By Mark Brown and Hamish Pepper*
- Despite a 12% decline from last year’s peak, we think New Zealand houses are still significantly overvalued based on historically high price-to-income ratios and mortgage repayment costs.
- The currently tight labour market is usually a positive influence on house prices but is currently being overwhelmed by very low rates of population growth, high mortgage rates and ongoing increases in housing supply. We expect this dynamic to continue in coming months which may result in further house price declines into 2023.
- A more benign scenario for the housing market could occur if house affordability slowly improves via ongoing income growth, reducing the pressure for house prices to fall.
Determining a fair value for house prices is imprecise and most measures don’t adjust for the improvement over time in the quality of houses. A popular metric is the house price-to-income ratio. This has trended higher over the last 25 years, likely boosted by multiple factors including: net migration, the capacity of the residential building sector, a secular decline in inflation and bond yields, financial innovation and, more recently, the increase in financial system liquidity via quantitative easing (QE). Some of these drivers are now being reversed. This reversal argues against the prospect of a long-term upward trend continuing.
As at the end of October, New Zealand house prices have declined 12% from last year’s peak but remain almost 30% above their pre-COVID level. The current median New Zealand house costs $820,000 - more than 10 times the median household disposable income. Regional data shows much higher price-to-income ratios in Auckland relative to other regions. Nevertheless, the nationwide data implies a 30% decline in house prices is necessary to return this house price-to-income ratio to average, assuming no change in income. Alternatively, if prices don’t move, it would take seven years of 5% income growth to return the ratio to average.
Perhaps what is more interesting than historic price-to-income ratios is the impact of higher interest rates on household capacity to make mortgage payments. Serviceability is a useful indicator in determining turning points in market behaviour. The current ability of a new buyer to finance a mortgage at prevailing mortgage rates is extremely low. It currently requires 64% of the median household disposable income to service a 30-year mortgage on a median house. For the new house buyer, house prices would need to decline by 28% for the mortgage servicing ratio to return to the 15-year average.
Relative to previous housing cycles, there are other negative dynamics at play, including:
- The cessation of the ability for property investors to offset mortgage interest costs against income for tax purposes; and
- Sharp increases in property maintenance and insurance costs.
Market feedback points to significant weakness in the housing market as we near the end of 2022. Housing price falls seem set to continue into 2023, though the current high costs of building may slow the adjustment as potential new home buyers switch back into the existing stock of housing. Prevailing mortgage rates continue to increase and sit well above the average outstanding mortgage rate. Almost half of all outstanding mortgages will roll on to these higher rates over the next year. It is currently taking 48 days to sell a house, well above the historical average of 39 days. This figure has continued to extend in recent months. Despite a reduced number of properties being brought to market, actual sales are down 40%. This is a strong indicator that there is an overhang of stock.
Thinking about the supply side, it is very difficult to determine when the New Zealand housing market was in equilibrium. The period 2014-2018 experienced significant population growth, a long way above the number of dwellings built. This began to reverse prior to COVID with excess construction accelerating over the past three years. This rise in construction has coincided with a collapse and reversal of migration, reducing population growth to almost zero. Consent growth has plateaued over the past three months and builders’ forward activity books indicate a private sector residential building cliff in H1 2023.
Overall, the chronic housing shortage that existed a few years ago has largely been solved. This has happened without New Zealand moving into a position of sharp oversupply, which created serious problems in Ireland, Spain and Florida after the Global Financial Crisis. A better sense of balance in the supply/demand in the market is also evident.
Many commentators have highlighted the weakness in the housing market, with bank economists among the first to place high risks going into 2023 for yet lower house prices and falling activity. Perhaps we are already well-progressed in the adjustment of house prices and the housing market, however, numerous indicators point to yet further pressures from:
- Low affordability
- Strong near-term building activity, and
- Low population growth.
Most periods of adjustment are measured in years and, in the absence of a significant change in incomes, interest rates or migration, the housing market may face further adjustment into 2023.
*Chris Di Leva, is a Director and Portfolio Manager at Harbour Asset Management. This article is used with permission and was first published here.
This article does not constitute advice to any person.
