By David Cunningham*
Since 2020, the story of New Zealand house prices has been a truly wild one.
They soared in the wake of our first COVID lockdown, then fell again almost as sharply – and only in very recent months, have started to balance out again. It’s been enough to leave Kiwi homeowners (and would-be homeowners) feeling dazed and confused.
So, how does that compare to the rest of the world? Have other countries been on the same rollercoaster?
Well, the short answer is: yes and no.
The graph below, based on OECD data, compares movements in house prices across New Zealand, the US, Canada, UK, Ireland and Australia. The numbers date back to 2015 as the baseline, at an index level of 100.
You can see that house prices everywhere were tracking upwards in the five years before COVID, with an average increase of about 25% over that period. And then, again in every market, they lifted – or exploded – upwards come 2020.
The key driver of this was one thing: much lower interest rates, as central banks around the world (like our own Reserve Bank) dramatically lowered their cash rates to keep their economies afloat.
With cash rates at close to 0%, home loan rates dropped to as low as 2% p.a. And so, we saw the same trend emerge everywhere – homebuyers had a party, borrowing lots in order to buy lots, and driving up house prices with all that cheap money.
But looking again to the graph, the situation in New Zealand stands out for two reasons:
1) When it comes to borrowing money, New Zealand partied harder than most. The sheer rate at which house prices increased here was harder and faster than anywhere else.
2) And our hangover was all the worse for it. New Zealand alone has had a subsequent, rapid decline in house prices from that COVID-induced peak.
In fact, right now, New Zealand is the only country across the comparison group where house prices are not still near, or even above, the previous peak.
That’s because, after spending up large when interest rates were low, Kiwi borrowers have felt the bite of recent interest rate increases particularly harshly.
Now, after 12 Official Cash Rate hikes (totalling 5.25%) the party is well and truly over – and house prices have fallen 14% on average, and up to 20% in Auckland and Wellington, as a result.
The “good” news for Kiwi homeowners is that, despite these falls, the average house price is still sitting about 25% above pre-COVID levels.
So, why is it that recent house price increases have held pretty consistently elsewhere – but not in New Zealand?
Let’s delve deeper into the factors behind house price outcomes in some of these comparison countries.
1. United States
In the USA, most mortgages are fixed for 30 years. Although borrowers have the option to repay early without penalty, they can’t take their old home loan with them when they move house. This acts as a huge incentive for homeowners to ‘stay put’ in environments where interest rates have risen.
After the 30-year rate hit an all-time low of 2.65% p.a. post-COVID, it’s now sitting at around 7%, having peaked nearer 8%.
As a result, housing market turnover in the US is at 13-year lows, with existing homeowners on low interest rates reluctant to sell. This limited supply, plus ongoing demand from a growing population, has supported house prices – keeping them at all-time highs.
2. Australia
House prices in Australia have recently surpassed their post-COVID high, but only after falling 7.5% from the peak previously set in early 2022.
Australia was one of the last countries to start increasing interest rates again post-COVID, as economies recovered, and inflation surged the world over. And it hasn’t gone quite as hard with its increases as other countries around the globe – up 4.25%, compared with between 4.75% and 5.25% in the USA, Canada, the UK and New Zealand.
But the major factor supporting a lift in house prices this year has been huge migration flows into Australia, currently running at an annual rate of over 500,000. Those people all need somewhere to live – and that’s helped to push up both house prices and rents.
This situation has been further exacerbated by a weak construction sector, struggling with construction cost inflation.
3. Canada
In the third quarter of this year, Canada’s house prices were still sitting within 2% of their previous peak – despite moves from the Bank of Canada to lift interest rates by 4.75%.
What’s supporting house prices in Canada is the fact that one of the features of their home loan market is that five-year fixed terms are the norm – compared to one- and two-year terms in NZ.
This has helped to soften the impact of those interest rate increases, and because longer-term rates are lower than shorter-term rates currently (something known as an “inverse yield curve”), the typical home loan interest rate in Canada is much lower than in NZ.
4. United Kingdom
The Bank of England has hiked its bank rate by 5.25% since December 2021, finally hitting pause in August 2023.
Despite the resulting surge in borrowing costs, house prices in the UK remain at record levels, having increased by 25% since the onset of COVID. That’s a result of pent-up demand post-COVID, very low unemployment levels, and construction cost inflation which has also risen about 25% since 2020, while wages have risen about 20%.
What’s interesting to note about UK house prices is just how steadily they’ve increased over this time. The net change is 25%, which is almost identical to New Zealand, but without the boom-bust rollercoaster we’ve had here.
What conclusions can we draw?
It’s obvious that the fall in house prices many were expecting during COVID, predicated on a sharp rise in unemployment globally, just…didn’t happen. The extraordinary monetary policy easing the world over was behind this, instead supporting house prices.
From March 2020, when we went into our first lockdown, the net increase we’ve seen in house prices in New Zealand (roughly 25%) is pretty similar to that in the other countries we’ve looked at.
Despite much higher interest rates in all markets, this largely comes down to a combination of low supply, pent-up demand, inflation lifting construction costs, a material increase in incomes and low unemployment – all of which have supported house price increases.
The exception is the USA, where house prices are up over 40% over that same period, largely down to one thing: a lack of supply. And that is caused by the many homeowners with very low 30-year fixed mortgage rates, which they’d have to give up by moving.
All things considered – and like many economic shocks – things ultimately tend to return to trend in growing economies.
In NZ, although we sometimes party harder (and suffer the hangover for it), sooner or later, we’re always back on an even keel.
*David Cunningham is CEO of Squirrel, a mortgage broker that also offers peer-to-peer lending and savings and investment products and services. This article first ran here and is used with permission.
141 Comments
New Zealand has the most extreme line on the graph. If there was ever an argument for a DTI... it was Q3 2020. Totally preventable. Kiwis have a manic obsession with owning as many properties as possible. They need saving from themselves. Is this government going to do anything about it? Unlikely.
The DVI wouldn't have done much if anything.
You can probably attribute us going troppo to our relatively mild COVID experience. People thought they dodged a bullet, and went nuts buying everything - cars, houses, boats, you name it. Everyone else was subdued from dealing with COVID throughout their communities.
Not very preventable.
The Reserve Bank was still running its Funding for Lending programme right up until December 2022. Long, long, long after it was apparent that there was no "emergency" (and never really was in respect of the housing market) and in fact was driving a massive and unsustainable boom in house prices. This was wholly irresponsible and ridiculously stupid - and Orr should be sacked for doing it.
"You dont just sign a piece of paper to buy something for a million bucks without thinking very seriously first (or you should do)"
At the time in 2020-2021, most buyers were operating under 2 key assumptions:
1) house prices will continue to rise (as frequently repeated by those with their vested self interests in the media)
2) mortgage interest rates will remain low (likely to be repeated by groups with vested self interests)
Both of these assumptions have subsequently been incorrect.
As a result, there are currently 19,200 borrowers that are past due. There are likely to be many thousand more borrowers in cashflow stress that are currently seeking financial hardship assistance with lenders and not yet included which could become past due.
"There are 19,200 mortgage accounts past due, up 25% year-on-year. As loans continue to be refinanced with higher interest rates due to the current economic climate, this activity could continue well into 2024." - https://www.centrix.co.nz/wp-content/uploads/2023/12/Centrix-Credit-Ind…
Here are some of those households that are now facing the consequences of their earlier choice to borrow large amounts:
(This excludes actual mortgagee sales)
1) Jan 2023 - https://www.nzherald.co.nz/bay-of-plenty-times/news/homeowners-scared-a…
2) Feb 2023 - https://www.nzherald.co.nz/business/mortgage-shock-900fortnight-rise-fo…
3) May 2023 - https://www.nzherald.co.nz/kahu/peak-ocr-pain-auckland-couple-working-f…
4) May 2023 - https://www.oneroof.co.nz/news/latest-news/interest-rate-pain-banks-urg…
5) July 2023 - https://www.oneroof.co.nz/news/they-dont-know-how-theyll-afford-it-home…
6) July 2023 https://www.oneroof.co.nz/news/desperate-homeowners-turning-to-third-ti…
7) July 2023 - https://www.stuff.co.nz/business/property/132483897/mortgage-rate-pain-…
😎 Nov 2023 - https://www.oneroof.co.nz/news/refix-terror-homeowner-has-to-stump-up-a…
Warnings were given by the RBNZ governor on the elevated house price risks.
