think i'd particularly miss it.
Great to hear you're getting some solid gains mate!
First BTC purchase was around $6 and LTC around $1 but than was many moons ago. Sold them far too early of course! Forgot about it all then seriously got back into it early 2017 before the huge bull run. Made a lot late 2017, lost a lot 2018/19 bear market, pretty typical story. Sorted my act out after that and spent time figuring out a proper plan and studying the cycles etc. Loaded up BIG during the Covid 19 dump as I knew it wasn't all "going to zero" as the boomers loves to say. That was a blessing dump for me. The rest as they say is history, some big buys are up probably 50x (yes boomer you read that correctly.. that is 5000% increase so far, find a house that'll do that!) since then. No BTC or ETH for me, they are boomer coins in my opinion, they will do well but BTC isn't doing a 10x from here. I won't mention what tokens I own but you can probably take a guess on one by looking at my username lol.
I have two pieces of wisdom if you care to read them. 1) Think very carefully if you want to be a bag holder during the next bear market and see all your gains gone. If you want to hold for 10 years, that is fine, but most people I know are selling into this bull run, and buying back in a year or two. 2) If you do want to sell and enjoy your gains, make an exit plan NOW. Don't try to figure it all out when we are at peak euphoria in a few months, the greed will blind you.
Sorry for the long reply, got carried away. Best of luck!
Blimey btc at $6 well done! Good on ya for having the courage to be greedy when others were fearful last year as well. Great story and advice thanks for sharing.
Definitely taking profits along the way, have already learnt the lesson earlier in the bull run particularly with the alts pumping and dumping.
Fascinating asset class, I have zero interest in property and shares right now. So much money to be made if you play your cards right. Its incredible people continue to dismiss the industry without even doing the most basic research first. Crypto continues to pump despite the endless media FUD...imagine when there is true mass adoption.
Hmmm...probably right. Kiwi's and property. The underlying problem is that speculators narcissistic sociopath tendencies of “more for me and nothing for you” is ruining NZ.
Just emailed my MP. Requested they set up a hotline for neighbours of speculators to identify house sales that should be attracting the Bright Line tax. All additional tax identified and collected to be spent on Health and Education needs.
If you agree, please email you nearest Govt MP as well.
Tallyho...
Good article, I appreciate your thoughts.
We'll have a huge economic problem if house prices regress to long-term trend. You'd be asking ordinary folk to essentially try to live on a New Zealand income in a country as incredibly expensive as New Zealand is to live. We can't just go cold turkey because the economy will nosedive, we need a plan to wean ourselves off.
Agreed. We expect to enslave the next generation with debt, so why cant we flip that and have the speculators go broke? Most homeowners have a low debt position on their house because the have been in the market for a while, and haven't been stacking on more houses and debt like junkies. They have focused on eliminating debt vs farming it.
Yes we need a support plan for recent fhb'ers. How about rediverting accommodation supplement from speculators to first home buyers as prices and rents retreat?
In my view A Orr's surprising comments, bordering on financial advice, were meant to warn:
"Watch out, interest rates are going to still rise materially from today"
I believe that the OCR will be raised by 0.5% on 24th November (which I also think is the right thing to do)
I agree. The RBNZ should have the courage to raise by 75 or 100 bps this month, but they will prefer not to see what is going on and bury their heads in the sand, so they won't increase by more than 50 bps.
I think that they will raise by 50 bps only, thus risking a very dangerous game of catch up early next year. Current swaps indicate a raise between 25 and 50 points this month, definitely more tilted towards the 50 points.
For many FHBs the late '90s is ancient history. If you're in your early 30s you were in primary school or intermediate then. It's like me being scared of the share market because of what happened in 1987 - it's something I've heard about but never experienced so I'm perhaps not as tentative as my parents would be.
I did, however, have a mortgage during the GFC, and it very nearly ruined me when the bank shut down lending mid-renovation, so I've carried those lessons forward with me, and I'm doing my best to impart that caution to my children.