158 Comments
Yes of course. Its a little desperate to cast aside the importance of overall affordable accommodation just because it suits you in the moment then in another thread you'll be suggesting how migration will support house prices and replay a housing shortage - (eyeroll)
Believability and consistency go hand in hand.
edit
The periods 20 years and 15 years are irrelevant. What is relevant is the international standard of affordability: that the median house cost no more than three years' median household income. To achieve that house prices must fall a further 60% from October 2022 prices.
That won't happen, and if it did the country would be wrecked and we should all, housed and unhoused alike, go down with the ship.
We must abandon the now foolish notion of everyone being able to own a home and instead elect a government that will foster the mass building of state houses for secure, lifetime, income-moderated rent by all who want them.
https://www.interest.co.nz/property/house-price-income-multiples
Not Cuba, depending on what you read.
The biggest issue for Communism is it's always come via revolution.
So you have inexperienced leadership, often arising via violence, inheriting states that were broken by the previous regime. Very difficult to develop positive outcomes given those inputs.
I don’t know much about Cuba, but I gather it’s hard to encourage doctors, engineers, etc to come/stay when you pay them the same as a burger flipper. its getting that way here, some of the new state houses being built have better infrastructure than anything a hard working educated person can afford, and then it gets tagged up and wrecked as a thanks.
An adjustment to the average of 7.6 implies quite a significant adjustment is in store. What about the possibilities of overshoot? If there is an argument to be had about wages playing catch up to put a floor under these lofty valuations then the RBNZ will keep interest rates higher for much longer in order to suppress this.
Assuming they survive financially, those flippers who anticipated banking big gains quickly will need to pick a different decade in which to offload. All that interest paid meantime is a sh-t load of dead money that could have been better invested.
Yes, indeed Mr Poppy. There is a suspicion that a certain Mr Powell is sumthing of a party pooper and bubble popper. He may actually be carrying Mr Volcker's book about because he has actually read it. He may be intent on restoring sanity to the US financial system by extinguishing the credit bubbles they have created at home and around the world, such as our very own Kiwi house price bubble. We live in interesting times indeed.
Yes, I hear you say, but aren't all American institutions captured by warmongering, CCP credit score inspired MMT and ESG, digital ID citizen tracking, compulsory partial sterilisation and immune system shredding vaccininators? Perhaps not, after all.
Completely agree! Like the below quote from the article.
” without New Zealand moving into a position of sharp oversupply, which created serious problems in Ireland, Spain and Florida after the Global Financial Crisis“
people that harp on about nz having a housing market crash like Ireland fail to recognise the 1 + 1 = 2 aspect that this was mainly caused by an oversupply. Something unlikely to happen in nz
You sure about that?
>>> The supply of new housing has exceeded population-driven demand by almost 60,000 homes over the last two years
https://www.interest.co.nz/property/118161/supply-new-housing-has-excee…
"and yes people are still buying"
Yes, in much reduced numbers they always do on the ride down. The point is though, in twelve to eighteen months time, will the majority of "expert knife catchers" regret these life changing decisions? Were they driven along by more emotion than rational thought?
There were also some buying in Nov-2021 anticipating quick gains from there too!
After what we've witnessed, "when buying a house it is better to do so when there are more distressed sellers.
We have already seen how interlinked events of the past have been met with policy missteps. These could easily deliver more unintended consequences in the future.
Our first home purchase in early 2017 was from a distressed seller. A reluctant landlord with a problematic tenant (they had initially bought to rent to their son&partner but they split up). Listed the property, but the tenant would only allow private viewings on Tuesday mornings between a specific time. My wife was on maternity leave so could view the place. We put in a very low ball offer and they negotiated slightly higher which we accepted. They made an 8% capital gain in 10 years.
Just for the record HW2 can you post on here when you think the bottom is in. Is it now?
I got my last great bargain in 2011 after the GFC in a divorce situation when the sale had to happen. Thats quite a long while after the offical recession, we do not even have a recession yet.....
ITGuy. You told us the other day you've been making tonnes of profit buying "old sh1tters between 2011 and 2021". (I did find myself questioning the truth of that comment). So which one is it that I should believe.
Tbh you're not much of a negotiater or serious investor if it was more than 10 years ago.
