By Olly Newland
Once again there are headlines that suggest the housing market is stirring and that prices are rising.
Auckland is, as usual, the leader of the pack, but by a process of osmosis the rest of the country will catch up over the next year or two.
With all the modesty I can muster, let me point out I have been predicting this for a long time now.
Why is this happening?
What is driving the improving market when the headlines are still lurching from one crisis to another?
Low interest rates are one key factor. Now borrowers can service up to twice as much debt as they could a few years earlier … but at the same cost.
Another key factor is that many savers are tired of getting measly returns (less tax) and are again finding the idea of investing in the property market a more attractive idea.
As for the Global Financial Crisis, people are thoroughly sick of that as well. There seems to be one crisis after another but the world keeps turning. It’s human nature to become immune to an endless, ongoing stream of ‘crisis’ talk – much like the desensitisation practice of tying a horse up to a fence by the road so they get used to traffic.
People cannot fail to notice that cars still fill the streets, that restaurants are full, exports are solid and that rents are slowly but surely rising.
Now that the 'looney left' with their capital gains tax ideas have been well and truly routed at the polls, New Zealanders can get on with their plans - which include investing, buying and selling with the freedom they have always enjoyed.
All in all, these and other factors and we end up with an (un)holy mixture which could result in an even bigger boom that the last one.
'Bubble bursting more likely than ever'
However I believe there is a risk of some considerable danger so I give this warning:
If we do have another boom - and the chances of that are increasing daily - encouraged by continuing low interest rates, plus earthquake rebuilding, leaky home renovation etc then the risk of the bubble bursting followed by a nasty crash seems far more likely than ever before.
So my advice is to tread carefully.
By all means enjoy any such boom. Do all the profitable deals you can find. Make money with both hands but be ready to press the ‘dump button’ at any time. In other words do not get involved in long-term speculative projects.
In my view the next boom (when it happens) will be shorter, sharper and could have a very nasty bite at the end.
Coincidently, this report surfaced in the last few days: “Housing bubble set to burst” by Anne Gibson, NZ Herald
“The Economist” rated New Zealand in the world’s top overpriced markets.
New Zealand homes are overvalued by 25 per cent and the country is one of nine under threat of a housing bubble burst, says the Economist.But the leading international publication’s feature report – headlined ‘House of Horrors’ – has been rubbished by real estate industry insiders.
“The Economist” ranked New Zealand in the world’s top overpriced markets along with Australia, Belgium, Canada, France, Britain, the Netherlands, Spain and Sweden.
How these predictions are made is anyone’s guess but it makes good headlines for the media to shock and horrify us on a daily basis.
I wonder if the pointy head at The Economist ever talked to any buyers of the over-priced shoebox apartments that blot our inner cities?
I bet the original buyers of these would wish their properties were only 25% less than they paid.
I wonder if those who bought lifestyle blocks and seen their equity melt away feel they have made 25% on their purchase? And don’t forget the beach houses, and the mosquito infested lake front sections that Spruikers shamelessly tucked retired farmers into along with naïve buyers that believed the hype that prices would rise forever.
“The Economist” may have called it right but they have called it way too early. They may well be right one day - but that day has not yet arrived. The next boom is patiently waiting in the wings for the next curtain call.
Then we have this item of news which confirms all of the above:
First home buyers return
Wednesday December 07, 2011 Source: FairfaxFirst home buyers appear to be the driving force behind the residential real estate market in New Zealand, according to new research released this morning by BNZ.
The survey, conducted by BNZ Banking Group with the Real Estate Institute of New Zealand, canvassed more than 10,000 licensed real estate agents.
Some 29% of real estate agents reporting first home buyers are prevalent in the market.
BNZ chief economist Tony Alexander said first home buyers nationwide were probably responding to the lower level of interest rates at the moment.
“Since we went into recession in 2008, a lot of young people who may have left home and gone out on their own otherwise have not done so. Maybe they have been living at home, have now built up a deposit and are certainly sick of living with their parents,” Alexander said”.
And if you need more proof …
Property Prices Still Keep Rising
08/12/2011 ww.stuff.co.nzResidential property prices continue rising nationwide, with the average price of house sales in November up 1.7 per cent from a year earlier according to the latest data from Quotable Value (QV).
Each month since April this year, prices have shown a steady upwards trend and are now only 4 per cent below the last market peak, seen in late 2007.
QV research director Jonno Ingerson said most of the main centres had seen an increase in new listings after the Rugby World Cup ended in October, with more houses expected to be coming onto the
While on the subject of the 'looney left' … just read what the Greens are suggesting to help the first home buyer:
"The government is being urged to boost the supply of affordable housing to help wean people off a state rent subsidy which could cost NZ$2.2 billion a year – almost twice as much as official predictions – by 2016.
But any fix could require a large up-front investment in state house building, and/or require action from the private and community sectors to help increase housing supply, and therefore affordability, at the lower end of the price spectrum.
The Green Party has called on the government to see whether spending on the Accommodation Supplement could be more effectively spent elsewhere, with the party touting construction of more state houses as one solution to problems of housing and rent affordability. Co-leader Meteria Turei has attacked the Accommodation Supplement in Parliament as a subsidy for landlords. Turei told interest.co.nz high house prices, with constrained supply, meant higher rents and therefore costs to the government through the rent subsidy.”
