One of the largely unspoken sentiments I gleaned from reading the Reserve Bank's latest six-monthly Financial Stability Report last week was a sense that the RBNZ is very comfortable any financial risks with the housing market as it is now are contained - but the future might be more problematic.
More specifically, there was the feeling that those who were already in the market - were on the 'ladder' - were very nicely placed thank you, but those getting into the market now could get exposed financially. Particularly as interest rates go up.
That's my impressions anyway, but here's a specific quote:
Recent buyers have needed to borrow more and are increasingly vulnerable to future shocks. Recent high-LVR borrowers are vulnerable to a decline in prices from their current levels. Also, while current debt servicing costs are quite low, higher mortgage rates could see debt servicing costs rise substantially for some borrowers as a share of their income, creating financial stress and reducing aggregate demand.
This all reminded me of an opine I had produced in early April last year, which was headed: 'When time wasn't on the side of the young'.
The secondary headline was: 'We needed a reasonable period of time to allow the recent surging wave of highly geared first home buyers to get financially comfortable. We didn't get it.'
Well, I can have a little chuckle about that now, and I guess you did too. But it's worth casting minds back to those early Covid days (or was it daze?) and remembering the way that apparently everything up to and including the sky was going to fall in. And yes, that certainly included the housing market.
So, my opine, published on April 1, was very much lamenting the fact that young first time buyers who had taken a punt on what looked like an over-pumped market might have found their luck ran out. Well, as we now know, far from it.
And it all demonstrates the hazardous nature of either trying to forecast prices - or for that matter offering advice to people considering buying houses.
The RBNZ can say now that there's risk for new buyers getting into the market now. Equally the same could have been said at the start of 2020. And then increasingly so as the pandemic took hold.
Back to the opine I wrote in April 2020. The figures I looked at in that piece all related to February of 2020. Just before all the craziness really kicked off.
REINZ figures for February 2020 showed that Auckland had a median house price of $888,000, which was up 4.3% from the year before. The rest of NZ (excluding Auckland figures) had a median price of $550,000, which was up 11.8% in 12 months.
What that means is that a first time buyer with a 20% deposit, and paying the assumed median price, would have needed $178,000 in Auckland and $110,000 in the rest of NZ.
How did they do?
Well, the REINZ figures for September 2021 gave an Auckland median price of $1.15 million (very probably affected by Auckland's lockdown) and the rest of NZ had a median of $720,000.
So, our imaginary first time buyers would be looking like this: The Auckland buyer would have seen their original deposit (not including any benefit of mortgage repayments) increase in value by 147% from $178,000 to $440,000, while the rest of NZ buyer would have increased the value of their deposit by 154.5% from $110,000 to $280,000.
Very significantly in terms of being insulated against any adverse market moves, our Auckland buyer would now have equity in their property in excess of 38% (up from the original 20%), while the rest of NZ buyer would have equity of just a touch under 39%, again up from 20%.
Didn't work out too badly for those people that seemed in such a vulnerable position in those early months of 2020 then did it? To say the least. From the bottom rung of the ladder to comfortably mid-rung in not much more than a year-and-a-half.
Here's hoping then that the warnings being issued by the RBNZ about recent buyers will prove similarly wide of the mark to those fears expressed early in 2020.
What could be different? Well, firstly that house prices moved up such a long way in 2020 and well into this year.
Secondly, and most crucially, money is getting more expensive.
I've been surprised just how quickly mortgage rates have been going up.
Since June two year fixed 'special' rates have risen from around 2.5% to 4%. It sounds like a lot and if you put it into 'real' figures, it is.
To stick with the first buyer theme, the average sized mortgage for an FHB in September was $548,000.
The trusty interest.co.nz mortgage calculator suggests that at the June rate of 2.5%, on a 30-year mortgage of $548,000, the monthly payment is $2165. At current 4% rates the bill goes up to $2616 - an extra $451 a month.
It goes without saying that $450-plus a month extra is going to be noticed.
People will pay it before they spend the money on anything else, because that's what people do. But $450 a month of discretionary spending a month vanished into the ether will make a difference to the economy, which over time might make a difference to the livings people can make, and to jobs.