Pretty much same story everywhere
Originally written by *Chris Di Leva, is a Director and Portfolio Manager at Harbour Asset Management
It would be fair to also include a comparison to other asset classes and the financial colloaspse of the those and you wonder why people buy houses.
Mainly because it's the only asset class that allows such high levels of leverage from a retail bank. The Spruikers where selling it as a leveraged retirement product... where you could use the equity in your home to purchase an income stream in old age. What could possibly go wrong?
I first thought "yet another article on NZ housing" but it's actually a well balanced, fairly complete assessment of the housing situation in NZ. If there is one thing I would add, it's that there is strong growth in incomes, which will help bring back the equilibrium between income and house price, sooner.
If there is one thing I would add, it's that there is strong growth in incomes, which will help bring back the equilibrium between income and house price, sooner.
Yes. But if you require incomes to increase at a greater rate than inflation, you're going to run into all kinds of problems.F'more, people don't seem to understand that it's 2022. The advance of technology means that deflationary forces are strong and that also applies to incomes. It's not the 1970s anymore.
Bingo!
Cheers BW. You're not going to read about such things in Granny Herald or hear them from the likes of Lord Key (don't matter if he can hole in one), Cindy, Robbo, or Orr (who I've decided not to affix the honor of 'Kaumatua' to anymore. Disrespectful to Maori IMO).
The woke attitude might be a responsibility of the role in the job description drafted for him by Robbo. All we know is that the actions of the RBNZ have not benefitted Maori in any way (accept those closest to the magic money machine and who can clip the ticket).
Yet another article about property that ignores the biggest problem of all - the very highly leveraged property investors.
Once again, the authors talk about household incomes. But they completely ignore investor incomes vs debt levels.
The most rotten and unstable parts of the market are those areas where investors have purchased negatively geared (or almost negatively geared) properties at 7, 8, 9 and 10 times debt-to-income ratios. All those speculative purchases made right near the top of the market, when interest rates were super low and the lvrs were removed. They are a ticking time bomb - most of those sales didn't even make financial sense when rates were super low - they are extremely risky now that rates are higher. Far worse than the USA sub-prime lending.
If there are forced sales, they will come from highly leveraged property investors. Chances are that the marginal (desperate, forced) sellers will be overleveraged property investors. This is the rotten section that will crater first.
How can nobody see this? How can we have article after article from supposed "experts" that completely ignore this? Talk about the blind leading the blind.
https://www.interest.co.nz/property/113230/new-reserve-bank-debt-income…
I think it's a good article. Objective. The authors are not trying to identify drivers of the property ponzi. And we already know that credit creation (inflation) to speculate on the existing housing stock has been part of the problem. But everyone should know that by now
Not a "bad" article. But it is useless to talk about household debt to incomes and ignore investor debt to incomes. Completely useless. It renders their analysis worthless.
Marginal buyers and marginal sellers set the price. We don't need a crystal ball to understand where the marginal sellers will come from.
I have yet to see any article about property that focuses on the most important things - the weakest links in the chain.
I think it's a good article. Objective. The authors are not trying to identify drivers of the property ponzi. And we already know that credit creation (inflation) to speculate on the existing housing stock has been part of the problem. But everyone should know that by now
Years in advance, most non vested commenters had already identified the culprit drivers of this "Property Ponzi". Being non vested and more thoughtful of others, they were active in their efforts in deterring others from becoming victims of the fall out. Victims I think the RBNZ insensitively sees as "acceptable collateral damage" in order to correct a terrible policy misstep.
Yvil, you say that "everyone should know that by now" but yet all I recall you ever saying in 2021 was that the "RBNZ should quickly raise the OCR to pre-pandemic levels" You seemed reluctant to expand on why you felt they should. Could it be that you were yearning for higher term deposit rates? If so, did you specifically warn other commenters of the coming carnage in house prices.
Hi Yvil, I see you posted the same message, verbatim, about 40 mins after J.C.
by J.C. | 10th Dec 22, 11:38am
I think it's a good article. Objective. The authors are not trying to identify drivers of the property ponzi. And we already know that credit creation (inflation) to speculate on the existing housing stock has been part of the problem. But everyone should know that by now
What a coincidence!
