Treasury does not expect a surge in house prices as interest rates fall, since the market has already priced in the expected decline in long-term mortgage rates.
In a public lecture on Wednesday, Chief Economist Dominick Stephens said that while lower interest rates eliminate the risk of further house price declines, they shouldn’t lead to significant increases.
“I think people are thinking that since interest rates are falling now, then house prices must go up … there is a very strong relationship between interest rates and house prices, but I don't think it works quite that simply,” Stephens said.
It is not short-term changes in the Official Cash Rate that move house prices, but the long-term expectation of where those rates will settle. That is why the Treasury is forecasting “low single-digit growth” rather than a sharp rebound.
“The level of interest rates that prevailed during the peak of the Official Cash Rate, had that peak been sustained, there would have been a lot more downside in house prices. They would have fallen a lot further,” he said.
“So, when the expected drop in interest rates occurred, that eliminates the downside for the housing market. But it does not, according to our models, really suggest a huge upside”.
That said, the housing market appears to be stabilising. Prices were flat and sales were starting to pick up. Banks have reported a significant lift in new loan applications, he said.
The property market was most responsive to long-term interest rates, which had trended lower for decades and driven a generation of house price growth.
For example, the five-year swap rate was 1.3% at the end of 2019 and fell further during the pandemic. It then surged above 5% as inflation spiked but has since settled at 3.75%.
The 10-year swap rate was 1.7% before the pandemic and has traded somewhere between 4% and 5% since 2022 — it was last recorded at 4.17% on Wednesday.
Stephens said houses bought from 2022 onward were priced for long-term interest rates that the two-year swap rate has only recently approached. If that drop hadn’t happened, house prices would’ve fallen further.
"In the late 2010s and early 2020s there was a bit of euphoria around a sense that interest rates had dropped to very low levels. And perhaps some people in the market thought rates could stay at those very low levels for a long time,” he said.
That expectation has changed, and the market now believes interest rates will remain significantly above pre-pandemic levels.
“Therefore what people are willing to pay for an asset is a little bit different now to perhaps what it was at the peak of that slightly euphoric period."
Other policy considerations
Changes in residential zoning policy are another reason to think falling interest rates may not result in a lift in house prices. If land supply were unlimited, lower rates would reduce building costs and rents would fall.
Stephens said that because New Zealand’s land supply was so constrained in the decades before the pandemic, falling interest rates drove prices higher.
“The decline in interest rates needed to lead to a change in the price-to-rent ratio of houses, but it resulted in higher prices rather than lower rents because of the restricted land supply,” he said.
Stephens said his work with the Housing Technical Working Group had emphasised that land supply is the key factor in how the market responds to interest rate and tax changes.
While NZ was still on the “more constrained end” of the supply spectrum, some improvements had been made in recent years.
“There's evidence that the Auckland Unitary Plan resulted in something of a loosening over time; rent in Auckland clearly … rose less than other places in New Zealand,” he said.
Wellington recently passed its own looser zoning plan, and Housing Minister Chris Bishop has pledged to require all cities to zone for 30 years of growth—though that policy has yet to be implemented.
These looser zoning rules may further limit house price increases, as the lower cost of capital should result in more housing being built and more affordable homes for people to buy or rent.
94 Comments
“So, when the expected drop in interest rates occurred, that eliminates the downside for the housing market. But it does not, according to our models, really suggest a huge upside”.
I would love to see the Treasury make their models available to the general public. None of this "you wouldn't understand them even if we did" nonsense. Let's move to an open source government model. Would be great for those with the chops to understand their thinking and for students to use them for learning.
A top economist in NZ once said to IT Guy, economic models are like sausages , if you knew what went in, you would not eat them.
They say similar about much consulting work provided by Bain, McKinsey, KPMG consulting, etc. I've seen first hand. Clients don't ask relevant questions and just accept what they're told.
It might just be a mental model based on a first principles theoretical framework.