This long whinge from the Greens and other sectors can be summarised in one simple sentence:
The Government (that is, the rest of us) should pay for housing the people that are too lazy to get off their bums and house themselves as their parents and grandparents once had to.
Before the “We are the 99” mob camp at my office door let me add that Government housing is necessary for the truly poor and afflicted - but that is all.
How the government should help
If the Government really wanted to help, it would do what I have suggested previously. That is:
(1) Throw out the ill-thought-out rules limiting depreciation so that the most efficient sector - the private sector - can get on with the job.
(2) Rebate all or part of the oppressive GST imposition for first home buyers (think how that would help the building industry and create jobs)
(3) Revamp the Residential Tenancy Act which remains a huge disincentive to investors particularly the bond limitations.
(4) Encourage savers by indexing their deposits against inflation. Banks cannot lend if they cannot attract savers so would have to level the playing field some how.
Mark my words: Housing shortages and rising rents will be the next scandal on our doorsteps, and never mind what happens in Europe or the rest of the world.
The commercial market
Good quality commercial property is selling for lower and lower yields (i.e. higher an higher prices). Typically a block of solid block of shops or retail would may have sold at a 10% cap rate a few years ago, now often sell for 6% yields or less. Or put the other way: they are selling for nearly twice as much as before.
examples:
Cambridge, corner Alpha & Victoria Sts, 425m² 2-level bank building, on 653m² high profile site with off-street parking within the main shopping precinct of Cambridge, occupied by Westpac on 3-year lease from May 2010, with 2×3-year right of renewal, sold at auction for $1.3 million at a 6% yield (Blair Hutcheson)Birkenhead, 13 Birkenhead Avenue, 141m² character building on a 114m² site, shop occupied since 2007 by specialty food & beverage retailer Ashore Fine Foods, which has exercised the first of 2 3-year rights of renewal; potential to add another floor to the building, which has harbour & Auckland CBD views from the rear, sold for $510,000 at a 4.9% yield (Christina Heaven & Claire Rawkins)
(source Bob Dey report)
Other commercial properties typically sell for around 7% to 8% yields which is much better than money in the bank because of tax advantages and the prospect of capital gain.
Summary
Within the next couple of years the recession will be five years old and if history is anything to go by, it should be soon coming to an end.
Time and again, in almost all the previous booms and busts people endure the hardships for a maximum five years before becoming restless.
The ensuing public disquiet leads to political pressure which in turn forces corrective measures (mostly wrong ones) from the legislators who then must find solutions or face political ruin.
The end result is always the same. Despite the rhetoric, Governments print money and printing money eventually leads to inflation sooner or later. Just look at property prices over the last 25 years, if it’s proof you are wanting.
Real estate is all about timing. If you can get the timing right you will profit mightily. I rest my case.
---------------------------
Olly Newland
December 2011 www.ollynewland.co.nz Used with permission.
263 Comments
He who says "told you so:" last, says so loudest and longest.........
Anyone who follows Ollie Newland needs to also follow "DrHousingBubble" blog, look back in their archives, and see how we are tracking California - the spruiking, the arrogance, the greed, the dead cat bounces, the wishful thinking, the misplaced optimism.........
You are struggling mate................I have posted this SO many times before, but all ye who harp on about the US must get your facts right. The US is the only place I have ever come across where you used to be able to get a home loan on a property and if you can't afford to pay it, take the keys back the bank and say 'thanks alot, but we will leave it'. Then the bank was stuck with the property but you could walk away and not have any debt hanging round your neck - what a stupid system. Thankfully that doesn't happen elsewhere, so comparing collapses in the US market is comparing Apples with Oranges.
Did they have non recourse mortgages in Ireland or Spain?
Or Florida? (The law varies State by State in the USA).
http://www.macrobusiness.com.au/2011/11/recourse-mortgages-dont-prevent…
What actually happened in the US, was that the banks only went for those who they saw as being able to pay something back. The sub-prime mortgages were by nature, loaned to those borrowers, who were not credit worthy. As the debt crisis snowballed, then the banks couldn't cope with the influx of all the newly 'available' properties onto the market and so went to the government to bail them out. In the end, the banks were better off loaning to people who couldn't pay back the debt, as the US Federal government bailed out the banks.
What we really need to compare, is the "proportion of income required to service the mortgage". I recall an article on Ireland that claimed "we don't have sub-prime", but someone pointed out that seeing "sub-prime" in the USA really means "more than 45% of income required to service mortgage", MOST of the mortgage market in Ireland WAS "sub-prime". They just didn't call it that.
Households paying less than 45% of their income are resilient to minor financial reversals, but households paying a lot more than that are not resilient to ANYTHING. Hence the whole thing becomes a bubble with a tighter and tighter "skin" that can be popped with a lighter and lighter "prick".