All we can do is watch this space. Predictions are futile.
All you can look at is the risk and judge whether that is increasing or decreasing.
The very sharp increases in mortgage rates, with more it seems to come, present a very new kind of risk to that which was seen in 2020.
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...discretionary spending...vanished into the ether will make a difference to the economy, which over time might make a difference to the livings people can make, and to jobs.
Quite right. And what will the indebted stressed do? What would any of us do? One of two things, (1) sell up or (2) Take on a 2nd or 3rd job at whatever wages they can get. And that leads to lower wages, as 'the desperate' will work for less than those who aren't. "All we can do is watch this space."
Young and skilled of you bought a house in last 2-3 years then my good suggestion would be to sell up and move along to better pastures. This country is not old and people who just want to warm their chairs sitting in it. You will find better opportunities in the whole side world and you will have new experiences to experience. If you stay here, it will be lost life and increased debt.
Oh you missed option (3) wait for RBNZ to come to the rescue with rate cuts (incl. negative rates).
Here's how it plays out: Swap yields up, mortgage rates up, mortgage repayments up [we're currently here], discretionary income down, demand inflation down, business profits down, employment down, swap yields down, mortgage rates down, mortgage repayments down, house prices up!
Rinse and repeat in a never ending cycle of saving property owners. NZ the land of increasing housing debt where you get rich by participating in the game of greater fools...just don't get caught holding the candle at the end.
..sort of my point.
We got told the one side so as to allow the engorging of the asset owners to continue, whereas it shouldn't make a whole lot of diff - just changes who benefits.
We see the same thing with tourism - they always 'forget' to deduct overseas spend from inbound spend.
.....always shocked me that the "ma & pa" property investors got hit with that "non deduction" of mortgage interest against income earlier this year.
So who really knows what will happen in the next 4- 6 months ....it's all "up in the air" at the moment.
With NZ, if property does go "negative", it will be a result of an overseas "event" ....locally, I can not see anything in the near future that would decrease these current values.
However, if there is no capital growth in prices, some investors will be going "backwards" in various degrees.
It should never have got to this point in the first place...... while all this "debt" - both public and private, has to be paid back somehow ???
I also think it will take some sort of international financial crisis to result in a significant correction or crash.
However, even without that I could easily see a minor correction, say 5-10%, starting in autumn 2022.
Prices could well increase a further 5-10% before then due to FOMO, however.
" The RBNZ can say now that there's risk for new buyers getting into the market now. Equally the same could have been said at the start of 2020. And then increasingly so as the pandemic took hold"
I have always looked at this from the opposing direction - the risk in not owning a property? If you do not own a property you are short, not even square, but short.
I have always looked at this from the opposing direction - the risk in not owning a property?
Such an out-of-touch boomer understanding of things. What if you're in the more recent end of the age demogs like millennials and Gen Z? They're likely to say the same thing about the old farts not owning NFTs.
I'm not that old but I cringe at NFT's and Crypto. Every second boho millennial social influencer without any qualifications or experience is pumping them for kickbacks. I think something like 10k+ coins have launched with 98% of them worthless.
If you want to spend $10k on a fluoro koala NFT I have one for you.....
I'm not that old but I cringe at NFT's and Crypto
Well that's not the issue. Do you expect the under 30 age groups to buy into boomer attitudes and behavior? One of the core reasons why crypto exists is because the financial / monetary system is geared against younger people, which they increasingly understand.
I couldn't care less what the under 30's think of older age groups, why should I? Tech enabled young are getting richer and doing it faster than older generations ever did - Atlassian, Canva etc etc. Crypto has potential of course, but it is also ground zero for the financially illiterate and gullible and my advice is steer well clear of it.
Yes its quite a joke these days the 12 year old's think they know it all and us oldies couldn't have possibly done any of it before. Don't waste my time talking to them much really they don't listen. Still one thing has never changed, you learn things the hard way.
I personally think that a wise investor should always be diversified across multiple asset classes, and also with good internal diversification within each asset class. Then, depending on the circumstances, on the investment time horizon and on the current personal, national and international economic prospects and asset valuations, an investor may decide to temporarily go a bit underweight or overweight within some margins/tolerances defined within an overall portfolio profile. For example, I have gone underweight in bonds several months ago, and I am very happy with my decision, and I am currently a bit overweight in resources-related industries as I am trying to build a profile a bit more resistance to inflation.