1) Feb 2021: https://www.stuff.co.nz/national/politics/300238808/reserve-bank-govern…
2) March 2021: https://www.stuff.co.nz/business/124430525/adrian-orr-frets-over-soarin…
3) Nov 2021: https://www.rbnz.govt.nz/hub/publications/speech/2021/speech2021-11-02
4) Nov 2021: https://www.1news.co.nz/2021/11/24/first-home-buyers-encouraged-to-wait…
If borrowers chose to ignore those warnings, that is entirely their choice. Those borrowers who borrowed large amounts are free to choose, yet they are not free to choose the consequences of their choice.
People who borrowed large amounts at or near record low interest rates may now find themselves in cashflow stress and mental stress. There is only one person responsible for the borrower getting themselves into that situation and that is the person who voluntarily chose to sign their name on the mortgage contract and agree with the terms and conditions of that mortgage contract with their lender.
This is what some commentators on interest.co.nz were saying at the peak. They may or may not have vested interests. The point is that these commenters are unable to see the impact of their advice at that time on those highly leveraged buyers in late 2021 - 2022.
Imagine an owner occupier taking their advice at the time, using ALL their life savings (incl Kiwisaver) and taking on large amounts of mortgage debt to purchase an owner occupier residential dwelling, who is now in cashflow stress, mental stress and could lose their owner occupied home in a mortgagee sale, and now face life changing financial circumstances which result in a deterioration of lifestyle at retirement. Many have experienced a significant loss in their equity deposit (some may even be in negative equity) and facing cashflow stress.
Names omitted intentionally (but these commenters are still active on interest.co.nz)
a) 9th Nov 21, 2:38pm
"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"
b) 9th Nov 21, 5:52pm
"Or maybe right the opposite, don't hesitate, be brave and go for it, you'll be fine"
c) 23rd Nov 21, 8:52am
"It makes absolutely no sense for a couple like this to bank a capital gain now rather than wait two years and avoid 90k in taxes. The market is not going to crash 10% in the next two years."
d) 9th Nov 21, 2:38pm
"locally, I can not see anything in the near future that would decrease these current values."
f) 14th Oct 21, 11:25am
Shrewd investors will capitalise on perceived price weakness - cementing their position for the next market upswing.
Well located property remains a prime investment for the long term. (But you already know that.)
If these commenters did not have any vested financial self interest, then they didn't know what they didn't know. They didn't know about the extremely elevated house price risks.
What has been the financial cost of following that advice that those commentators don't tell you about?
Here are some financial calculations for owner occupier buyers to think about. The Peaker and Buyer Today.
How does this compare with a Peaker and a Buyer Today (BT) in NZ? (Assuming that the Peaker can hold on and is not under cashflow stress to sell.)
1) Peaker
The median house price at the peak for Auckland was $1,300,000
With an 80% LVR, this is a mortgage of $1,040,000
The 20% equity is $260,000
2) Buyer Today ("BT")
In 2021, the buyer who waited, deposited the same $260,000 equity into a bank deposit earning interest. Also BT would rent an equivalent house and have still saved money due to the rental being below the monthly P&I mortgage payments of Peaker - in 2 years the savings would have been about $20,000 annually. So a Buyer Today would have an amount of $319,349 to use as a deposit.
The current median house price for Auckland is $1,040,000
Equity deposit of $319,349
The mortgage at this purchase price would be $720,651 (an LVR of 69%)
The Peaker has a mortgage which is higher by $319,349 (mortgage of $1,040,000 for Peaker vs $720,651 for BT)
Assuming BT, pays the same exact dollar amount each year that Peaker pays for their mortgage, as a result of that additional borrowing, Peaker is paying $856,632 more over the 30 years than BT (This is due to higher borrowing amount of $319,349, and total interest on this of $537,283 over 30 years). BT is mortgage free by the year 2042, whilst Peaker continues to pay their mortgage until 2051 (9 years later) - so after the year 2042, BT can save all that money that Peaker continues to pay on the P&I mortgage.
Assuming same incomes, and same living costs (food, travel, etc except mortgage) , BT can save the $856,632 in payments that Peaker is paying.
Remember that at the end of 30 years, the house price will be EXACTLY THE SAME for Peaker and BT.
BT will have more money available for retirement than Peaker. Conversely, Peaker will have less money than BT at retirement.
That single decision to buy in November 2021 would have cost $856,632 extra to buy the exact same house for Peaker compared to a Buyer Today.
Note that the median house price today of 1,040,000.
If Peaker was on an interest only loan - then all of Peaker's equity has evaporated in 2 years.
Median House price: 1,040,000
Mortgage balance: 1,040,000
Equity is ZERO
Loss of 100% of equity deposit which may have been their entire lifetime savings.
Thankfully we can, for now. However if rates end up 10% + that would be a different story. We would need to sell and at that point it’s likely it would be at a loss. Gosh we would likely be negative equity too. 😅🫠
Although being FHBs we were told many times “house prices always go up” “you never loose when buying in Tauranga” etc. I often argued these statements but with a decent income, sick of renting and a couple of kids, it made sense to buy for stability - if only the stability part remained true. Haha
Nice breakdown, but you'd have to factor in the respective mortgage and wage inflation for Peaker & BT.
We bought near the peak, in April 2022 (at 150k below CV since the downturn spooked the vendor) with the express intention of locking in home loan below 4% for 3-4 years.
We're now saving ~$20-30k per year through avoided interest costs we would have faced at current rates of >7% p.a.
Two years of tight labour market and inflation has seen wages rise ~15-20% for both household earners, with the majority going as tax-free lumpsum payments against the home loan.
We're already >$80k ahead on the mortgage.
"150k below CV"
Buying at a cheap price is the key. On the face of it, based on the information provided, it seems that you might have bought at a cheap price. Just out of interest:
1) What was the percentage discount to CV?
2) what was the LVR of the mortgage compared to the purchase price at the time of purchase?
3) what is the current market value relative to your purchase price? +5%, +10%? other
Some of these people followed that advice. This is the situation that has resulted from buying when house price risks were elevated:
1) May 2022 - https://www.nzherald.co.nz/nz/waiting-for-the-guillotine-to-fall-how-in…
2) July 2022 - https://www.oneroof.co.nz/news/homeowners-scramble-for-interest-only-li…
3) Nov 2022 - https://www.stuff.co.nz/business/130353910/no-money-in-negative-equity-…
4) Jan 2023 - https://www.nzherald.co.nz/bay-of-plenty-times/news/homeowners-scared-a…
5) Feb 2023 - https://www.nzherald.co.nz/business/mortgage-shock-900fortnight-rise-fo…
6) May 2023 - https://www.nzherald.co.nz/kahu/peak-ocr-pain-auckland-couple-working-f…
7) May 2023 - https://www.oneroof.co.nz/news/latest-news/interest-rate-pain-banks-urg…
😎 July 2023 - https://www.oneroof.co.nz/news/they-dont-know-how-theyll-afford-it-home…
9) July 2023 https://www.oneroof.co.nz/news/desperate-homeowners-turning-to-third-ti…
10) July 2023 - https://www.stuff.co.nz/business/property/132483897/mortgage-rate-pain-…
11) Nov 2023 - https://www.oneroof.co.nz/news/refix-terror-homeowner-has-to-stump-up-a…
Many will simply be unable to maintain their higher mortgage payments as they renew their mortgage interest rate. Those that followed the advice of some commenters and bought in the 2021 - 2022 period using high amounts of leverage are going to lose a significant chunk of their equity, for some it could be their entire life savings. Some will be in negative equity and will owe money to their lender even after the residential property has been sold.
There will also be the non financial costs, the impact on their mental health. Unfortunately some may choose to resort to self harm.
What the property promoters with vested financial self interests are unlikely to tell you.
Another common line of reasoning is buy property as the mortgage erodes with inflation.
https://www.oneroof.co.nz/news/can-rising-inflation-magic-away-your-mor…
So how has that worked out as at November 2023 for a property owner who bought a median priced house in Auckland at the peak using an 80% LVR?
1) Median house price in Auckland has fallen 19.1% in nominal terms
A) November 2021
House price: 1,300,000
Mortgage (at 80% LVR): 1,040,000
Equity: 260,000
B) November 2023
i) Nominal terms
House price: 1,052,000 (-19.1%)
Mortgage: 1,040,000 (deemed to be interest only for simplicity and comparison)
Equity: 12,000 (-95.4%)
2) Inflation adjusted values using a deflator or 1.12 as per RBNZ for corresponding period
https://www.rbnz.govt.nz/monetary-policy/about-monetary-policy/inflatio…
House price: 939,286 (-27.7% from original price)
Mortgage: 928,571 (-10.7%)
Equity: 10,714 (-95.9% from original equity)
That fall in inflation adjusted equity value is a significant erosion of purchasing power.