Accepted. Once again, there's no reason for them not to lay this all out for public consumption instead of us having to pick through the codes and signifiers.
Then we could ask other relevant questions like what 5 things they achieved last week.
The older guys built stuff in Excel but the newer economist grads have introduced R into the mix, there is also a bit of SAS in the mix, often for seasonal data adjustment. Plenty of Python now days as glue...
From my experience Bank Economists have less access to backend transactional banking systems data then many on here believe. There are people inside banking data insight teams that have full access to everything, but not Economist team. There are also firewalls between trading teams and insights and economists.
Just as treasury must sit outside the trading floors in there own secure spaces.
They all drink craft beer together however............
From my experience Bank Economists have less access to backend transactional banking systems data then many on here believe. There are people inside banking data insight teams that have full access to everything, but not Economist team.
That's interesting. You would think that all these data sets are a treasure trove for the bank economists. And I can't work out why they can't access the data. The bank owns the data and the economists are contracted to the bank.
Economists have OIA’d Treasury models before. If you are capable of assess/making models you could OIA a copy.
It has been pointed out to me that some models are posted for public consumption.
However given that so much policy is directly and indirectly related to the Ponzi, making all frameworks and workings open source at least makes stakeholders and "customers" (taxpayers) as informed as they want to be.
In the private sector, we're also seeing more clients wanting to understand the what's going on under the hood of the 'black box' solutions.
My reckon is that Treasury sees itself as being distinct from the hoi polloi - there is no seat the table. Now, while I understand the reasons for this - mainly that our political representatives handle all the higher-level thinking - the more we understand the assumptions and thinking of the higher power unelected bureaucrats, the better we are able to make decisions in our own interests.
Do we really want a "surge" in house prices? Just generally keeping pace with inflation is all investors really need. There will be locations that may get more desirable or properties that can have value added etc. This making large capital gains after a year or two of simply holding a property should be seen as an anomaly. Normally you would make a loss if you sold in such a small timeframe.
Just keeping pace with inflation is what investors really need...
Another Zachary classic. In the real world, what the bag holding and leveraged Specuvestor still expects, is different from what would be widely perceived as reasonable need. There are many still financially geared to outdated expectations and combined with demographics of the aging population, persistent high unemployment, weak immigration, I think that' speaks more of a market that's still vulnerable.
Spot on. Great comment.
The biggest issue is that if house prices start to rise again more skilled young kiwis will leave. (For better careers, public services and affordable housing overseas).
We replace skilled young kiwis with unskilled, poorer immigrants. Leading to less taxes and thus worse public services and more people leaving nz.
When the economy was booming and house prices always rose .. the ponzi worked. Now people realise it's not a one way bet... the ongoing house price trajectory will be downward or flat. Until a government starts to address our mid to longterm strategy (or we forget the bust again - but that's 5 years plus away) and the issue next time is that the public services and infrastructure in nz are so bad vs overseas that people will leave anyway.
We also now live in a very different world where defense spending will rise at the expense of accom supplements and tax rebates. With potential for wars and more pandemics... which will affect populations and migrations.
Invest in AI, military and tech for the next 5 years.... Not houses and land. Looks who is really running the usa now (not trump) and musk owns no houses.
Isn't it within 10 years the pension was due to implode at current settings with the status quo? Add healthcare to the mix and the ageing population adding demand year on year for both, then military spending, then exodus of Kiwis abroad. We will have a large reallocation of resources in this timeframe either by choice (semi-preemptively) or by force. We will all have to pay more moving forwards, the question is how much longer will we extend and pretend before the masses realise and demand change.
The specuvestors have no room in their budgets for R&M let alone a non cash item like depreciation. The postponement in R&M on rental properties is blindly obvious if one drives around many suburbs. The vestors convinced that none would be necessary as they would flip before any remedials were needed.
There is a going to be a huge amount of cash required to keep some many of these dumpsters habitable. The 'asset' is morphing into a liability as each day passes.