GC
I agree. I was about during the 1987 sharemarket correction and while not personally affected - I wasn't financially in a position to be involved - I do know it was costly to many of my generation and as to why many now prefer property today rather than equities.
The current outlook would seem to be increasing mortgage rates over the immediate to medium term (possibly 3 months to 2 or more years).
If I was a recent FHB with a large mortgage, I would be listening to RBNZ and bank economists and most importantly being prudent. Their comments are consistent that the days of sub 3% interest rates are now seemingly over.
Depending on one's situation, this could be looking to cutting discretionary spending now (such as renovations and upgrading the car which can wait) rather than when under pressure to do so, paying down expensive/high interest debt, carefully considering the term when re-fixing, and even investigating the cost of breaking short term and fixing longer term.
Tell that to the multimillionaires who don’t listen to naysayers like yourself. Many of them are ordinary working people who put regular amounts into their equity portfolios overs the years. They have diversified portfolios of NZ, Aussie and American blue chip shares. Now they have substantial incomes as their dividends roll in. All brokers have such clients. Some will have rentals also but most have equities only as they don’t need rental income and the worry of tenants. So many New Zealanders don’t realise what they have missed out on. Investing in equities since the 87 crash chase been extremely lucrative for those New Zealanders who had the inclination to build up a multinational diversified blue chip portfolio. They certainly do not need to buy lotto tickets.
We all know no one listens to RB Governer as he is not profiting anyone in his personal capacity.
Kiwi way of living: Buying houses make you rich period so go for it.
Until there is a bad downturn, no one will learn the lesson and it will only happen if Govt. decides, which they will not let happen. So it is a vicious circle you can say anything and criticize but this is not going to change.
Repercussions: more homelessness, poverty, wide gap between having and haven't & increase in crime.
AJ
"We all know no one listens to RB Governer . . "
Sarcasm I assume as not the people I know . . maybe because it is that they are older/experienced, financially comfortable, and have made sound financial decisions in life.
They also not only know it, but have also experienced it, in the short term houses don't always keep going up in value.
Who remembers the Minimum Price of Wool that New Zealand used to guarantee it would pay to its farmers? 1980's.
What is that Minimum Price today? Answer: There isn't one.
Why not? Because the country could no longer afford to financially support the drain to its economy that its biggest industry imposed. So it was dropped - overnight.
Farmers suffered horribly, but enough survived, and the country did to.
That was another "They'll never do that!" event - but they did; they had to.
Equally, the country can no longer afford to support the weight that property prices (the debt) impose on our economy, and belatedly Orr is telling us what is an evident truth.
The only remaining question is, "Does he do to the urban economies what previously was done to the rural sector - an immediate change? Or does he try to engineer a slow change?"
One way or another, change is coming - if it's not here already. The 1980s farmers that ran down their commitments to an industry in change, survived the best.
Housing specuvestors won't do that, convinced as they are that housing is a very special asset class not subject to the same laws and fundamentals as all other asset classes. They think that house prices will just keep increasing by magic, regardless of how divorced current prices are from common sense and economic fundamentals. If there is one thing that I learned in the investment world is that you should never be too confident of anything.
These housing specuvestors remind me so much of Bertrand Russell's parable of the Christmas Turkey:
"The turkey found that, on his first morning at the turkey farm, he was fed at 9 a.m. Being a good inductivist turkey he did not jump to conclusions. He waited until he collected a large number of observations that he was fed at 9 a.m. and made these observations under a wide range of circumstances, on Wednesdays, on Thursdays, on cold days, on warm days. Each day he added another observation statement to his list. Finally he was satisfied that he had collected a number of observation statements to inductively infer that “I am always fed at 9 a.m.”. However on the morning of Christmas eve he was not fed but instead had his throat cut.