Which would a person prefer?
1) pay 10-20% higher rent or
2) lose 95% of their equity used as a deposit
Also note: an owner who owned their property mortgage free experienced a 27.7% erosion of their purchasing power due to the inflation adjusted change in the market price of their property.
What were property commentators (and potential vested financial self interests) saying at or just after the peak?
1) Tony Alexander - 19 reasons why there's no crash - December 2021
https://ndhadeliver.natlib.govt.nz/delivery/DeliveryManagerServlet?dps_…
2) Catherine Masters - July 2022
Why the New Zealand housing market is nowhere near crash point
https://www.oneroof.co.nz/news/why-the-new-zealand-housing-market-is-no…
3) Ashley Church - April 2022
Four reasons the housing market won't crash
https://www.oneroof.co.nz/news/ashley-church-four-reasons-the-housing-m…
4) Kelvin Davidson - Dec 2021
“But will prices actually fall? I’m not convinced because in the past a serious housing downturn has come with a recession, but no one is suggesting that and unemployment is low at 3.4 per cent.”
https://www.stuff.co.nz/life-style/homed/real-estate/127305870/what-lie…
5) Nov 2021 - Here's why it might be fruitless to pin your hopes on a house price crash
https://www.stuff.co.nz/business/300449314/heres-why-it-might-be-fruitl…
Great analysis, CN.
(Damn hard to argue with numbers. Although, as you point out, many will continue to make fools of themselves trying. And many who should read what you've written, well, their eyes will glaze over at the shear effort.)
But some info on timing the housing market ...
I've mentioned I've been back checking actual annual percentage gains from last sale price against most recent sales price. People making a gross annualized gains over the intervening years of more than 3-4% per year are rare. (I'm excluding places where a major reno has been performed. Basically, I don't know - without further time-consuming research, if the owner turned their time into cash or whether they paid someone else to do the work, hence they have to be excluded.)
There are a few that have made 6-7%. What most of these have in common is purchasing in the big dips - think the years following the GFC, or further back to the Asian crisis.
So am I saying people should buy this dip? Absolutely friggin' NOT.
Why? Times have changed ... The factors affecting the rate of supply have changed SIGNIFICANTLY.
See my posts - and of chrisofnofame - on the NPS-UD, MDRS, new higher intensity zoning by Councils, etc. etc.
All of the above are examples of why house prices will not fall significantly.
"almost all of the country became possessed by the idea that home prices could never fall significantly. That was a mass delusion, reinforced by rapidly rising prices that discredited the few skeptics who warned of trouble. Delusions, whether about tulips or Internet stocks, produce bubbles. And when bubbles pop, they can generate waves of trouble that hit shores far from their origin." - Warren Buffett on the US housing bubble
A reminder - these are some reasons given in the mainstream media, property market commentators, property market promoters, bank lending promoters masking as bank economists, real estate agents, property market mentors & other sources as to why property prices in Auckland will not fall by much and that there is a low probability that property prices will fall dramatically:
1) during the GFC, house prices in Auckland fell only 7-10%
2) over the past 50 years, house prices in Auckland have averaged 7.2% per annum (or commonly referred to as house prices doubling every 10 years). This trend can be expected to continue into the future - https://youtu.be/Agp9xFWoBX4?t=172
3) there is a shortage of underlying housing in Auckland, so property prices won't fall by much - https://www.interest.co.nz/property/97513/auckland-councils-chief-econo…
4) there is a growing population which means that there will be more demand for houses - https://www.stuff.co.nz/business/106883553/house-prices-have-fallen-but…
5) we have inward immigration which means more demand for houses
6) Auckland is an attractive city with an attractive lifestyle - that makes it desirable and attracts foreigners to move to Auckland and hence raise the demand for houses
7) we mustn't forget either the vested interests in ongoing stability. No government, central bank or trading bank with mortgage exposure wants materially lower house prices. Nor does an incumbent Beehive want falling house prices going into an election campaign https://www.stuff.co.nz/business/110499233/think-house-prices-are-going…
😎 the economy is doing well, with low unemployment - https://www.stuff.co.nz/business/110499233/think-house-prices-are-going…
9) there has been insufficient construction of new builds to meet the housing shortage - https://www.stuff.co.nz/business/106883553/house-prices-have-fallen-but…
10) there are high construction costs to building a house. House prices cannot fall below their construction cost. - https://www.stuff.co.nz/business/106883553/house-prices-have-fallen-but…
11) people don't sell their houses at a loss - https://www.stuff.co.nz/business/106883553/house-prices-have-fallen-but…
12) continued inflation means that house prices will continue to rise in the future
13) The fact is, debt levels have barely changed from the beginning to the end of those 10 years, compared to GDP levels, compared to household assets, compared to household disposable incomes. And much more importantly, debt servicing is very much easier now, an item that is almost universally overlooked. We are not pushing out to unsustainable levels now, and even if they creep up a little, we are far from that point. https://www.interest.co.nz/opinion/95894/if-you-think-new-zealands-hous…
14) in aggregate household debt servicing is low in New Zealand - currently at just under 8% of disposable income of households - https://www.rbnz.govt.nz/statistics/key-graphs/key-graph-household-debt
15) property market participants & commentators who have been correct in their predictions about recent property price trends have more credibility and hence their predictions of upward prices are believed by a wider audience (such as Ashley Church, Tony Alexander, Ron Hoy Fong, Matthew Gilligan, etc). - https://www.stuff.co.nz/business/84322204/all-predictions-of-an-aucklan…
16) previous warnings about a house price crash have been wrong - property prices have continued rising upward significantly since these warnings were given, so there is little reason to believe these warnings.(such as Bernard Hickey) - https://www.stuff.co.nz/business/84322204/all-predictions-of-an-aucklan…
17) its unlikely Auckland prices collapse. I think the main two reasons though are: a) Affordability has been this bad, and worse, in the past and it only resulted in about a 10% drop. b) The number of homes built over the last decade has been too low and will take some time to recover
18) Not a single person who bought 10 years ago has ever regretted buying / have you met anyone who has bought a house and regretted buying it?
1) " If there was ever an argument for a DTI... it was Q3 2020."
Remember it takes time for the lenders to update their systems to implement this. DTI framework needed to be established well in advance so that the lenders have sufficient time to update their systems and be ready to go. Once the systems are ready to go, it can be implemented quickly. The issue is that the lender systems are currently not set up - this takes time. The banks have been given 12 months to set up and update their systems to prepare for this.
To give you a sense of the timeline so far:
a) 7 Nov 2022 - the RBNZ sends out an exposure draft and consultation paper
b) 3 April 2023 - RBNZ releases new framework - https://www.reuters.com/article/newzealand-economy-idINL1N36603C/
c) March 2024 - lenders need to be ready to implement the framework (this is essentially 12 months for lenders to set up their systems)
So it is expected to take 18 months from issuance of consultation paper to full implementation.
2) "Totally preventable."
The extreme house price risks were preventable back in 2016 when the then Finance Minister did not give the RBNZ the tools they requested to address macroprudential risks. There was lobbying by those with their vested financial self interests to not implement the debt to income measures. It may also have become a political issue with the upcoming elections at the time and may have cost potential votes for the incumbent government at the time - this policy would have adversely impacted property investors, and most owner occupier buyers - a potentially large voting constituency.
RBNZ's DTI plans hit by Government changes | interest.co.nz
If you assume it would have taken 30 months (include time for preparation of the exposure draft), then the DTI framework may have been ready to go sometime in in 2019. This would have been before interest rates reached their record low levels in mid 2021.
If a debt to income ratio of 5 was imposed back in 2019, then a significant amount of lending would not have been made (and house prices would have been less likely to have reached their record levels).
As a result of that single decision, this will result in potentially thousands of highly leveraged owner occupiers who purchased in 2020 - 2022 being collateral damage. This will cause cashflow stress, mental stress and unfortunately, some will resort to self harm.
This will likely also lead to an increase in demand for social housing.
3) "Kiwis have a manic obsession with owning as many properties as possible."
There has been a lot of speculation in residential dwellings in many other countries also - look at Japan in 1990's, Ireland in 2007, USA in 2006-2007. There were many owner occupiers that became collateral damage.