Some people here are obsessively focused on capital gains - and choose to ignore rental income.
The reality is that many Mum and Dad Investors use their rental properties as an income-generating nest egg for their retirement years, by when they aspire to being mortgage-free.
In fact, capital value typically takes a back seat when rental income (yield) is making a nice contribution to the owner’s disposable income and, thus, welfare.
[Edit 1]
TTP
Many landlords are far more focused on rental income than capital gains.
Agree with that, but, the math yield based investment has not made financial sense for a decade or more. Accordingly the sector is far more focused on tax free gain to justify investment. Will we see a rush to the exits as the bbq bragging crowd works out that reality?
As time go on, and the capital gains do not occur, new investors will make offers based on cashflow if these properties come up for sale.
Do you realize what you are saying? how this changes the value of the investment if it has to be based on cashflow.
Perhaps you will pivot to TAs view as MORE INVESTORS CONSIDER SELLING
before prices become yield based like commercial property.
Because current prices, in most cases, are so far removed from cash flow based valuations, its going to be painful.
If I wanted to buy I would be waiting until your vision becomes accepted in the investment community.
If I owned a rental property, IT GUY, I’d hold onto it. Buying good, well-located property and keeping it through the ups and downs of the economic cycle makes sense to me.
I know enough people who owned property, sold it and went on to regret it. Besides, I’d never be interested in trading (i.e. working the market via on-going buying/ selling, a la “specuvestors”).
Property has a pretty solid track-record as an acquisition/ investment and New Zealand is a safe country to reside - in a world full of uncertainty. Certainly, quality real estate beats bank deposits over the long-term (unless you happen to be a bank).
TTP
Property has been a safe investment for capital gain for the last 35 years. If you can find a well located property that is cashflow positive then sure, go for it, but location demands prices above what is likely cashflow positive, and without the capital gains to either leverage, or pay off in the longer term on selling, it is nowhere near as appealing as in the past.
You missed the disclaimer: "Past returns are not indicative of future performance".
Yes that is a very important disclaimer, however there is a more important disclaimer.
Does the commenter have any undisclosed "conflict of interest." or a undisclosed vested financial self serving interest?
CAVEAT EMPTOR
There is another question worth asking - is the commenter even trustworthy?
For many decades, people have been telling us that property has become a bleak investment with abysmal long-term prospects ….. But these people are never correct. Property always bounces back.
It’s the same as “trickle down” theory. It’s easy to proclaim it will work. But, in practice, it never does.
TTP
I’m going to be slightly contrarian and make the claim that most people who expect house prices to drop significantly long term (such as 3-4 times the average wage) are very possibly wrong and that house prices may even rise again… but not for any of the reasons that any spruiker has ever stated here.
I don’t believe we talk enough about wealth inequality enough on this forum nor website and how it affects the distribution of resources, such as access to affordable housing. Economists in general certainly don’t.
When the rich get richer, they snap up more of societies assets. They compete with each other for assets, thus causing asset prices to rise. The trickle down theory has been conclusively debunked. It happened in Ancient Rome. It happened in Victoria England and it’s happening right now in the US, the UK, Canada, Australia and right here in New Zealand. Here’s a link to an example of it occurring in Montana: https://m.youtube.com/watch?v=dU2x0BmFhJI&pp=ygUWSW5lcXVhbGl0eSBhbmQgaG91c2luZw%3D%3D
Evidence for the increasing wealth of the rich causing asset prices to rise may quite possibly be found in comparing a society’s Gini coefficient to house prices.
I have been looking into this and have noticed that as the Gini coefficient rises and societies become more and more unequal, housing becomes increasingly unaffordable. There’s a reason why an ordinary person (despite perhaps working hard) cannot afford to buy their own place in a severely unequal country like South Africa or India.