They think that house prices will just keep increasing by magic
You probably would have said the same thing five years, ten years, twenty years ago...
I remember myself back in 1998 thinking that there was no reason for house prices to go up. Soon had to jump back in two years later and a little too late. Since then prices have just kept on going up.
Many people are ridiculously optimistic although unfortunately they haven't been given any reason not to be over the last 30 years. Certain types are generally more optimistic than others , something I noticed when visiting the casino and also observe in the property market. They don't consider a downturn in case it jinxes things.
To be honest I wish I had been less pessimistic over the years. One day my pessimism may reap rewards but it hasn't been a good strategy up until now. Luckily I had someone pushing me close to the edge.
The renter saving for a deposit can't get acom supps once the cash saved reaches $8,100. Meanwhile a homeowner with many $100's of k's in equity can still qualify.
Just amazing msm hasn't put the appropriate Minister on the deck over this nonsenses. The rising inequality is being promoted by stupid ill thought out policies - many a disguise to engorge the banks via an encouragement to borrow and keep the housing ponzi forever growing.
Yep. The sudden 'tough shit' attitude to FHB's vs. the political protection around people who bitch that owning sixteen rentals is essential for their retirement plans is sickening.
If you win Powerball, you can have an OK five bedroom house in Hobsonville Point, or a palatial mansion on the Gold Coast with enough left over to furnish it with even cheaper consumer goods.
Country's broken. Tear it down and start again.
All he can do is point to risk...
Unfortunately "the NZ people" have a very poor grasp on the concept of risk. Risk is not the same thing as chance, which is where a lot of people go wrong. Risk is more accurately defined as the likelihood of a given event occurring, multiplied by the severity of the consequences if it does.
So, if the risk associated with a given event increases, that could either mean it's now more likely to happen than before, or that the consequences if it does happen have gotten worse. In the case of a NZ housing market crash, even if you - for whatever reason - don't think it's any more likely to happen than before, it's pretty hard to argue that the consequences won't be worse now if it does. Therefore, we can say that the risk in the NZ housing market has increased, and that this risk is (finally) being acknowledged through higher interest rates, since interest rates are how we (normally) price risk.
Logical argument. However, you are ignoring NZ money printing that is devaluing money. If increase in price is equal or less than inflation, then not only this does not indicate an increase in magnitude of risk (assuming likelihood of the price collapse is the same or not significantly changed) but the opposite.
Monetary policy makes assessing risk in a meaningful way very difficult.
However, you are ignoring NZ money printing that is devaluing money.
We're not printing money, we're monetising debt, which is different. It doesn't result in monetary inflation in the same way that money printing does, because for every new dollar created there's a corresponding liability produced on the other side of the ledger. As that debt is paid down, the new money is removed from the system.
The inflation we're seeing now is price inflation, which does not erode debt or the value of currency like monetary inflation does.
They're bringing out The Big Guns now!
Sir John Key says house price growth is now unsustainable. I don't know that we'll see a tremendously big correction. But I think the boom run's over. Personally I don't think house prices will collapse. I think that's a good thing because you don't want to leave a whole lot of New Zealanders with negative equity.
You "don't think house prices will collapse", John? That's a comfort...... But you did just mention the unmentionable, 'Negative Equity'. Halloween was a few days ago, John. Don't go frightening people by reminding them of what could happen.
House ownership has changed over the years, from our grandparents buying one house and spending 30 years paying it off, to our current culture of house-flipping. A first home for young couples, then a bigger home for family, then another home when you move cities for a new job... this has gone hand in hand with rising prices. It would not be sensible without the comfort of capital gains cushioning every home swap every few years.
First home buyers no longer have a choice but to follow this model. Nicer homes are far too expensive. And I believe this model relies on exponentially increasing house prices. Non sustainable, to say the least.