NZ v USA - its more like comparing a stale turd with fresh cow pat. Both are undesirable but in both NZ and the USa the crap was dressed up to look appealing. The US had more extreme cases (sub prime) on the edges, but NZ's problem is broader and deeper ie our household debt in aggregrate is higher, which is all the worse when considering we traditionally pay higher interest rates. Our current account deficit is higher as a result. As for non recourse, Philbest has dealt to that argument, and how many struggling mortgage holders have other assets to go after anyway??NZ has neg gearing, but then the US has deductability of home loans for home owners.
.... thats not to say NZ will correct in the same way as the US, it might take another year, it might take another 10. either way, property is a very poor investment in NZ right now. Low returns at best, with massive systemic risks. i can think of lots of high yielding blue chips where I'd rather put my money.
Too much greed, not enough caring for your fellow man. Since the property booms, this class of asset is now one riddled with greed, unwilling to buckle to normal market mechanations. Spruikers and property agents and government departments are always trying to keep those prices up, but the market will always prevail, and the market says SELL. Property is being artificially propped up by low interest rates, we all know this. When everyone is doing something do something else. Innovation is what will lift us in terms of standard of living, not continually investing in property!
It's to be called Bollard's Bubble....followed by Bollard's Bust....and there's nothing like cheap easy credit to create a full blown economic crisis....way to go.
The worst bit has been the govts decision to kill off the little new building going on with a fat tax hike....all that's left now is the spending of the borrowed loot....fabulous govt....and let's not forget the landlords subsidy boosting the prices on renters beyond the ability of the low income folk to buy into home ownership.
But no worries....the latest working group of flunkies is about to report to the idiots in the Beehive why property prices are bloated....another report to stash in the cellar.
Hey, don't forget Michael Cullen's role.
Central bankers have an impossible brief once a property price bubble starts and "supply" of urban land is constrained. The OECD's reports are starting to wake up to this.
NZ, ironically, had Don Brash and Owen McShane at the RBNZ in the 1990's, who were among the first people in the whole world to "get it".
The RBNZ submission to the current Housing Affordability Inquiry, shows that the Bollard RBNZ has finally caught back up to where Brash and McShane were 15 years ago.
The property sector is being kept afloat on life support, thru historically low & ultra-stumulative interest rates. How healthy is that? Return interest rates to normalcy, & see how robust the property market is!
& Olly is touching on another factor when he points out that people love property because of our lack of a capital gains tax, a "loony left" policy according to Olly which is in fact implemented in virtually all of the OECD, including such "loony left" countries such as Australia, the US, UK, Germany, France, Japan etc etc
Which is just more artificial life support, not meriting a "told you so", luring Kiwis into non-productive property.
As for The Economist, Olly claims "How these predictions are made is anyone’s guess". Well, a simple bit of research would tell Olly that "Calculation devices employed by the Economist to put houses into the over-priced category were a price-to-income ratio and a price-to-rent ratio." D'ooh! How hard is that to find?
http://www.nzherald.co.nz/nz/news/article.cfm?c_id=1&objectid=10771182
But that would be far to clinical and fact-based for Olly, of course, who isn't into boring metrics!
Really Bernard, it discredits your site to publish these sorts of rants
Cheers to all
Interest rates may be low at the moment by NZ standards, but they are higher than in many countries where the property market has nevertheless not been as resilient as it has been in NZ. Low interest rates help, but they are not the dominant factor.
CGT is indeed implemented in a number of countries. Has it resulted in prevention of property booms? – “Not” is the answer.
Price-to-income and price-to-rent ratios have their influence, but the dominant factor influencing prices is the supply / demand.
Finally and more importantly: ALL OF THE ABOVE DOES NOT MATTER! Analysis-paralysis aside, the fact is that property investment continues to be a good way of making money and this is what the author is saying (with some added caution) in his well-written article. If you are not an investor, the article is not for you. If you are but do not want to invest in property – then don’t!
Alex 13,
Property WAS a good investment 10 years ago. it is no longer, simple as that. Why buy something with a net yield of 2-3% (pretty much any stand alone house within 10ks of Akld) when you can buy plenty of blue chips (eg NAB, CBA, TLS) with 7-10% yields that come FULLY FRANKED ie almost tax free. I'm not saying these are without risks, but neither is property, and the worse the yields, surely the greater the chance of an asset bubble existing and therefore busting??
Price versus rent makes sense as a statistic - as it indicates a return.
However the price versus income ratio seems meaningless other than to first home buyers (who are a small percentage of owners)? A house may be worth 10x income, but it is irrelevant if mortgage is less than 2x income. It may halve in price to be worth 4x income, but mortgage is still 2x income.
A more useful statistic would be house price versus outstanding mortage - is this available anywhere?
Another beaut statistic that NO-ONE produces, is "household discretionary spending" for the next 10, 20, and 30 years.
When entry to the housing ownership club requires more and more household income, future discretionary spending falls. Great for the economy, and for childhood development, huh?
Check out the graph on page 5 of this, this is the sort of thing we need.
http://www.houston.org/economic-development/joel-kotkin/pdf/KotkinAppen…
Note how the high priced cities have lower discretionary spending?
Well said , Ollie . And to take one point of the 4 you laid out for the government , GST .
... On a basic $ 200 000 house construction package , the GST component is a hefty $ 26 000 . And is a real dis-incentive to build . Purchase an existing dwelling and you get a full $ 200 000 worth of house , not just $ 174 000 .....