Here is an example of owner occupier collateral damage from falling house prices elsewhere around the world:
1) https://www.investorschronicle.co.uk/2012/09/20/your-money/property/ove…
2) https://youtu.be/iKPG_l1P7lk
3) https://youtu.be/ugBKnP2FKDM
4) https://youtu.be/fiCXsu_4BoA
5) https://youtu.be/1hi7gV9uyK8?t=2297
Yes exactly right CN, Orr basically warned buyers to stop after they became ridiculous mid 2021. But the vested interests were saying if you dont buy you may never get another chance. Also the vested interests were saying RBNZ could not take the home loan interest rate past 4.5% because of the 800k loans. Who should you listen too, RBNZ or the real estate industry? Once again it has been proven that money doesnt grow on trees (at 2%), and NZ will be paying the (high) price for many years.
"But the vested interests were saying if you dont buy you may never get another chance"
This is what some commentators on interest.co.nz were saying at the peak. They may or may not have vested interests. The point is that these commenters are unable to see the impact of their advice at that time on those highly leveraged buyers in late 2021 - 2022.
Imagine an owner occupier taking their advice at the time, using ALL their life savings (incl Kiwisaver) and taking on large amounts of mortgage debt to purchase an owner occupier residential dwelling, who is now in cashflow stress, mental stress and could lose their owner occupied home in a mortgagee sale, and now face life changing financial circumstances which result in a deterioration of lifestyle at retirement. Many have experienced a significant loss in their equity deposit (some may even be in negative equity) and facing cashflow stress.
Names omitted intentionally (but these commenters are still active on interest.co.nz)
a) 9th Nov 21, 2:38pm
"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"
b) 9th Nov 21, 5:52pm
"Or maybe right the opposite, don't hesitate, be brave and go for it, you'll be fine"
c) 23rd Nov 21, 8:52am
"It makes absolutely no sense for a couple like this to bank a capital gain now rather than wait two years and avoid 90k in taxes. The market is not going to crash 10% in the next two years."
d) 9th Nov 21, 2:38pm
"locally, I can not see anything in the near future that would decrease these current values."
If these commenters did not have any vested financial self interest, then they didn't know what they didn't know. They didn't know about the extremely elevated house price risks.
What were property commentators (and potential vested financial interests) saying at or just after the peak?
1) Tony Alexander - 19 reasons why there's no crash - December 2021
https://ndhadeliver.natlib.govt.nz/delivery/DeliveryManagerServlet?dps_…
2) Catherine Masters - July 2022
Why the New Zealand housing market is nowhere near crash point
https://www.oneroof.co.nz/news/why-the-new-zealand-housing-market-is-no…
3) Ashley Church - April 2022
Four reasons the housing market won't crash
https://www.oneroof.co.nz/news/ashley-church-four-reasons-the-housing-m…
4) Kelvin Davidson - Dec 2021
“But will prices actually fall? I’m not convinced because in the past a serious housing downturn has come with a recession, but no one is suggesting that and unemployment is low at 3.4 per cent.”
https://www.stuff.co.nz/life-style/homed/real-estate/127305870/what-lie…
5) Nov 2021 - Here's why it might be fruitless to pin your hopes on a house price crash
https://www.stuff.co.nz/business/300449314/heres-why-it-might-be-fruitl…
This is bit of a side comment, but if the RBNZ had required all the banks to test serviceability at say 8% then all of the banks could have implemented that immediately and it would have had the same impact as a DTI limit (i.e. massively reducing borrowing capacity). But they didn’t and for no obvious reason.
Perhaps the law didn’t allow it, but it really was the easiest solution, and the banks did suggest it.
"Perhaps the law didn’t allow it, "
That is very possible.
" if the RBNZ had required all the banks to test serviceability at say 8%"
When mortgage interest rates were at sub 3% p.a levels, and bank stress test rates were at 5.8% p.a, there were wannabe borrowers who were complaining about how stress test rates were too high and that restricted them from borrowing more. Some tried to increase their borrowing power even more. Now they could be having cashflow issues or lenders have requested that borrowers reduce their loan amounts.
If the borrower's equity would cover the loss from a forced sale then the banks had zero exposure ... So they lent.
There was a reason why so many bank economists were saying covid would result in low interest rates for many years.
They created "plausible deniability"!
Thus, when punters appealed to the ComCom under the CCCFA the bank's could claim the "who knew?" defense.
Scoundrels, liars and 100% vested interests.
by macca | 11th Dec 23, 6:16pm
NZ's desire to own residential property as a hedge against retirement poverty could easily be curtailed by restoring our poverty inducing retirement savings structure to what it once was with incentivised retirement savings options like in USA, Canada, Australia and the UK. Right now, property is the only hope for a happy retirement at age 65.
It will flatten with increased supply that has been enabled by the MDRS, NPS-UD, new Council zoning, etc.. (I'm not going to explain that again or the flatline in Auckland house prices after their far higher density enabling Unitary Plan of 2016.)
Note that the NACTF is saying they're going to allow Councils to opt out of the MDRS. Pretty dumb. (Stuff has an article today on what independent economists think of that foolishness.) This won't affect Auckland all that much as the 2016 Unitary Plan was already close in many zoned areas and exceeded them in many other zoned areas. (Shame we still need to waste money getting past Council to get a Resource Consent though.)
Just an aside, the NACTF plan explicitly means going out further and further. Welcome to more cars on the roads and yet more inefficient public transport. Dumb Kiwis get everything they didn't vote for ... Again!
My understanding is that prices rose circa 35-40% in NZ during the ‘covid’ boom, and fell circa 15-20% - all dependent on location. Do the math and it’s likely that NZ is perhaps 15% higher (at most) than just before covid struck.
It’s not clear from the notations beneath the graph as to whether it uses an average, median or HPI type of value. All that is clear is that they are nominal values.
No, my point stands and is correct. I am referring to the statement in the para starting ‘The “good news” for kiwi homeowners’ - the author is clearly referring to prices now versus at the start of the pandemic, in that para, and his reference to 25%.
That’s a separate point to the analysis back to 2015.
In Christchurch, we are still sitting on 50%+ gains. Thanks Jacinda and Adrian! My house is valued at 53% more than what I paid for it in 2019. Also sitting on a 30%+ gain on a property in Marlborough
Congrats. Just a small point, these are 'unrealized gains.' Not trying to burst your bubble. The real value of property is your ability to borrow against it. Something Donald Trump knows much about.
Also, property is a suitable vehicle for the ruling elite for taxation. So while NZers feel quite smug about not having capital gains tax, remember that if it all goes to seed, property taxes can be imposed. This is something that most people don't really think about.
So you're happy if on paper you get wealthier while goods and services become more and more expensive? You're literally worse off than you were in 2019 until you decide to downsize someday. Unless of course you decide to take on more debt as the other commenter suggested. I can never wrap my head around this mindset. It's almost like the government and central bank know that as long as property prices go up they can tax away via inflation and property owners will turn a blind eye. Perhaps I'm too much of a simpleton to understand!
No its pretty standard. I watch or attend a lot of auctions, everything is at least 50% higher than when I was looking in 2020 and I've been looking for something to buy for 4 years now. Houses that used to sell in the $400s are now in the $600s. Something that was $1M is now $1.5M. But that is for standalone houses in the NW of Chch. Cant say the same for the capital appreciation on those crappy 2 bed townhouses. Just watched a house go to auction with a valuation of $680k, hit reserve at $775k and sold for $920k. So looks like the market is still moving higher.
Isn't ChCh Council bucking central government imposed higher density plans?
By restricting supply - as ChCh Council is doing - prices will go up.
Dumb Kiwis. They get everything they didn't vote for. Or perhaps they selfishly did vote for this?
Why are we voting for politicians when the 5% of swing voters get to override what everyone else needs?
The graph shows why property investment is so good, no matter which country, no matter if in an up or downtrend, values rise significantly over time, whilst the mortgage reduces. Add the tax advantages and the fact the the tenant/lessee pays for the mortgage and you have a superb investment vehicle. The cherry on top is that any decent investor will easily increase the return by adding value.
" I am still waiting for the crash"
Most people may be living in a housing price crash, and be blissfully unaware. They don't see it, even though it is happening all around them. Or perhaps they may choose to not see it.
House prices in some areas have met Ashley Church's definition of a property market crash.
Will Ashley tell you this? Will those with vested financial self interests tell you this?