Our Grandparents probably spent 20 years paying the mortgage off. But in the meantime; on probably only one full-time salary they also had 4 healthy children - well housed and educated; maybe a boat for a weekend or twos fun times on the water and maybe even a bach - at some isolated beach more than a day's driving away from home (cars didn't go very fast or far in those days; and the road weren't all sealed!) built by hand from materials loaded onto the trailer and assembled themselves as they could afford them. (ie: no debt for the bach, only the solitary home)
Home-ownership was the goal, but it wasn't the debt prison sentence it is for today's aspirants.
Things change, yes. Mostly for good, but enslaving our young to the banks for 30 years (or, soon,longer) hasn't been one of them.
Even JK thinks its over: https://www.nzherald.co.nz/business/housing-market-boom-run-is-over-say…
The funny thing is that he didn't try any of these options himself after being elected with a promise to make housing affordable:
There were many reasons for that view on house prices, he said. Interest rates are starting to track up, the Reserve Bank was starting to employ other tools (like debt to income ratios) to restrict lending. Land supply was also one of the big factors and was being opened up. "And we don't have migration running at levels near we've had it, in fact, it's very low. So if you put in all of those factors I think that you're going to see house prices top out,"
"I personally don't think house prices will collapse. I think that's a good thing because you don't want to leave a whole lot of New Zealanders with negative equity"
Never mind that no asset bubble has every burst by not collapsing.
Boy has the narrative changed in the last few days from 'housing always goes up' (they can see the futility in that one), to trying to convince the public it has peaked but won't do what it always does when the peak has been reached.
We will soon see who is swimming naked.
One problem is that real estate agents often market family homes as 'investments'. If a family house in NZ is seen as an investment, rather than a necessity of life, then surely it should be taxed for the capital gains. I recall reading somewhere that some countries tax people who own houses based on the rent they don't have to pay by living in that house. eg For every house that is owned and lived in by the owners, the government misses out on the tax from that rent. I wonder if that is one reason some governments prefer people rent rather than own their house? In some ways it could be in the governments best interest to make NZ a country of renters. IMO we do seem to be moving towards institutional landlords as we professionalise the rental market in NZ
"House buying is not an investment choice for Kiwis - it's a fundamental driver of life"
David Hargreaves, Question is WHO isresponsible for turning the basic necessity of life into casino chip.
Everyone knows what is happening but is anyone in power be it Orr or Robertson seriously interested in controlling the pyramid ponzi. Instead creating FOMO and coming out with reason and excuses even though data Every month suggests otherwise.
Biggest expose : Fear that house price may fall - Mr Orr acts vernight and throw everything to support leaving no stone unturned by going with policy of LEAST REGRET
AND NOW
House prices are going up on weekly basis and that too in double digit percentage and Mr Orr in this respect first is to manipulate and lie though data proves and if forced goes with policy of WAIT AND WATCH.
So Politicians of all breed and party (vote bank politics) along with RBNZ should take responsibility.
Suppose I'm surprised at the tenor of this article which I read as, carry on your good work house buyers, all's been fine in the past. Seems to contradict multiple warnings from high places lately. Took folk a long time and a lot of pain to realise tulips were only flowers even when a bulb was 'worth' a house.
"...house buying is not an investment option or choice for New Zealanders. It's an inbuilt drive... " Correct. Why is this? Because the retirement savings alternatives in NZ are hopelessly skewed against citizens because of our TTE tax system. The western world standard is an EET system but a former greedy Labour govt fundamentally changed NZ's superannuation savings system so everyone had no option but to pile into residential property. You cant blame NZers. Fix the super savings tax system and the situation will be helped immebsly. Introduce CGT on property and you will condemn the average Kiwi to a retirement of poverty on our universal super poverty pittance. Taxes eat up our super savings pots.
Exactly as it says, not to hard to work out the median action sell price. So much for all things look greener across the ditch. Saw that the average house price in Bondi is like $3.2mill and many are not even what most Kiwi's call a "House", your joined to the place next door, no garage on a 300sq/m section.
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