I’d appreciate an academic’s input on this theory if there’s anyone out there as I remain open to be accused of confusing correlation with causation… but I’m afraid to say that New Zealand’s Gini coefficient has risen significantly since the 80’s - as it does too in Australia, the UK, Canada, the United States - the list goes on…
…thus neatly explaining the rise in housing unaffordability.
To be honest, if this theory is correct, the implications for the well-being of people in a society and the prospects of our children to afford their own home one day are rather hideous.
The reference to Ancient Rome is in regards to wealthy patricians outcompeting small holder farmers and buying up vast tracts of land and converting them into Latifundia estates. Displaced farmers flocked to cities or to the army in search of opportunities. Comparisons could also be made with the like of the villainous Marcus Lucinius Crassus who questionably used his vast fortune to invest in real estate in Rome and modern day investors.
The Victorian era in England is a nod towards societal inequalities pointed out by the likes of Dickens, ironically the very society that many of our European ancestors sought to escape, in pursuit of opportunity abroad where honest work could realistically equate to the ownership of one’s own place to call home…
Like the feudal system in England was a social, economic, and military structure based on land ownership and obligations. It was in place from the 9th to 15th centuries.
I had this view a while back, but I think it breaks down as other asset classes provide better returns
Yes, there came a point where owning factories gave better returns than owning land. Today it’s stock ownership of Silicone Valley tech companies. I think though that this increased wealth gap has meant an overflow and diversification into real estate worldwide. Perhaps as a buffer against shocks and black swan events? An example being Gates and others buying up US farmland on a huge scale.
Yep, the top 10% own most of everthing, and thus control virtually everthing, including the narrative.
Land ownership is the big issue always has been. The top ten dont need to work , many do and many aint fun to deal with.
Build costs are absolutley insane, hardly can own land and build their own house now, hence the characterless grey boxes all everwhere. People farming has always been lucraitive.
As often mentioned, liberal democracy is built on a property owning middle class.
There is a economist Gary Stevenson who discusses wealth inequality
This is what I think. One possibility is you are right and I am concerned about that. Imagine Blackrock and similar owing the predominance of our housing. The possibility is that since we have 360 billion or more in private housing debt and it's crushing the economy we can't afford to buy our own homes anymore.
The other possibility is. With buyers needing bank financing and only a limited ability for the nation to afford the massive debt that this involves, and continued recession, housing must fall to the point where it is affordable to enable a viable economy
The idea of Blackrock or similar owning the majority of housing (and everything else) is the idea. It's the agenda behind the WEF's "you will own nothing and be happy". The idea is to have the corporations, the financial institutions to own everything, and the peasants will simply rent everything they need.
There was a statement by Warren Buffett back in 2012 about capitalising on the distressed housing market. From a monetary investment perspective, great. From a societal, ethical, human investment perspective, absolute shit.
The US especially, Wall Street and the ultra wealthy have been doing it all along, but have really taken it to the extreme.
We're not much better here.
"you will own nothing and be happy" Here is the original blog where that was written:
https://web.archive.org/web/20210319013318/https://www.weforum.org/agen…
I implore you to read the whole article, and take your own POV about it.
They key point is:
'Land supply is the key factor in how the market responds to interest rate and tax changes.'
And it is the making of land supply more responsive to demand and the prevention of landbanking that will allow supply to equal demand.
This will mean the 'market' will not be able to get an unearnt speculative premium on land and buildings as interest rates fall.
Houses thus become more affordable in price, and due to the fact that less debt and interest on that debt is required.
I really can’t see house prices going back to their crazy price increases over the last few generations. The double it every 10 years theory is out the window. I think about people in their 20s, the ones who are meant to be buying this housing stock coming online as they enter their late 20s and 30s, they’re all broke. I don’t see where the money is coming from to pay twice what we did 10/15 years ago.
I’m mid 40s and I’ve heard/read that exact thing repeatedly over the years, “house prices can’t go up any further” followed by “who will be able to buy them if they do”, then the cycle turns and it carries on.