1) From Ashley Church
"But what constitutes a housing market crash? ...... I define a property market crash as a 20% drop in the median sales price from market peak, and which lasts for more than 12 months." - https://www.oneroof.co.nz/news/ashley-church-four-reasons-the-housing-m…
2) REINZ median house price changes from peak as at Nov 2023
Some areas below have now met Ashley's definition of a property market crash.
Locations where median house prices are down 20% or more from their peak:
1) Franklin: -21.4%
2) North Shore: -20.3%
3) Papakura: -29.8%
4) Waitakere: -21.1%
5) Hauraki: -20.7%
6) Otorohanga: -37.1%
7) South Waikato: -21.2%
8) Thames - Coromandel: -28.0%
9) Opotiki: :-21.8%
10) Rotorua: -24.0%
11) Tauranga City:-20.5%
12) Whakatane: -22.6%
13) Gisborne: -21.7%
14) Central Hawkes Bay: -27.6%
15) Hastings: -23.2%
16) Horowhenua: -24.3%
17) Rangiteki: -29.4%
18) Ruapehu: -32.3%
19) Whanganui: -23.1%
20) Kapiti Coast: -20.6%
21) Lower Hutt: -25.5%
22) South Wairarapa: -51.5%
23) Upper Hutt: -22.5%
24) Wellington City: -24.2%
25) Nelson: -21.7%
26) Buller: -33.7%
27) Westland: -33.4%
28) Hurunui: -22.3%
29) Clutha: -35.3%
31) Southland district: -25.4%
Remember that for most owner occupiers, the equity deposit is 20%, so for those who bought at or near the peak, most of their equity (which could be their entire lifetime savings) has evaporated in just 2 years. In some cases, property owners are now in negative equity.
The purchase of a owner occupied residential property is likely to be the largest purchase for most households and the source of funds for retirement.
Also remember, that the above are nominal prices and not yet adjusted for inflation.
Actually it's a similar situation with crashes. We could design the system so it doesn't necessarily result in death but a very well resourced and connected vested interest obstruct every attempt to fix things and they are backed up by a few ignorant old fu***rs who oppose every attempt to make out roads safer because they can't accept their generation might have got things wrong.
"There are people behind these numbers"
Lessons out of Ireland - https://youtu.be/1hi7gV9uyK8?t=2297
You might want to check the math on that. And adjusted for inflation - especially over the last few years - the returns aren't that flash.
See https://www.investopedia.com/terms/a/annualized-rate.asp
Many houses sold at auctions I've done quick checks on (use TM, Homes, REINZ, Onewoof for last sale prices) show 3-4% is a "good result". Many are lower. To achieve greater than 6-7% (without a serious makeover costing big $$$ and/or a lift/shift/develop or infill) requires buying the right thing and at the right time in the first place. Maybe one in 20 get this right? Maybe less ;-)
I agree that it is important to look at annualized rates, but it is important that the inputs include opportunity benefits. Few people here seem to include the following factors when doing there calcs:
1) you have to live somewhere so owning your own place will save on rent. This is more than 40k p.a. for a typical family home in Auckland.
2) while not flash at the moment, capital gains have averaged 6% p.a. in the last 10 years. Add this to the 3% gross rental yield.
3) if you work from home, a portion of the expenses becomes a business expense.
4) it is far easier to borrow for a house than other investments and at lower rates. For example. I'd rather make 3% on a $1million property investment, than 6% on a 200k import investment.
5) the mortgage will not be adjusted for inflation.
When I consider points 1 to 3, my property investment journey has given me an average annualized return of 13-14% without the additional advantages of 4 and 5. I wouldn't consider myself a particularly savvy investor. I have made mistakes along the way but the returns have been better than what I would have made elsewhere with investments of a similar risk profile.
re ... "while not flash at the moment, capital gains have averaged 6% p.a. in the last 10 years"
You might want to investigate the truth of that statement. On a like-for-like basis that's compete b.s. (See my other comments as to how I know this.)
In short, the aggregated totals that are used to work out the averages make no adjustment for minor or major renovations (sometimes costing millions) that the owners have invested. Nor do they adjust for new builds or lift & shifts or infills which all incur addition capital injection..
re ... "1) you have to live somewhere so owning your own place will save on rent. This is more than 40k p.a. for a typical family home in Auckland"
I do. I have quite a bit of economics training. (And 40k - $770 per week - is a ridiculous number to use for most people who are renting.)
re ... " I'd rather make 3% on a $1million property investment, than 6% on a 200k import investment. "
So you're the reason why NZ Inc's productivity is among the lowest in the OECD. Shame on you. ;-)
The graph shows why property investment is so good, no matter which country, no matter if in an up or downtrend, values rise significantly over time, whilst the mortgage reduces.
Wrong. Japan is a case in point. Now the usual water cooler reaction to that is always something related to demographics. No Westerner was pointing out Japan's demogs at the time of their epic bubble, even though Japan's future demographic profile was known in the 80s.
F'more, the major problem with the property ponzi across the Angloid nations is that it has relied on an increasing degradation of the money supply. In effect, creating money out of thin air. The bubble has not been built on the productive output of the respective countries. For that reason, the ratio of house price 'values' to nominal GDP in NZ/Australia has surpassed that even of Japan during its ponzi. The bubble coincides with bank deregulation in the early 90s. The marginal buyer has been more or less neutered by all the credit creation and have a future of living paycheck to paycheck. That doesn't bode well for those who believe in the antifragility of the bubble.
I'm just pointing out what is correct and exposing the urban myths. Real estate in China's had an 81% drawdown from 2021-2022 and another 64% drawdown in 2023.
FYI, that index relates to the share price index of property development companies in China, and not residential dwelling prices or prices per sq mt in China.
Correct. I will point you to the collapse of the Nikkei 255 in calendar year in 1990 - 35%. Land prices had subsided 5% in the previous year but property prices were relatively stable in Japan in 1990.
In 1992, land prices in residential areas slid 19% while commercial land prices declined 13% from 1991.
https://fred.stlouisfed.org/series/QJPN628BIS
Some observations to note:
1) Residential property prices peaked in 1Q 1991.
2) Prices bottomed in 2Q 2009 (almost 18 years later) and fell 46.5% from their peak.
3) Prices are currently back at 3Q 2001 levels. - this means that everyone who bought between 1Q 1991 (32 years ago) and 3Q 2001 (22 years ago) and still owns, the market value of their residential property is still below their purchase price. Imagine that - owning for 22 - 32 years and the market value of your owner occupied property is below what you paid for it.
The person who started working in say 1985 (say 20 years old), saved for a deposit and bought in 1991. That person today is aged 58 years old, nearing retirement and the market value of their owner occupied home is still 26% below what they paid for it 32 years ago, after regular mortgage payments for 32 years. How many property buyers would expect that the market value of their property 32 years later would be 26% below their purchase price?
Note:
1) these numbers are before the impact of leverage.
2) back at the peak, some lenders were offering mortgages with terms of 100 years (multi-generational mortgages) - https://money.cnn.com/magazines/fortune/fortune_archive/1990/05/21/7356…
3) a buyer in 1Q1991 would have been better to deposit their money in the bank and rent for 32 years, rather than risk the loss of their entire savings used to buy that residential property.
Let's take a look at the leveraged buyer in 1991.
From 1955 to 1991, the house price index has grown at a rate of 13.0% p.a.
A) 1991 - at time of purchase
House price: 1,827,882 (index value multiplied by 10,000)
House purchase price: 1,827,882
80% LVR mortgage: 1,462,308
Equity: 365,577
So given the house price growth average of 13.0% p.a over the previous 36 years, we will use 10% p.a to be conservative. This means in 32 years (in 2023), the house price would estimated to be: 38,593,556
Estimated house price in 2023: 38,593,556
Mortgage: 1,462,308 (assumed to be interest only for illustration purposes)
Equity value expected: 37,131,248
This represents a 15.5% p.a return on the initial equity of 365,577
B) 2023 - today
Market value of house: 1,352,113 (that is an annual growth rate of NEGATIVE 0.9% p.a for 32 years - vastly different than the "conservative" 10% p.a. used back in 1991)
Mortgage: 1,462,308 (assumed to be interest only for illustration purposes)
Equity: NEGATIVE 110,195
Total equity loss of 475,772
That is a loss of 130% of the initial equity - after 32 years
That one single decision to purchase in 1991 has had a significant impact on that person's standard of living in retirement, compared to if they had rented and saved the money in the bank and earned interest.