....... you could learn alot from Ollie , Bernard : Firsty you lay out a reasonable argument , and follow with a probability of outcomes . Secondly , when you've been proven correct , you have a well earned little gloat . And thirdly , you lay out some tangible solutions to the problems we currently experience , and to those you believe will affect us in the near future .
Ollie 1 : Bernard 0 ........ tch tch !
I am no fan of Ollie, but this time I have to concede that he is 100% correct
The bubble bursting to which he refers is very likely to happen
Right now, with such low interest rates and the prospect of a double dip recession or prolonged slump, one would be wise to reduce all debt and pay off major assets such as income generating property, plant and equipment , etc .
The storm clouds in Europe are a real warning of a near perfect strom brewing
Over the past 2 years we have had adequate warning to get prepared , and tidy up our affairs
yes - more tripe from Olly. I think we would have to wait a few years before he could say he told us so. This is purely a tax policy and interest rate driven scenario. Olly's right to some degree, after tax you might get 2% in a TD at the moment. There is no tax on property - the yields are shite and inevitably mean a loss, but the govt has your back on the loss as well via tax rebates. That said any revival will be muted by the fact that debt levels are already enormous and must go higher to feed further price rises. So the best case scenario is not that great IMHO. The worst case scenario is still a strong possibility (ie high rates, hgih unemplyment etc) but the clear aim of this govt is to inflate away losses which means to some degree the bubble will be inflated away and the losses shared amongst us all. For a saver its a choice of 2 evils, for my mind saving is still the lesser of the evils. We can only hope for world events to take over the capacity of govt to hold up the banking / property oligarchy. its a bit like having paretns who punish you for eating veggies and reward you for eating sweets, what do you choose?? Bad teeth or psycholigical trauma?
Saving paper, whats the point? Can't inflate away these bad boys;
http://www.nzmint.com/bullion/products/gold-and-silver-coins#Silver-coins
No GST either. Tax free CG yes. Good for stacking.
Here is an experiment you may want try skudiv, walk into NZ Mint and buy a silver coin, let's say a Silver Fern at $50.73. Then immediately change your mind, and decide to sell it. Since you are already at NZ Mint, might as well sell it to them, makes sense surely? NZ Mint will then offer to buy your coin, that you purchased only 10 seconds ago, for $39.34.
So you bought it for $50.73 , and 10 seconds later it's only worth $39.34
The Bid / Offer prices quoted above are from are from http://www.nzmint.com/bullion only a couple of minutes ago.
My humble opinion is that if you want trade precious metals, do it via an ETF.
Those that make the most money from a Goldrush are almost always the shovel sellers.
Olly Newland says - "(4) Encourage savers by indexing their deposits against inflation. Banks cannot lend if they cannot attract savers so would have to level the playing field some how."
I would suggest that Olly needs to do a bit more research. Brian Gaynor writing in the NZ Herald on Saturady points out that currently there is approx. $90 billion in bank term deposit accounts. So there is certainly no shortage of savers' funds. olly certainly doesn't let the facts get in the way of a good story.
Wouldn't knock it too much .. there is an element of truth in it ... but when you think it through completely it doesn't stack up ..
On 31 January 2011 I wrote ... negatively geared investing in property is a proxy for investing in "inflation" ..
indexation would work fine for savers (only) while there is inflation .. it would eliminate a lot of the "need" to invest in investment property .. but who would pay for it (?) ... then if you had a serious bout of deflation ... savers would be hammered on the downside ... and they wouldn't be too happy with that .. but the banks would love it .. it would then be moral hazard on steroids ... yes olly needs to think things through more carefully before spraying his ideas around .. be interesting if he could articulate how it would work ..
Ireland was/is a third world country. Their massive progression was not just funded by property speculators, but also by ridiculous funding from the EU. We are now seeing how good the EU are with their investments. From virtal obscurity Ireland moved from being an essetially subsistance farming nation to a cosmopoliton centre because of EU grants.
As before, read my earlier post about the US - not a good comparison.
This rubbish about well or badly maintained properties is again a bad comparison. The market predicts the value, not someone's opinion on what is well maintained. Example a run down uninhabitable property is Auckland's best area is always going to be worth more than a brand new, well built property is Auckland's worse district and will have as much chance of attaining it's true worth.
I have waited 5 years for the housing market to tank. It hasn't happened. The US crashing had little effect on the land of the long white cloud. Why sould eurpoe be any different?
The reserve bank will just have to reduce interest rates further so that all the debt junkes can be able to make ends meet.
So either wait until interest rates go up, and the housing market finally tanks, which could be -how long away - ? 5 years, 10 years? longer?
Or just get on with it, take out a small mortgage, and be able to cater for 9%+ interest rates later on down the track...
A difficult decision. But after 5 years of waiting, it's very tempting to jump...
The thing is Notch that there are always people who get in too deep. They have to sell quickly to get out. In a rising market, these people are just 'profit takers', but in a falling market, they can lose serious money.
The doom-sayers then point to these to 'prove' that the 'property bubble is bursting' but in realty, the sensible ones, just sit it out until the dip turns.