The quick aggressive boom over the covid years was avoidable, and it was disgusting that it was allowed to happen on the back of some terrible decisions, those gains have washed out and I think (hope) lessons were learnt and we never see that happen again.
But people outright calling the death of property seems a bit wild, only time will tell but I can’t help but think we’ll see kiwis punting on property again in a couple of years.
I usually avoid commenting on property posts since there’s a good chance I’ll be wrong, but I think a lot of it will come down to how demographics play out.
If the population starts to retract, as some projections suggest, that would be a pretty fundamental shift in how economies have operated for centuries. Property has always had the safety net of a growing population, which could still hold up here due to immigration. But without that key factor, the whole system could unravel, since our economic model is essentially built on the assumption of infinite growth, something that just isn’t physically possible with our current technology or scale as a species.
This recent fall in interest rates will take the pressure off some households but a lot of this freed up money is going to get swallowed up by the ever increasing cost of living. Food prices continue to rise, energy costs are about to go up significantly again, insurance costs are about to go up further as well and so will council rates and other costs while wages for many are stagnant. On top of this we now live in an inflationary world with a weakening NZ dollar. The current geopolitical environment + climate change are both strong global inflationary forces which won't be reversing anytime soon. On top of that record numbers of people are leaving NZ while inward migration slows, we have loads of supply, rising unemployment and low productivity. This all means house prices won't be going up significantly any time soon.
I agree there is no high upside, but there is certainly still some more downside exposure that most seem to be ignoring. The housing market is still in a downturn yet we seem to have this idea that we can use narrative economics to declare an early floor/bottom. The Covid boom was extreme stimulus on an already overvalued market so a couple of cuts to the OCR isn’t going to turn it on a dime. No asset market is immune to correction, yet in NZ we seem to think we have some exceptionalism with property.
"TA - MORE INVESTORS THINKING OF SELLING
now treasury "
Treasury needs longer term price forecasts for their economic projections.
Meanwhile actual residential real estate market data:
Listings for sale on Trademe:
1) 29 Feb 2024: 43,165
2) 27 Feb 2025: 48,526 (+12% yoy)
"More buyer choice" is the commonly used euphemism being used by property promoters under current market conditions.
I agree that there will be more people in the future generations resigned to renting rather than buying s home for their own occupation.
This is quite prevalent overseas now, and nothing wrong with that.
However if you do own it dies make for a better financial position long term and into retirement.
I can assure you that it is extremely possible to do this as I still see very good opportunities in ChCh, but then again not everyone can!
Hugh Jorgan, why would I need to pay a subscription to make comments on any forum?
What I post is always the truth and not rubbish at all!
The ChCh market is rising with people out and about buying, you only need to look at the number of sales and prices being achieved at the online auctions.
You will see from the stays that come through over the next few months from the happiest city in NZ
"The Christchurch Spruiker Force is strong with this one. "
FYI, comment from a predecessor account?
by THE MAN 2 | 3rd Jun 20, 1:08pm
Will all the doom and gloomers stop commenting about the housing market if there are not all these mortgagee sales?
I will guarantee that with interest rates being as low as they currently are and into the future, there are going to not be many mortgagee sales at all!
It is cheaper to own than rent now in general, and if home owners need to sell it will not be pressure from the Banks to sell them up.
People need to live somewhere so they won’t be selling due to not being able to afford the payments rather from business that has struggled due to the over reaction from the government in having the extended lockdown.
If you are expecting all these properties with “mortgagee” on them, you are going to be very disappointed!
by THE MAN 2 | 3rd Jun 20, 2:24pm
That doesn’t make sense CN!!!!!
If you have properties that are giving investors returns of say 5% and with tax savings and interest rates at 2.5% approx. why on earth would you want to deleverage or reduce debt servicing???????