It would be interesting to also have in the graph a immigration line on a percentage of population growth to see what effect that does to house prices. Example from memory NZ from 2010 to 2020 had 600k new NZers so on average 10 percent growth over a decade compare say if the US had that same growth 370 million population would be 37 million new Americans.
There were plenty of people in 2020 warning RBNZ that juicing the housing market to tackle pandemic lockdown driven collapse in consumer demand was a stupid idea. Govt saved the jobs and economy with fiscal. We would all be better off if RBNZ had done precisely zero through 2020 and 2021.
I sincerely hope that the new Govt and RBNZ manage to work out how to get low-cost finance flowing into house building without setting the country off on another phase of the housing ponzi. We used to know how to do this of course - Govt / RBNZ simply extended near-interest-free loans to house builders (and Housing NZ basically bought any surplus). Simple times, simple solutions.
I also hope they hurry up because rents in Auckland are going absolutely ballistic and when rates are cut in April next year, investors are going to be back in the game.
There were plenty of people in 2020 warning RBNZ that juicing the housing market to tackle pandemic lockdown
Actually, I don't think that was the case back then. All the talk was about tens of thousands dying in NZ (Ardern figure was over 40'000) and a collapsing economy and collapsing everything else.
I sincerely hope that the new Govt and RBNZ manage to work out how to get low-cost finance flowing into house building without setting the country off on another phase of the housing ponzi.
There's a problem here Jfoe. Basically you're asking for the suppression of the price of money. Ironically, this is one of the pillars of the bubble in the first place.
The effect would be minor if done in the right way.
If the developer got working capital much more cheaply they could just keep on building through the downturns. (Smoothing the ups and down is good for everyone in the building supply chain.) They'd be forced to not to get carried away (build too many, or the wrong types, or at too higher spec) as they'd still need to sell the new build at a price the market could afford. (Might even result in build costs falling ever so slightly - but i'd doubt it except perhaps when belts are being tightened, e.g. now.) Note that I said working capital ... Not for land banking as many too developers do.)
No one ever seems to mention the justified value increase of many Auckland property prices as a result of the 2017 Unitary Plan.
That justified a significant increase in tens of thousands of Auckland property values ie pre 2017 you could only build say 2 dwellings on a 700sqm site then suddenly you could build 6 or more.
That had the impact of justifiably increasing the value of a huge amount of existing sites whilst reducing the price 'per site' for new dwellings to be built upon.
True to an extent. And the covid boom saw people paying outrageous sums for sections that could support higher intensities.
But things have largely settled back down. Why? Because there are so many developable sites! Thousands! Tens of thousands even. But still just the same number of developers wanting them and they can bide their time.
Some people are surprised, and they're often the owners, that a tired old house on a large section would sell for so much.
But not in a good area, not with good gradients, not with good transport connections, not with good utilities and services connections and capacities ... and nobody wants them. Like the old saying goes, "it not just the size that counts".
lol.
Yes - true. NZ town planners all thought we'd remain in single houses and needed long sections to plant vegetable gardens. So they sub-divided sections on that basis - long and skinny!
So now all we get is sausage-houses (long narrow terraced houses with no gardens at all.)
We need now is for Councils to drop the daft side yard requirements so we can develop perimeter blocks that allow large central gardens ... Like they do all over the world.
Council planners and elected Councilors pre-2010 need to be shot.
I would be interested to know David, if other countries had a similar programme to the Funding For Lending that pumped billions directly into the NZ housing market. And if they did, how long did they continue it for (as the NZ one ran until Dec 2022, long after any "emergency" justified it). Is this the cause of our outsized asset bubble?
"As part of a package to deliver monetary stimulus to the economy during the pandemic, in 2020, the Reserve Bank deployed the Funding for Lending Programme (FLP) to offer low-cost, 3-year funding to banks. The purpose of the FLP is to lower the funding costs of banks and, consequently, encourage banks to pass on the lower cost to households and businesses and increase lending."
https://www.rbnz.govt.nz/hub/publications/analytical-note/2022/rafimp
"As part of a package to deliver monetary stimulus to the economy during the pandemic, in 2020, the Reserve Bank deployed the Funding for Lending Programme (FLP) to offer low-cost, 3-year funding to banks. The purpose of the FLP is to lower the funding costs of banks and, consequently, encourage banks to pass on the lower cost to households and businesses and increase lending."
ASB CEO Vittoria Shortt stated that FLP was not cheap bank funding, but an "investment in NZ". Her words. Not something I made up.
The sheeple were supposed to lap this up.
Let’s be clear, there are zero “gains” for the house you live in. Gains or uplifts in value are only for properties you and your kids don’t need.
Married with two kids? You need three houses to be better off.
For anyone with equal or fewer houses than they and their kids need, they just took a massive hit to their families standard of living and for dessert we are eating big shit sandwich.
The charts and analysis should go back to 2007 and really show the issue. It’s bigger than what is shown here.
Depends. All being equal, the home owner should be better off. People suggest investing the 20% deposit, and the difference between rent and home ownership costs into the NZX50 returning 7% p.a. But over time, that difference is eroded with market rent increases.
Investing is also building from the ground up. Buying a home, even with a mortgage, puts you at a significantly higher initial gross capital position. E.g. 20% deposit = $150k vs a $750k house. The time value of money helps erode the burden of mortgage debt, whereas your investment is constantly battling against it.
But we don't have a crystal ball. Over the next 20 years rents and house prices could halve, while cash investments start returning double digits.
"All being equal, the home owner should be better off."
For those who require accommodation:
A) under most market conditions the financial choice is between:
1) pay rent
2) buy their own owner occupied residence
B) under market conditions where there are elevated house price risks, the financial choice changes to:
1) pay 10-20% higher rent
2) risk losing 50% - 250% of their life's savings / entire net worth (assuming their net worth is used as equity on a deposit on the purchase of an owner occupied residence) when they buy their own owner occupied residence assuming a 80% LVR mortgage
Most owner occupier buyers are unaware of market conditions when the financial choice changes from A to B and taking on the risk of losing 50% - 250% of their life's savings.
Over the past 2 years, it would have be better financially to rent rather than buy an owner occupied residence using a high LVR loan. There may be non financial reasons for owner occupiers buying in the last 2 years (and these were of a higher priority than the financial reasons), and they chose to buy - they are now facing the financial consequences of that choice.
These buyers of their owner occupied residence might be regretting their choice to buy - they are now in cashflow stress, potentially mental stress -https://www.nzherald.co.nz/kahu/peak-ocr-pain-auckland-couple-working-f…
Look at this Kiwi buyer in Australia - initially overjoyed when they purchased. Now in cashflow stress, and potentially mental stress - https://youtu.be/Nomji5pmhEU?&t=45
At the time, this guy disappointed that he was unable to obtain financing but it was actually a blessing in disguise as he was saved by the bank - if he had purchased, there is a high probability that he would have faced significantly higher cashflow payments, potential cashflow stress - https://www.newshub.co.nz/home/money/2021/11/first-home-buyer-not-very-…
Now he can use his increased deposit to buy a similar residential property at lower prices and take on less debt to finance that purchase. They will pay a lower price and less interest over the term of the mortgage due to lower amount of debt.
Refer example above - Peaker vs Buyer Today.
It would have been better for Peaker to rent for a period of time rather than buy.
Here are some of those households that are now facing the consequences of their earlier choice to borrow large amounts to buy (this excludes actual mortgagee sales):
1) May 2022 - https://www.nzherald.co.nz/nz/waiting-for-the-guillotine-to-fall-how-in…
2) July 2022 - https://www.oneroof.co.nz/news/homeowners-scramble-for-interest-only-li…
3) Nov 2022 - https://www.stuff.co.nz/business/130353910/no-money-in-negative-equity-…
4) Jan 2023 - https://www.nzherald.co.nz/bay-of-plenty-times/news/homeowners-scared-a…
5) Feb 2023 - https://www.nzherald.co.nz/business/mortgage-shock-900fortnight-rise-fo…
6) May 2023 - https://www.nzherald.co.nz/kahu/peak-ocr-pain-auckland-couple-working-f…
7) May 2023 - https://www.oneroof.co.nz/news/latest-news/interest-rate-pain-banks-urg…
😎 July 2023 - https://www.oneroof.co.nz/news/they-dont-know-how-theyll-afford-it-home…
9) July 2023 https://www.oneroof.co.nz/news/desperate-homeowners-turning-to-third-ti…
10) July 2023 - https://www.stuff.co.nz/business/property/132483897/mortgage-rate-pain-…
11) Nov 2023 - https://www.oneroof.co.nz/news/refix-terror-homeowner-has-to-stump-up-a…
How many of those highly leveraged buyers that are now under cashflow stress are happy that they own rather than rent?