We have had high profile casualties, Terry S and the Blue Chip debacle to name a couple. It is never a bad time to buy, as long as you aren't putting yourself in a position where you will be forced to sell.
"........We have had high profile casualties......"
Understatement of the year.
Almost the entire finance company sector in NZ was toast even before anything happened to Lehmann Bros. By the way, Northern Rock in Britain went down 1 year before Lehmann's, too, indicating that there were problems there too regardless what happened in the USA.
notch : What is your intention , to buy a family home to live in , or do you seek an investment in property .....
.. if the former , a family home , then any time that you find the place of your dreams & within your means , is perfect to buy . To hell with the property cycle . It's meaningless if you're happy , and if you're comfortable with your finances .
...... if you're looking for an investment , then things get curly . Where are we in the property cycle , topping out , or resuming a bull run up ? Your guess is as good as mine . But one thing I do know , seeking heat , plunging into already hot investment sectors such as residential property and commodities such as gold is fraught with risk . Check some old charts , commodities and property can crash equally as alarmingly as the stockmarket does . Its just we've forgotten the fact , 'cos neither gold nor house prices have plunged in the last decade .
Consider: no nation in the world has SUSTAINED distorted relationships between property prices and incomes, and between property prices and GDP, for LONG. The inflated property prices are a COST to the productive aspect of the economy, making them the ultimate self-undermining mechanism. They increase workforce cost pressures, they reduce productivity, they reduce household discretionary spending.
My advice to first home buyers, is to rent until it is obvious NZ's bubble has well and truly burst. When renting is so much cheaper than buying and mortgaging, you simply are not losing at any time, even if prices inflate a bit more. The only people who can "gain" now, are speculators who sell out "at peak" - assuming "peak" is yet to be reached. This is, of course, high-risk, not low-risk anymore. Serious investors who want to hang onto the home and make rental income, should wait just as much as first home buyers.
Also consider:
1) A small mortgage at a high interest rate involves FAR smaller total pay-out over the term of the mortgage, than a large mortgage at a low interest rate.
2) When interest rates are high, inflation is also high, so incomes are rising while the principal of mortgage loans remains the same. After a few years, the mortgage principal might be 1 years income when originally it might have been 3.
3) Historically, people who bought low cost houses at a high initial interest rate, have benefited from FALLING interest rates LONG before the mortgage term was halfway through. But how much re-financing at a LOWER interest rate can current first home buyers expect to do, compared to their parents who might have bought a $30,000 home at 20% interest in the 1970's?
One of the most sickening things about all the fiscal child abuse that is now going on, is that PARENTS who enjoyed all the above luck, are pushing their own sons and daughters just as much as the banks and RE agents are; onto the Property Ponzi scheme as the “greater suckers” at the BOTTOM. Can’t ANYONE in NZ simply use a calculator any more? That goes especially for MSM journalists.
..... who is Kim Kardashian , anyway ...... is she the tart who's tossing her tits in Play-Boy magizine ?
Magizines still exist ? ...... fecking hell !
...... what does the word " sensical " mean , Mr Mandalay ?
Is " manadalay " something funny Bart Simpson would ask in one of his prank calls to Moe , at Moe's Tavern ..... " hello , I'm looking for a mandalay .... come one youse guys , find me a man da lay ! " .......
Just remember, "this time its different"
Dont be silly.......there are times when renting makes sense, like now in a ponzi scheme bubble.....
With a 100% markup over a fair price (wages to capital value of 3 to 1 is the norm, its 6 to 1 now) and a risk of a major Global Depression and severe financial loss you would have to be ignorant, crazy or incompetant to buy IMHO.
regards
Thanks, Steven, we don't disagree ALL the time...........
Jimmy Squirrell below is spot on. A minority of sensible people are doing just that - deliberately renting because it is currently so much cheaper.
There has to be SOME level of mortgage debt and burden of mortgage debt servicing beyond which it is an illusion to say that you "own" the house anyway. The BANK owns it, and you are de facto paying them extra high rentals merely for the illusion of "owning it yourself".
frazcam,
I save 60,000 per annum by renting for 550 per week a property that would cost me 1.2 mill to buy. Granted, I live in Aussie which is even worse than NZ, but the broad principle holds. Interest money, maintenance money, insurance, rates, lawyers fees, valuers, REA fees (on sale) etc etc are all dead money as well.
Also, if potential first home buyers organised and boycotted the market, they would help themselves in the long run, because it would crash earlier.
And one of the best ideas I ever heard came from Britain, where the "AudaCity" organisation is trying to get a co-op of young people together to build an "illegal settlement" on legally bought farmland, and defy the government to tear it down. Farmland is, after all, only about $4000 per acre everywhere in the world.
While I agree that renting might make more financial sense at present, buying a place is not all about $$$. I still call the house I was raised in "home" even though it's on the other side of the planet and it holds many memories for me, my sister & my parents (who built it when we were young and will probably be living in it for many more years).
Renting usually means moving on a regular basis. Said sister has been given notice to leave rental place as the landlord decided to cash in and has finally decided to take the plunge and buy; whereas buying/building can provide a place to live in long term, stability for the kids (not to mention you don't have to ask for permission to hang a frame/change the colour scheme/plant trees etc). Not sure how to put a $$$ value on this but to me, it's not insignificant.