The above comment shows the line of thinking involved by non owner occupier buyers in the positive carry trade. Many buyers believed that interest rates would stay low and then got caught out when the cost of borrowing increased rapidly and this became a negative carry trade. Also costs of insurance increased as did cost of council rates and the rents did not increase sufficiently to cover the increased cash outflows. Over the past few years, people have drawn down on excess cash, sold other assets to raise cash, and paid out of their own incomes to cover the shortfall, however the longer interest rates stay high, their reserves are becoming depleted, as their household living costs have increased, or they have experienced a drop in household income resulting in the negative carry being unsustainable cashflow pressure.
Anything other than a substantial drop in housing with a increase in the supply of land for both houses and businesses will result in further damage to our productivity The $360 billion plus in unrepayable housing related debt that grows more than gdp will further weigh down the economy and we will remain in recession and stagnation. Eventually there will be a financial shock in the world and our ability to continue to easily operate in substantial deficit will be curtailed and we will be a economic basket case.
So will Dominic fall on his sword if he gets it wrong like they do most of the time. The one thing I see that could spoil his prediction is were is all the TD money going to go as the rates drop people will be pooking for a return do they leave it in the bank? Do they buy a rental as ROI rates get better with the chance of capital gain to at least match inflation remeber new builds are dropping off? Or will people put their money into the sharemarket which is not doing that well at the moment? There are alot of moving parts to be adamant about your opinion
Hi Colin Cameron,
When has Dominic got it wrong?
I've been reading his offerings for years. He's onto it and articulate (and a very pleasant guy too). Has an excellent track-record for economic analysis and forecasting. He's both innovative and a safe pair of hands. Without such strengths he would hardly have been appointed to his lead role at The Treasury.
TTP
TTP we will wait and see. From memory he has also got things wrong. But I will not waste my time looking for those predictions look at the article above investors had the bigger mortgage pie. Maybe now those ones with reasonable TD but getting SFA interest are starting to put it into property. Exciting times ahead
I'd like to thank the commenters here for their insights that have provided a healthy tempering of housing froth/bullishness from captured media, recency bias and my boomer parents. This forum is the only place I have been exposed to an alternate perspective on the housing market.
I am a millennial FHB with a good deposit but will be sitting on the sidelines and watching for now, trying my best to invest the money somewhere productive.
It has been difficult trying to explain the risks of current house prices to my peers who are obviously excited about their purchase and the security that home ownership brings. It is impressive just how effective the industry bulls have been in their messaging and persuasion.
I do have a question, members like Jfoe and others have continuously stated that this is our only game in town. Can someone please explain how this plays out? Do more people go in together on housing (groups)? Longer mortgage terms? A greater divide between classes as is mentioned in another comment on this article?
It is heartbreaking to see this country that I love getting so f***d by this. There seems to be little political will to make any meaningful change. This place could be the jewel of the world. How did it come to this?
The only game in town...only if you have no skill and no creative ideas that you can form into a business.
Policy has favoured tax free speculation on land, and has done so for some time. What is needed is a vote for meaningful change otherwise status quo. That means a universal land tax. Its is simple and impossible to bypass and forces speculation to have to pay its way, every year, year after year. This is why the speculative are all against. NZ used to have land tax but after over 100 years it was killed off by of all people, a Labour govt viathe Land Tax Abolition Act (1990). Discussed here.
Sub 35 yr olds need to actually vote and vote for meaningful change other wise its simply more of the same.
I agree with your first line for sure.
My oldest got into his own business instead of buying a home. Within a surprisingly short time he had the home and a decent business. He is continually surprised how f### ing hopeless many are of whom he deals with and how this hopelessness has created any number of directions for his business.
So I say to young ones, if get into a massive property debt whilst on wages you are, on average, locked in for life and you better love your job,
Or find something, back yourself and go for it. Park the home idea for a few years, they will get cheaper anyway.
As a credit creation engine it has been the only game in town.