There are 19,200 borrowers who are currently in mortgage arrears and may be unable to continue making mortgage payments in which case the lender is contractually entitled to sell in a mortgagee sale.
The rent vs buy question is not really a valid question. Ergo your "$1m better off" isn't really realistic.
It doesn't reflect the real world (unless one wins a lottery, or has wealthy parents to stump up the deposit, ideally a very large deposit). Most will rent before they buy.
Thus better questions would be:
1. Should I, and if I do, what should I rent? (i.e. making sacrifices to save for a deposit, living at home with the parents, etc.)
2. When should I think about buying? (i.e. how the size of the deposits affects repayment terms, timing the market, etc.)
3. What should I buy? (i.e. max out borrowing for possible capital gain vs more sensible pay it back fast)
4. When should I think about upgrading.
Are these owner occupier buyers going to be $1mn better off?
1) May 2022 - https://www.nzherald.co.nz/nz/waiting-for-the-guillotine-to-fall-how-in…
2) July 2022 - https://www.oneroof.co.nz/news/homeowners-scramble-for-interest-only-li…
3) Nov 2022 - https://www.stuff.co.nz/business/130353910/no-money-in-negative-equity-…
4) Jan 2023 - https://www.nzherald.co.nz/bay-of-plenty-times/news/homeowners-scared-a…
5) Feb 2023 - https://www.nzherald.co.nz/business/mortgage-shock-900fortnight-rise-fo…
6) May 2023 - https://www.nzherald.co.nz/kahu/peak-ocr-pain-auckland-couple-working-f…
7) May 2023 - https://www.oneroof.co.nz/news/latest-news/interest-rate-pain-banks-urg…
😎 July 2023 - https://www.oneroof.co.nz/news/they-dont-know-how-theyll-afford-it-home…
9) July 2023 https://www.oneroof.co.nz/news/desperate-homeowners-turning-to-third-ti…
10) July 2023 - https://www.stuff.co.nz/business/property/132483897/mortgage-rate-pain-…
11) Nov 2023 - https://www.oneroof.co.nz/news/refix-terror-homeowner-has-to-stump-up-a…
Many will simply be unable to maintain their higher mortgage payments as they renew their mortgage interest rate. Those that followed the advice of some commenters and bought in the 2021 - 2022 period using high amounts of leverage are going to lose a significant chunk of their equity, for some it could be their entire life savings. Some will be in negative equity and will owe money to their lender even after the residential property has been sold.
There will also be the non financial costs, the impact on their mental health.
Had close relatives lose their owner occupied home and all their other real estate in a previous downturn. This family never financially recovered, and had to stay in social housing. When the parents died, their estate did not have sufficient funds to cover the cost of their funerals. Their adult children covered this cost. One adult child currently aged in their late 40's, has a university degree, is a saver, and single is still unable to afford to buy.
FYI, here are examples of the long term effects on owner occupiers who bought and lost their homes elsewhere around the world:
1) https://www.investorschronicle.co.uk/2012/09/20/your-money/property/ove…
2) https://youtu.be/iKPG_l1P7lk
3) https://youtu.be/ugBKnP2FKDM
4) https://youtu.be/fiCXsu_4BoA
Home owners in negative equity
https://www.stuff.co.nz/business/129470098/hundreds-of-wellington-first…
The party went on for decades. Zeus only knows how many years the hangover will last but I seriously doubt we’re out of the woods already.
People I personally know are already worried about rising mortgage rates next year and say they will struggle. This nationwide problem won’t magically disappear over summer, it’ll play out over years… unless the entrails and omens seek to deceive me.
I wonder what is the point of this article other than to say we have learned nothing and are now returning to our dysfunctional way thus carry on buying (and getting a bigger mortgage).
The real takeout from it is yes the Covid crisis disrupted supply and the extra money fueled demand, and that happened to unstablise markets even like Texas. Horror they went up to nearly 5x median income.
But post-COVID, housing in most areas is reverting to the status quo, which means for the likes of Texas it is circa 4x median income multiple and NZ dysfunctional 8x plus.
More surge in prices with a strong uptick around 2030. While acknowledging New Zealand's imperfections and a perceived decline in the last decade, there are still over a million individuals from various countries eager to relocate here within the next 30 and that’s to place upward pressure on housing prices.
Also, and this would surprise many people, we have more favourable demographics than many other oecd countries including Australia.
Perhaps it's the effects of the working for families policies or the fact that we have allowed suburban sprawl rather than restricting people to apartments but our ratio of younger to older people will be more favourable in the future than in many other countries.
KW, this is a gross comment to read because it plays on untrue stereotypes. Some of us are a bit more educated about the multiple drivers of intergenerational poverty in this country. Perhaps you could be too.
For everyone else's benefit: the demographic changes were noted in a recent RNZ article. Our Māori and Pacific populations comprise a younger demographic than others.
Perhaps the author is only able to read English?
Some other national housing markets
1) Sweden: -14% from peak - https://www.bloomberg.com/news/articles/2023-11-02/swedish-home-prices-…
2) Germany: -9% (estimated) - https://www.ifw-kiel.de/publications/news/greix-real-estate-prices-in-g…
3) Hong Kong: -20% from peak - https://www.midland.com.hk/en/market-insight
Out of Hong Kong:
A property owner who owned their property for 11 years sells their property for 29% below what they purchased it for. This is before the impact of leverage.
"According to reports, the original owner purchased the unit for over HK$14.81 million in 2012. However, the current sale has resulted in a staggering loss of over HK$4.23 million, representing a depreciation of approximately 28.6%"
https://www.dimsumdaily.hk/property-prices-in-causeway-bay-plummet-as-o…
The best time to buy is when interest rates are up, and that's right now.
I've bought on the outskirts of Auckland, and will be building in an area that's going to experience quite a bit of growth. New government too, we did away with Labour which was hellbent on destroying the NZ economy.
The cost of building will continue to increase, so if you do your homework, carefully stake out an area that's got potential and drive a hard bargain, you'll make money.
Council fees, imported materials, environmental considerations, labour, cost of subdividing land, increasing population (esp. around Auck), transport - it all means the cost of a new house is on the way up. Pretty sure that that in the not too distant future you'll see the government and local bodies extort more from the construction industry due to 'global warming'.
I'm going to build a new house in Riverhead...so far I've spent $29,888 and the house plans haven't gone to Council yet. And it's not a big house.
I did post this before but this seems like a better place for it.
House prices are going down!
When priced in Bitcoin -
US Median Home Price in #Bitcoin
2012 - 43,000 BTC
2013 - 19,000 BTC
2014 - 340 BTC
2015 - 920 BTC
2016 - 697 BTC
2017 - 306 BTC
2018 - 18 BTC
2019 - 78 BTC
2020 - 44 BTC
2021 - 12 BTC
2022 - 9 BTC
2023 - 25 BTC
August, 2023 - 16 BTC
* I've not checked these figures myself but they eyeball pretty good, obviously NZ houses are more expensive so will cost more Bitcoin, but it does highlight the deflationary nature of Bitcoin or the inflationary nature of fiat money.
NZ's desire to own residential property as a hedge against retirement poverty could easily be curtailed by restoring our poverty inducing retirement savings structure to what it once was with incentivised retirement savings options like in USA, Canada, Australia and the UK. Right now, property is the only hope for a happy retirement at age 65.
"It’s obvious that the fall in house prices many were expecting during COVID, predicated on a sharp rise in unemployment globally, just…didn’t happen."
People don't understand why. What were the key policies undertaken after those initial forecasts?
1) unemployment didn't rise - government programs to support businesses so that they didn't lay off staff
2) house prices did not fall - mortgage payment deferrals allowed to borrowers by lenders due to relaxation of capital rules by the RBNZ
If these policies had not been implemented, then the counterfactual is that the economy would likely have gone into significant economic contraction resulting in higher rates of unemployment, business bankruptcies and mortgagee sales as borrowers were unable to continue mortgage payments and lenders enforced their contractual rights.
House prices in some areas have met Ashley Church's definition of a property market crash.
Will Ashley tell you this? Will those with vested financial self interests tell you this?