Regarding the "fiscal child abuse", using the terms child abuse to describe a money matter seems a little over-the-top/out-of-place...
All your teaching your kids is how to be a bank slave. There is no evidence that moving house regularly effects your child's state of mind whether renting or buying, It's the moving schools that does that. Think about it Elley, the property bubble was homeowners selling time and time again( no different to renting). More detrimental will be the prospects of those kids ever owning their own "home" thanks to unwarranted capital gains based on easy credit and excessive debt.
Thanks for your concern...however we are no bank slave - sorry to disappoint. We like to keep our relationship with the banks strictly to savings accounts. In fact, I have just opened savings accounts for all 5 kids (age 3 months to 7 years) last week.
That's in addition to the savings account that we have been filling up on their behalf to help them buy their first home. We save between 50-75% of our monthly income and you can rest assured that we do not waste one opportunity to teach them about budgeting and the value of money (and how it gets earned through hard work!). Hopefully that clarifies what I'm "teaching my kids".
Even if we did have a mortgage I'd by far prefer to own than rent. We have rented in the past and I didn't particularly enjoy it. On the other hand, I tremendously enjoyed drawing the concept plans for our home and it is a pleasure to live in - it's perfect for us (just as well, since that was the whole point of us designing it).
Elley, it is concerned people like you who should be getting worried about what is being done to the opportunities for your own children.
If you get well acquainted with the facts, follow the house price data, and identify the cyclical trends, you will avoid counselling your own children to buy their own home anywhere near the TOP of a bubble.
Read what I am saying about what urban growth containment has done to the housing market in Britain, and the volatility of its cycles. When the "inflation" cycle is in force, almost no-one is going to be able to save money as fast as the prices inflate. This leads to tragically high numbers of young people encumbering themselves with mortgages for the rest of their life, to "get in before the prices rise any more".
But 10 years later, the home they bought might be worth only half in real terms, what they paid for it, and renting meanwhile would have cost less than the mortgage payments cost them.
I am pleased that your children are so young, because you will have plenty of time to think about this. We are in a new phase of property markets that no-one understands. They are all looking backwards to better, saner, more stable times and kidding themselves that an unprecedented increase in prices relative to incomes can be a new norm, instead of something that has to come down soon.
The worst irony is that Kiwis love to criticise stupid Americans for their mistakes, but then they themselves make the same mistake AFTER they've got the negative example to learn from?
Hi Phil, thanks for your reply. Re-"you will avoid counselling your own children to buy their own home anywhere near the TOP of a bubble.", wWe bought our first home at the bottom of the bubble not at the top (Jan 1st 2003 to be precise).
Later, staying in a 3 bedroom/1 bath house with 3 kids and another due soon (at the time) wasn't an option we were keen on regardless of where in the house cycle we were. So we started looking while prices were increasing but got sick of only having the choice between overpriced sections or old, poorly built/uninsulater overpriced houses.
The thing is, instead of lamenting on the increasing prices, waiting for the bubble to burst (who knows how long for) and analysing over and over again the monthly price fluctuations, we, hmmm, took the bull by the horns. Bought a lifestyle block in the country for much less than a tiny section in the city, built a house to suit our lifestyle and left 2 good jobs behind to start our own software consultancy business. So far it's been working perfectly. I am not in any way advocating to buy at the top of a bubble, but you've got to do what's right for your family at the time and sometimes it does pay to take risks...
Also, regarding "But 10 years later, the home they bought might be worth only half in real terms, what they paid for it" - I couldn't care less how much our house will be worth in 40 years time. All I'm asking of it is to provide an enjoyable, stable, secure setting to raise our kids.
It's like saying in 10 (or 20) years' time someone's new car will be worthless. Sure but hey, if it did do its job during those years, where's the problem ;) Actually I think a car loses half its value the minute one drives it out of the car dealer's shop (?). And yet people still do buy them, don't they? Even though most could go for a cheaper option, like bicycle or public transport. There are many things that come into the decision-making process, and money is only one of them.
But if you could RENT a car considerably cheaper meanwhile, save money, and buy your own car when the prices of cars for purchase outright came back to a level comparable with renting, why would you not be just as well served with the use of a car meanwhile?
What Jimmy Squirrell says below is absolutely right, rents USED to be close to the cost of "owning". But one of the features of a "bubble", is that rents do not increase anywhere near as much as prices. This is something everyone needs to be aware of. One of the whole points in favour of owning, in past decades, was that it really did not need to cost you much more than renting. Now it costs you heaps more.
I am very interested that you bought a lifestyle block in the country. This phenomenon has increased because of exactly what you say - the unfair pricing of appallingly bad homes in cities. This is because the LAND is inflated in price. YOUR land is NOT inflated in price. Hence your many acres cost less than one eigth of an acre INSIDE the urban growth boundary.
Do the regulations allow you to build one single more house on your lifestyle block, for one of your children and their family to live in one day?