As people bought at house @ say 500k 8 years ago and sell at 1mil later, they would effectively get 500k in their hand, but the person borrowing would have probably increased the mortgage book of banks by 900k (100k deposit) this is how we have built a 380 billion mortgage book across banks.
by the Magic of house price appreciation that 500k profit could now be spent, reinvested etc etc in NZ
During the boom years That mortgage book was going up by 10% a year 30 billion? all could be spent or re invested or even just pissed against the wall in hospo.... (I tried my best at vultures...)
Now with no house price appreciation there is no Magic flow of $$$ into the economy, traditionally Gubermint spending should increase in recessions to replace this private credit, but NAct is cutting back.
The economy is on its knees as there is no free money. Money that paid for so many jobs, let alone the production of the ITM Fishing show.... (perhaps NZ was the only place in the world where traddies could afford big game fishing boats....).
I use to think credit creation by banks was great, now I've realised it only benefits the banks and its why house prices have raced away compared to incomes.
This has consequences as it often takes 2 earners to earn sufficient to earn enough to run a family whereas my parents were able to have a stay home mum to bring up the children
In theory we have a better standard of living as the economy grows - but do we? or are we giving more to banks on interest and govt through paying tax at higher brackets (as the tax brackets don't increase as average income increases)
"Money that paid for so many jobs, let alone the production of the ITM Fishing show."
Or the production the "The Block".
https://www.oneroof.co.nz/news/townhouses-from-cancelled-block-nz-sell-…
The Block started a few property trading careers and promoted property trading / renovation activity to the wider general public. This led to increased public interest in residential real estate.
One other subtle feature was the property valuation websites such as homes.co.nz and realestate.co.nz where historical price charts of each property could be viewed and valuation updates each fortnight. The general public began to view residential real estate prices in the same manner as share prices and created excitement when prices rose.
"It has been difficult trying to explain the risks of current house prices to my peers who are obviously excited about their purchase and the security that home ownership brings. It is impressive just how effective the industry bulls have been in their messaging and persuasion. "
The property promoters with their vested financial self serving interests have frequently repeated their messages and this has influenced the general public. It is the same with residential real estate manias that have occurred throughout history, with a large amount of collateral damage being first home buyers and owner occupier buyers. Very few people recognise the signs of a asset price mania. A number of commenters gave warnings about the elevated price risks of residential dwellings, and those with their vested financial self serving interests attempted to discredit the commenters giving these warnings.
FYI, here is an example of owner occupier collateral damage from falling house prices elsewhere around the world:
1) https://www.investorschronicle.co.uk/.../aft.../article.html
2) https://youtu.be/iKPG_l1P7lk
3) https://youtu.be/ugBKnP2FKDM
4) https://youtu.be/fiCXsu_4BoA
The future trajectory of the lives of these people are forever changed.
There seems to be little political will to make any meaningful change.
Look at the underlying incentives operating for the people involved to understand the reasons for this.
"How did it come to this?"
The incentives operating throughout the whole system.
"It has been difficult trying to explain the risks of current house prices to my peers who are obviously excited about their purchase and the security that home ownership brings."
Here is an example to show the risks and financial consequences: Peaker vs Buyer today
People are free to choose to dismiss the calculations, however people are not free to choose the consequences of their choice.
Let's take a look at "forced savings" by buying their own residential dwelling for a buyer in a low income neighbourhood - Manurewa in Auckland.