1) From Ashley Church
"But what constitutes a housing market crash? ...... I define a property market crash as a 20% drop in the median sales price from market peak, and which lasts for more than 12 months." - https://www.oneroof.co.nz/news/ashley-church-four-reasons-the-housing-m…
2) REINZ median house price changes from peak as at Nov 2023
Some areas below have now met Ashley's definition of a property market crash.
Locations where median house prices are down 20% or more from their peak:
1) Franklin: -21.4%
2) North Shore: -20.3%
3) Papakura: -29.8%
4) Waitakere: -21.1%
5) Hauraki: -20.7%
6) Otorohanga: -37.1%
7) South Waikato: -21.2%
8) Thames - Coromandel: -28.0%
9) Opotiki: :-21.8%
10) Rotorua: -24.0%
11) Tauranga City:-20.5%
12) Whakatane: -22.6%
13) Gisborne: -21.7%
14) Central Hawkes Bay: -27.6%
15) Hastings: -23.2%
16) Horowhenua: -24.3%
17) Rangiteki: -29.4%
18) Ruapehu: -32.3%
19) Whanganui: -23.1%
20) Kapiti Coast: -20.6%
21) Lower Hutt: -25.5%
22) South Wairarapa: -51.5%
23) Upper Hutt: -22.5%
24) Wellington City: -24.2%
25) Nelson: -21.7%
26) Buller: -33.7%
27) Westland: -33.4%
28) Hurunui: -22.3%
29) Clutha: -35.3%
31) Southland district: -25.4%
Remember that for most owner occupiers, the equity deposit is 20%, so for those who bought at or near the peak, most of their equity (which could be their entire lifetime savings) has evaporated in just 2 years. In some cases, property owners are now in negative equity.
The purchase of a owner occupied residential property is likely to be the largest purchase for most households and the source of funds for retirement.
Also remember, that the above are nominal prices and not yet adjusted for inflation.
At it's peak the estimated value of housing stock by the RBNZ was NZ$1.76 trillion.
https://www.rbnz.govt.nz/statistics/series/economic-indicators/housing
A reminder - these are some reasons given in the mainstream media, property market commentators, property market promoters, bank lending promoters masking as bank economists, real estate agents, property market mentors & other sources as to why property prices in Auckland will not fall by much and that there is a low probability that property prices will fall dramatically:
1) during the GFC, house prices in Auckland fell only 7-10%
2) over the past 50 years, house prices in Auckland have averaged 7.2% per annum (or commonly referred to as house prices doubling every 10 years). This trend can be expected to continue into the future - https://youtu.be/Agp9xFWoBX4?t=172
3) there is a shortage of underlying housing in Auckland, so property prices won't fall by much - https://www.interest.co.nz/property/97513/auckland-councils-chief-econo…
4) there is a growing population which means that there will be more demand for houses - https://www.stuff.co.nz/business/106883553/house-prices-have-fallen-but…
5) we have inward immigration which means more demand for houses
6) Auckland is an attractive city with an attractive lifestyle - that makes it desirable and attracts foreigners to move to Auckland and hence raise the demand for houses
7) we mustn't forget either the vested interests in ongoing stability. No government, central bank or trading bank with mortgage exposure wants materially lower house prices. Nor does an incumbent Beehive want falling house prices going into an election campaign https://www.stuff.co.nz/business/110499233/think-house-prices-are-going…
😎 the economy is doing well, with low unemployment - https://www.stuff.co.nz/business/110499233/think-house-prices-are-going…
9) there has been insufficient construction of new builds to meet the housing shortage - https://www.stuff.co.nz/business/106883553/house-prices-have-fallen-but…
10) there are high construction costs to building a house. House prices cannot fall below their construction cost. - https://www.stuff.co.nz/business/106883553/house-prices-have-fallen-but…
11) people don't sell their houses at a loss - https://www.stuff.co.nz/business/106883553/house-prices-have-fallen-but…
12) continued inflation means that house prices will continue to rise in the future
13) The fact is, debt levels have barely changed from the beginning to the end of those 10 years, compared to GDP levels, compared to household assets, compared to household disposable incomes. And much more importantly, debt servicing is very much easier now, an item that is almost universally overlooked. We are not pushing out to unsustainable levels now, and even if they creep up a little, we are far from that point. https://www.interest.co.nz/opinion/95894/if-you-think-new-zealands-hous…
14) in aggregate household debt servicing is low in New Zealand - currently at just under 8% of disposable income of households - https://www.rbnz.govt.nz/statistics/key-graphs/key-graph-household-debt
15) property market participants & commentators who have been correct in their predictions about recent property price trends have more credibility and hence their predictions of upward prices are believed by a wider audience (such as Ashley Church, Tony Alexander, Ron Hoy Fong, Matthew Gilligan, etc). - https://www.stuff.co.nz/business/84322204/all-predictions-of-an-aucklan…
16) previous warnings about a house price crash have been wrong - property prices have continued rising upward significantly since these warnings were given, so there is little reason to believe these warnings.(such as Bernard Hickey) - https://www.stuff.co.nz/business/84322204/all-predictions-of-an-aucklan…
17) its unlikely Auckland prices collapse. I think the main two reasons though are: a) Affordability has been this bad, and worse, in the past and it only resulted in about a 10% drop. b) The number of homes built over the last decade has been too low and will take some time to recover
18) Not a single person who bought 10 years ago has ever regretted buying / have you met anyone who has bought a house and regretted buying it?
FYI,
Rent vs buy in Auckland?
Can get this lifestyle with renting and at much cheaper cost (for an equivalent house, estimated to be $36,816 to rent vs $73,800 payment for 80% LVR on a 30 year P&I with rates, insurance, maintenance etc.)
Here is a house in Auckland near the median house price in Auckland currently for sale:
https://homes.co.nz/address/auckland/panmure/32-domain-road/QjbYx
Can keep saving the difference of renting over buying (this is almost $37,000 in year one) to increase their savings. Savings can be deposited in bank earning interest, thereby increasing the size of savings.
Every owner occupier buyer should do their own rent vs buy calculation - one of the key assumptions is the future house price growth.
There are lots of lessons littered throughout history if you look. For example, in terms of significant property price falls, there are lessons to be learnt from:
1) 1582 - 1810 Amsterdam property bubbles
2) 1890's NZ land bubble
3) 1880's Melbourne, Australia land bubble
4) 1920's Florida land bubble
5) 1930's US
6) 1980's Netherlands property price fall
7) 1990's UK property price fall,
8) 1990's Swedish property price fall,
9) 1990's Norwegian property price fall,
10) 1980's Finland property price fall
11) 1998 - Hong Kong
12) 1998 - Singapore
13) 1998 - Indonesia
14) 1997 - Thailand
15) 2008 - Ireland
16) 2008 - Spain
17) 2008 - Portugal
18) 2008 - Netherlands
19) 2008 - Italy
20) 2008 - Greece
21) 2008 - Denmark
22) 2008 - Cyprus
23) 2008 - Latvia
24) 2008 - Estonia
25) 2008 - Lithuania
26) 1990's Australia property price fall
27) 1990's central Auckland property price fall
28) 1989- 1990's property price fall in Toronto, Canada
29) 1990's Japanese property price fall
30) 1980- 1990's US savings and loan - California
31) 2005-2006 US
32) 2008 - Perth, Western Australia
33) 2009 - Queensland, Australia
Another common line of reasoning is buy property as the mortgage erodes with inflation.
https://www.oneroof.co.nz/news/can-rising-inflation-magic-away-your-mor…
So how has that worked out as at November 2023 for a property owner who bought a median priced house in Auckland at the peak using an 80% LVR?
1) Median house price in Auckland has fallen 19.1% in nominal terms
A) November 2021
House price: 1,300,000
Mortgage (at 80% LVR): 1,040,000
Equity: 260,000
B) November 2023
i) Nominal terms
House price: 1,052,000 (-19.1%)
Mortgage: 1,040,000 (deemed to be interest only for simplicity and comparison)
Equity: 12,000 (-95.4%)
2) Inflation adjusted values using a deflator or 1.12 as per RBNZ for corresponding period
https://www.rbnz.govt.nz/monetary-policy/about-monetary-policy/inflatio…
House price: 939,286 (-27.7% from original price)
Mortgage: 928,571 (-10.7%)
Equity: 10,714 (-95.9% from original equity)
That fall in inflation adjusted equity value is a significant erosion of purchasing power.
We welcome your comments below. If you are not already registered, please register to comment.
Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.