Says the guy that still hasn’t built his house in the armpit of australia and has since seen the value of said unbuilt house plummet meaning he now has an unbuilt house that is valued less than what he paid for it. You’re the only guy on here bitching about future being banned for mocking mental health.
Please put some effort into making sense. Only an idiot would buy into the most overvalued market on earth at it's absolute peak and I most certainly did not on both counts.
Your speculations are unfortunately wildly off the mark because you are operating in a knowledge vacuum. Only idiots post details of their financial affairs online.
It is unfortunate that The Apprentice was banned for asking questions. It is important that we discuss mental health issues instead of sweeping them under the carpet.
Let's learn about the symptoms of Narcissistic Personality Disorder (NPD) today.
https://www.mayoclinic.org/diseases-conditions/narcissistic-personality…
For 2021 Loans to owner occupiers that also had investment property as collateral with a DTI >9. 1.46 billion to 1552 borrowers. That 940k average borrowed against the house they live in. Most likely they had to leverage their home to fund the deposit and skirt the higher LVR rules for investor lending. So when all the loans reset to 6% plus. There will be at lest 2 or 3 properties per each one of these investors in a forced sale situation. So a guesstimate of 3000+ dwellings in a must sell situation. 9-10 per day that need to be liquidated.
What do you think that does to values?
Renting your house out to probable drop kicks has always been high risk in my opinion that's why even years ago I opted to sell a house and bank the money on a 4.8% return and you can sleep easy at night. Would I have been better off renting it out ? probably in hindsight with the huge capital gains since 2014 but prior to that the gains had been pretty flat or no better than a TD really.
And now have to pay tax on the rent as interest becomes non-deductable, Many people bought to offset income so I assume they will end up paying 30%+ on the rent to IRD.
900k mortgage on int only, rent = 800 pw before tax 560 after tax , rates 2600pa water 500 thats only 26k income, and a interest bill of 56k, or having to find 30k PA.
Any its int only in 20 years you will still owe 900K Be Quick..... to sell.
On a yield basis that place is only worth 400k now.
Wishful thinking is that we have wage inflation to compensate for the falls. I.
E.g. nominal house values remain static but wages increase 50%. That would be the ideal scenario for many as it would mean the nominal price of a house remains above the debt amount = negative equity avoided.
Except if wages go up that much then interest rates will also go up. The only possible saviour for the housing market is if inflation goes away and interest rates drop again, however I’m not sure they will go back to under 3% again, you would think the RBNZ has learned their lesson.
It would be informative to see these graphs over a much longer time frame.
Even at a DTI of 6 back in 2000, houses were already expensive relative to incomes.
And it would be interesting to see the difference between Auckland and the rest of the country over those years too - as Auckland was far more expensive than everywhere else for a long time.
Not 12% but in Auckland house prices are down 20% and will not be surprised if the fall touches 30%.
Houses that would last year sell for 1.4 million to 1.5million are going between 1.05milliin to 1.2million and house that were selling last year for 1.1 Million to 1.2million are now going between 900k to near around million.
Expecting minimum further fall of 5% to 10% from here on as many FHB who were still suffering from FOMO and had secured income bought on downside therby supporting ( Still 1 out of 20 FHB bought at high price thinking that getting 1.3 million house for 1.25million is a deal).
My old rental at 7 Churton Street just sold for 200k less than its last sale in 2020. The 'homes.co.nz' valuation peaked at around 3.4mm and that wasn't unreasonable during the peak crazy season so its down around 40% from its peak value.
The place I sold in Mission Bay for 3.7m back in 2021 is now valued at 2.7m. (Development land) so let's say off 25% plus some.
From what I can see the market in Auckland at the middle higher end is already off considerably more than 20% being driven by investors who can't afford the negative carry or can't get refinanced.
https://homes.co.nz/address/auckland/parnell/7-churton-street/wqEZB
Yes - upper is cratering big time.
Something odd going on with the graph. 24 Feb 2022 to 10 March 2022 it basically loses $1m off the HomeEstimate value bringing it back to the estimated price 12 months prior.
Were the numbers in the last 12 months being artificially pumped by agents on Homes.co.nz? A quick revision downwards to unwind this disingenuous practice.