IF the regulations did NOT prevent people from developing clusters of houses "anywhere they like", we would NOT have a housing affordability problem at all, or a bubble that is ruining the economy. It would not need many people to actually do this; the mere fact that the option existed, would stop the racket where fringe land owners expect their farm which is worth $4000 per acre as a farm, to sell for hundreds of thousands of dollars an acre.
The mere fact that people can buy bread at a fair price from competing producers of it, does not lead to "over consumption" of it. If the government wanted to restrict over consumption of bread by strictly licensing a small number of bakers of fixed quantities of bread, would it make sense, if the prices they charged rose and rose and rose to "what people are prepared to pay for bread"; to argue the following:
"but we can't let just ANYONE enter the bread production market to bring prices down. This would lead to over-consumption, and in any case, the prices won't come down, the prices are this high because "that is what people are prepared to pay for bread, not because there is any constraint on supply""
I do get your point that it makes financial sense for many people to rent at present (not for mortgage-free people though). However if you refer to my first post above, for me owning a family home presents many other advantages - providing stability for the kids, a place they can still call home when they are adults, emotional attachment/roots etc. Although money does come into the equation, the decision to buy/build goes far, far beyond finances.
Re-our land, you are quite right - at $5/m2, it is not over-inflated in price and we have beautiful views to the mountains as a bonus instead of a view into our neighboor's bathroom. No, we can not subdivide at present and nor would we want to. We have not the slightest desire to be surrounded by townhouses and the shopping malls that would come with them, and lose the charm and tranquillity of the area. It is likely that the land will become subdividable in the future though as we are just 3kms from the village. To be honest, even if we could subdivide I am not convinced that our kids would want to live next door - I reckon our days of being their idols are counted :) I believe the regulations do allow for another house to be built without subdividing so long as it's less than 30m from existing house (provision for "granny flat' I guess).
I agree with you re-inflated house/land prices in cities. We bought our first home, a nice enough standard 3beds/1bath which was more than enough for the 2 of us at the time, for 176K. We intended to build a few years later but when "later" came, our eyes almost popped out seeing the price increases and lack of available sections while we pored over the Property Press and Realtor every week. Hence the decision that we made eventually, moving away from Chch (quite pleased about that in light of the events of the past 15 months).
We were very lucky that our timing meant we bought when it was quite easy to do so, and that coming from overseas also probably meant a higher ability to buy (no student loan + significant savings from a few years in the workforce on much higher salaries than NZ salaries). It must be utterly depressing to be a young couple on an average wage these days. As I said, we don't care much about the future value of our property so seeing its value halved wouldn't bother us. We don't control house prices though, so we do what we can to make sure that at least our kids won't be mortgage slaves (saving on their behalf to make up for the high prices). I realise that not every parent is able or willing to do this though, and it'd be good if they didn't have to in the first place. But the situation being what it is, I'd rather not count on house/land prices crashing and do what we are able to do to help at least our family in the meantime...
Phil,
NZers have already been making the same ppty mistakes as americans, just bigger mistakes and for longer. There is no point showing the sheeple logic - the vested interest spin is what they believe until even the VIs can't pretend things are ok.
ps - agree with your fiscal child abuse comments. My parents are the same, dont seem to be able to understand that a 2.5 gross yield (1.5% net) is not good value. Dont seem to understand that its not like their day when you swapped rent for a mortgage roughly the same size. Always back to the same irrational arguments ('you cant lose', 'we did well', blah blah) - i even showed them a spreadhsheet showing I woudl be out of pocket by 60gs a year if I bought the nice house we rent. I'd rather put that money away - low int rates and tax are a killer, but the lesser of 2 evils by a long stretch.
Get your facts straight PhilBest.
In the early 70s housing corp loans were available to first time buyers at about 3%. Banks rates were 7 or 8% by the end of the 70s rates were knocking 12%.
20% rates weren't until the mid late 80s. At that time the median house was about $90k (ie effectively costing $18k a year) the average hourly income was $11.
So interest only cost 78% of income.
Today the median is about $360k. Interest rates about 6% (effectively costing $21,600 PA). The average hourly income is $26. Interest only costs 39.9% of income today! (Virtually half 1987!)
That leaves a surplus (over the 1987 interest cost as a proportion of income) of $20,500PA!!
You are a fool to think high interest rates help anything. A house cost what it costs to build. Land values (apart from Auckland Central) are not particularly and only make less than a third of the total new home cost in most parts of the country. If new house prices can't fall, then higher interest rates only make everything more unaffordable.
Of course high interest rates only help those with assets and no debt anyway (as inflation would need to be off the chart if interest rates were 20%), which hardly helps the affordability situation.
Low interest rates are needed so people spend money and the economy grinds on. High interest rates rewards the lazy who hoard money rather than investing in productive activities that generate jobs and wealth for the nation.
Honestly why would an average person bother getting up in the morning if interest rates in the bank were 20%? When they could put a mere $250,000 in the bank and earn close to the average income!
I did not say that high interest rates are good, I said that it is misguided of people who allege that they had it tougher in their day "because of high interest rates".
Do you have data bases to back up your claimed figures?
I am going by memory from times I lived through myself. Maybe my dates are a little bit out one way or the other. But I stand by the point I am making, having been around and actually doing these sums at the time.