Property (be it industrial, commercial or residential) does have a role to play, as one of the main investment classes - if for whatever reason you decide that other forms of investment are preferable to owning your own house, fine: but not investing in property (even if just in the simple and easy form of an ETF) gives you an unbalanced portfolio, with all the associated risks. Having some form of investment in property (including your own house) is not necessarily an out-of-touch boomer understanding of things.
Te Kooti,
Absolutely disagree and i think I'm older than you. I would rather slit my throat than be caught saying; if you'll take my advice, you'll do.........
I would only offer advice if asked for it and then only reluctantly. One trait of arrogance to think that your 'experience' gives you the right to offer it to others.
The real bugger Brock is that two year old may soon be asking you why you don't own a property yet. Life sure is interesting at 50+ if you have a few friends you have known for decades and the final outcome is a total of their life's decisions. Its not been good for at least 3 people I know.
I almost pulled out of buying my first house in Te Kauwhata for $660,000 in April 2020 because of the doom and gloom predictions. Fast forward to now and the house over the road sold for $1.1 million within a week a couple of months ago. And another house nearly identical to mine but on a smaller section has just been listed for offers over $1.3 million last week.
This lockdown in particular has been great for us in the North Waikato. Being an easy commute to Auckland yet not in the “Auckland region” is kind of a best of both worlds place to be right now. Very lucky in that regard!
I was very worried when covid struck.
I had bought in November 2019 and was worried within 6 months of purchase I would be in negative equity (I put down a 25% deposit). It would have just been my luck!
I had the townhouse valued a couple of weeks ago, and rather than dropping by 30% through covid, it was up by around 30%.
At least now I have a buffer for the falls that I think are coming.
Sounds similar to my house in the UK, on the outskirts of a city the size of Christchurch/Wellington (10 minute bus to the city centre). It's worth the equivalent of about $330k NZD.
Of course we couldn't make housing as affordable as that in a country like NZ with a population density 15 times lower than England.
Young Kiwis should not be gambling their futures like this. Heads you double your equity, tails you wipe it out and may even end up with a large debt. Or do you wait for prices to fall because you cannot afford the deposit and hope that prices will fall. Tails you win, heads you loose and go even further backwards.
The only sane advice is to get the hell out of the country and focus on a country with a competitive, sane and sustainable housing market.
A market with true and open competition, always delivers the product at the minimum price and must always be stable. so you are always unlikely to get caught like this. EC 101
There's still big assumptions at play about *having* to own property.
Perhaps if a lot more build to rent comes on line with much more security and certainty renting won't be so bad?
Provided you invest well in other things, you aren't *necessarily* guaranteed poverty in old age if you rent forever.
One argument as in any pyramid ponzi is that everything should be done to not only support but to promote the ponzi OR pyramid will break as a result Pyramid will and has to keep on growing AND this is exactly what is happening.
Now can Mr Orr and Robertson ever, even think of controlling and under pressure even if they do start to think, will be interesting to see how so called experts, economist, bureaucrats, lobbyist, re industry and not to forget politicians will come out in open to protect.
See the media and byte currently on, all lobbying for Orr to not raise OCR or.....
In general people with money are pretty smart, however I have known people who literally were given a house and years later had nothing. Some people could win Lotto and years later be broke again, they just make non stop stupid life decisions. Odds on anyone still able to buy a house and make the mortgage repayments and has the right attitude will come out the the other side.
NZ beats UK x 5 times.
What UK is hoping to achieve in FIVE YEAR NZ has accomplished it in ONE year courtsey Orr and Jacinda.
https://www.thisismoney.co.uk/money/mortgageshome/article-10177319/Hous…
"I've been surprised just how quickly mortgage rates have been going up" Really? Surprised that 'our' banks rush to put up their mortgage rates given the slightest opportunity?
Well, I can only assume that for you, Santa is still real. By the way, I am a Nigerian prince and if you will just give me your bank details, You will receive millions as a reward.
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