Homes was totally pumped early this year, the pricing was incorrect as the second the new RV came out it all took a dive. Reality is that Homes is only correct when a house actually sells and the sold price appears. You simply cannot generalise by taking a single sale and applying to the whole market, the variation based on just the area and location and the quality of the home is huge, plenty selling bellow RV and plenty still selling above.
Well my place on Homes has taken quite a dive over the last two months, but hey what they value it for and what I would sell it for are two different things. I know what the replacement value would be and the land its sitting on happens to be currently in a location that's simply not replaceable so I still wouldn't sell it for another $500k if someone walked up my drive tomorrow and offered it to me so the homes evaluation is meaningless.
Bout time residential construction had a pricing whack. Whole lot is crooked including utility providers and councils. Overt price fixing on social media. Rubbish workmanship. Developers building, selling, moving on and not looking back. Overt life-style marketing. Housing the many should not be a financial engine vehicle to create wealth for the few: drive the RR, fly the jets, employ the chefs and splash it for everyone to see. Humble NOT.
Sadly, MANY more disasters like this to come:
https://www.nzherald.co.nz/nz/podular-collapse-leaves-up-to-60-home-buy…
For those taking out mortgages in the current environment the price drops equate to ZILCH in fact payments will cost more than ever before... fhb borrowing 670k (ave) before drops on 30 yrs @3.05% (2020 rateaannzzbnk) 656week ..fhb today borrowing 610k (new ave) @5.75% (Hlaaandbnk) 821week...it hasnt got cheaper for anyone in fact the goal posts have shifted dramatically into outer space....that price drop seen in the adverts is to attract idiots into bailing out idiots. The only winners are those rolling in cash ,those without mortgages and those that dont want to play lets buy over inflated RE (even though it seems to have dropped very very slightly in price) . It is smoke and mirrors...FHB'S borrowing now ,getting a bargain...NOPE...your being fleeced !....there ive said it plain and simple...My advice is hold out and watch the market be forced to cough up some extraordinary better deals.... be warned they will try and make the 'silly' (overinflated) prices hold even though they know its starting too slip away on them... The truth is RE is not worth as much as they want you to think it is....its certainly not worth having a marriage break up or cardiac event over..... Nothing beats a good nights sleep regardless of where you are in life.... Peace of mind is something the financiers arent big on...lol
Countries tend to have houses that are appropriate for the conditions. Up until recently we had this right for relatively hardy people. The leaky house fiasco was because we started using designs and materials not appropriate for a wet climate. The wooden weatherboard, tin roof, bungalow is a great match for NZ's weather.
Big design improvement of late with the reversion to the open gutter design so if it overflows it just goes directly over the top to the ground or over a vertical facia board to the ground, there is no way water can enter the soffit anymore. With the type of intense rain we are getting of late, overflows can still happen on clear gutters and downpipes. You need serious eves in this country as well that's for sure.
Did anyone else hear Combover on the Newstalk ZB Oneroof radio show yesterday, being forced by a savvy host to put a stake in the ground and make a prediction.......
He THINKS that there are only another 5% falls to go and the market will bottom out in Apr-Jun 23, though as all Spruikers do he did say he might change his mind at any time and review the forecast.
Why do they bother.... number one ITS A SPONSORED SHOW.
Does anyone think that they are ever going to say , hey wait a year then buy... mmmmmmm
I have to stop listening to Trash radio , I just find it too triggering. I may need to limit my Newstalk to that nice man Mike Hosking... who will be buzzing Monday due to the Hamilton East trashing ....
First the DGMs say property is falling in the comments.
Then actual articles like this one appear...
And now MSM articles...
https://www.stuff.co.nz/life-style/homed/real-estate/130677426/are-we-o…
Is this a trend.... as Labour say 2023 "Let Do This"
Median income to house price multiple needs to be separated a little more. Relevant in working places. A multiple of 6 to 7 more relevant to a country like NZ (where we are geographically/topgraphically constrained), a multiple of 3 to 5 more appropriate for a country with more land (e.g. America) and more investment in productive business.
Remove some of the outliers such as Southern Lakes (but look at the supporting towns/suburbs), remove Auckland Blue Chip. Some people are just not affected by multiples!
Households might have incomes of 120k in South Auckland. Spend 50% on housing with a 10% deposit so a price range of 700 to 900 is about right (second hand homes).
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