A) Peaker:
1) Nov 2021:
Median house price in Manurewa: $1,025,000
Purchase with 90% LVR mortgage: $922,500
Equity deposit:$102,500
2) Payments for 3 years to Nov 2024
1) Total P&I payments for 3 years: $133,108 (2.6% fixed interest rate for 3 years P&I payments of $44,369 per year)
2) Total payments for 3 years for rates, insurance, maintenance:$12,673 ($4,100 for first year, rising at 3% p.a)
Total payments over 3 years: $145,780 (note that the amount is likely to be higher to to the low equity risk premium interest rate to be charged which is not included above)
So over the 3 years, they have paid
1) equity deposit $102,500
2) total payments for 3 years: $145,780
Total payments of $248,280 since purchase
3) Situation at as Nov 2024:
a) Median house price in Manurewa: $792,672 (price fall of 23% over 3 years)
https://www.realestate.co.nz/.../manukau-city/manurewa
b) Mortgage after "forced savings" of $64,145 due to P&I payments above: $858,355
c) Equity position: NEGATIVE $65,683 (i.e negative equity)
So the owner occupier buyer has paid a total of $248,280 over the last 3 years to have an asset with NEGATIVE $65,683.
That initial equity has evaporated as they were told to buy a house for "forced savings"
B) Buyer today
1) Nov 2021
a) Chooses to rent, pays $92,171 over 3 years ($28,392 in 2021 increasing by 8% per annum)
b) saves $0 (spends the surplus $53,609 as they are spenders - $145,780 paid by owner occupier buyer above less $92,171 in rent) - a financially disciplined household can save that surplus and invest it.
c) keeps 10% deposit in a bank account - $102,500 - earns no interest.
2) Nov 2024:
Equity position: $102,500
This can be used to buy a house at the current median house price in Manurewa of $792,672
90% LVR mortgage: $713,404
Equity position: $102,500
For buyer today, the mortgage is lower 22.6% (by $209,096) compared to Peaker. Peaker had an original mortgage of $922,500 (29% higher) vs Buyer today's mortgage of $713,404. Peaker will pay $455,717 over 30 years (at 6.0% p.a mortgage interest rate) for the larger mortgage, that Buyer Today will not have to pay. For a financially self disciplined household, they can take that $455,717 and invest for their retirement / financial future. Peaker does not have that choice available.
As a result of that single decision to purchase in Nov 2021, Peaker is in a more vulnerable financial position and at risk if they experience a fall in household income (job loss, fewer hours for wage earners). They may be unable to maintain mortgage payments and may face financial stress, and mental stress. If Peaker is forced to sell, then they are less likely to financially recover, they are likely to have lost their entire lifetime of savings, and they may need emergency housing, social housing or accommodation supplements in future.
So which position would people to choose to be in?
1) Peaker who was told to buy due to forced savings : equity position NEGATIVE $65,683
2) Buyer Today: equity position of $102,500
There are conditions where it is better to rent, and there are conditions where it is better to buy. The common widely held belief is that buy under ALL conditions. That is not the case.
Furthermore, what if Peaker wants a larger residential dwelling as they want to have children? They will be unable to upsize as they have insufficient equity to upsize.
Very few of these personal stories of Peakers in NZ are being reported in the media.
And we still have seen the impact of the couple where one looses job, the other a severe reduction in earnings - and they have a home and rental. I see a fair amount of these scenarios, situation has always been there but my gut tells me there is a lot worse to come.
There are property developers and land bankers in Auckland who are adversely impacted by the Watercare constraints potentially sitting on unrealised losses.
How long will these owners be able to hold on before they need to sell?
The Statutory Manager has listed for sale the properties owned by Du Val group in Auckland (development sites). Some are still unsold. I wonder how long before the Stautory Manager waits before they lower their price expectations.
Mainstream economists all need to be sent away for rehabilitation. Their academics and models all need to be rethought. They need to attend classes and learn from real "social" sciences - anthropologists, ecologists, indigenous and spiritual teachers - as we all do really. The operating system gotta be integrated with more than mathematical numbers.
So much has been cherry picked from the theories of Friedman, Keynes, Smith, etc and not for the betterment and empowerment of all. Economics and Monetarism is a mutated abnormality. Humanity has succumbed to just another religion. In no way can we claim to be an evolved species.
Lol my big send off. Finish off with a blast before I have to manage the withdrawal symptoms come 1 March ;)
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