IF somebody in the late 1980's, which is when you say it was (and I say it was earlier than that), did buy their house with a mortgage of 20% interest, around 5 years later their income would have doubled due to the very high inflation that existed at the time, and their mortgage payment outgoings would have fallen to half, as a proportion of their income.
OR, the interest rate would have fallen.
A combination of both things, is in fact what happened. The home buyer ended up with a much higher income a few years later relative to the mortgage denominated in dollars of a value that existed at the time he bought, AND a much lower interest rate.
Can buyers today expect things to move IN THEIR FAVOUR in the future, to this extent?
AND, even at the high interest rates, the lower house price will work out to a lower total amount paid out over a lifetime, than the higher price at a lower rate of interest, even if interest rates and inflation meanwhile do not benefit the former or penalise the latter.
By the way, even extremely low subsidised interest does not cause increases in house prices IF "supply" is attended to. The combination of "GI Bill" and "Levittowns" in the USA following WW2, meant that young people could pay off a new house in 5 years or even less. Not that they bothered, if they were getting subsidised interest.
I don't know how many older people now are still getting their locked-in 3% interest rate on borrowed money (or whatever it was); I remember people of my parents generation, when interest rates were 20%, still having their original 3% loan without bothering to pay off principal at any time, AND "investments" that were netting them around 20%.
Philbest your memory fails you.
Interest rates were only ever near (or above) the 20% level in the mid late 80s. Remember United Building Society days??
The data is freely available on the Reserve Bank's website search the statistics page. "B2" for the historic mortgage lending rates. House prices, hourly wages etc can also be found there.
In 1987 mortgage rates were 20%+ and wages $11per hour. By 1992 wages had only increased by a third to about $14.70 an hour. So you assumptions above about high wage inflation too aren't quite accurate! In fact the effective mortgage rate was 15.8%PA for the five years from Jan 87 to Dec 91. The average wage increase 5.9%PA!!
You've been listening to too much garbage from Hugh P. The Levitt's were building 80m2 2 bed identical boxes miles from towns. Of course they were cheap!
That was an extraordinary era of economic distortions (years of Muldoonism, wage freezes, price freezes, etc) unwinding after deregulation.
I still say my main point is valid - people who bought a house even under those conditions, came down on their feet long before the mortgage was halfway through its term, thanks to rising incomes relative to their mortgage, and falling interest rates. Keep doing your analysis past 1991/1992 and see what it looks like. I am saying that the young now, are unlikely to have the same luck.
Regard my original rough, dim mists of memory figures as an illustration of a principle, by way of exaggeration, not data from a database.
The fact that the Leavitts were allowed to do that, kept a lid on the prices to which raw land was allowed to escalate on all property within the region.
It is funny how advocates of urban growth containment talk about "improving choice" when actually what they are all about is denying "choice" of which they disapprove.
Don't follow the advice of the pro-renting lobby on this site. They are already $50,000 behind those that bought a house in 2009. And slipping .... then moving again - due to to the Landlord's sale of their home.... and not enjoying the lowest interest rates in 28 years ...
MortgageBelt
I'm curious. Do you believe interest rates will stay low forever.
Do you think it is sensible to plan your personal finances based on low interest rates forever.
Because that is what many home buyers are doing, and what many home buyers are assuming when they assess the value of a house now...
cheers
Bernard
Your answer is somewhere in here Bernard...
Hi Bernard,
Probably interest rates will not remain this low for more than another 2 years - hence my comment that for the last 3 years owners have been able to repay their mortgages quicker at 5.6 rather than at 7%.
Also you can buy at good value currently & last 2 years - ie get more house for your $$.
So, for a middle band home bought without stretching fiancially is better than renting. Slowly but surely over time the beefits of owning beat renting.
Also paying off a mortgage is forced saving - that renters may not otherwise save - renters get tto much discretionary spending. I see so many younger colleagues with 2 cars on HP, Sky, entertaining etc ... who could have been paying off a house.
Also: I have a couple of times after selling a house been keen to rent for a season - but: a) it's hard to find a comfortable home in the area you want for a family, and rent same as mortg repyments.
Other area renters miss out on: Over time a home-owner can make a series of small inexpensive improvements, weekend work, night painting etc which build tax-free equity. Renters cannot 'improve their lot' in this respect.
Yes, agree - people should not over stretch. Keep your mortgage at levels consistent with 7 - 8% rates.
the sad irony Bernard is that the higher the debt levels the more likely the govt / RBNZ are going to try to force low rates regardless of the inflation outcome. Hell, they are doing it right now. Look at UK - Mervyn King had the gall to say "sorry savers, inflation is over 4%, but we are gonig to push OCR to near zero regardless to bail out the too big to fail". You said it yourself the other day, is housing our too big to fail??? I really hope any future bail outs fail, but there is a lot of money the govt can steal from existing savers / taxpayers and lots of immigrants they can bring in before the fuel runs out. I hope they fail, but they havent failed up to this point.
$50,000 behind......on what criteria?
If they bought a home in 2009 and sold it today for $50,000 more? Is that what you are saying?
If someone bought their first home in 2009 and intend to live in that (until they ever move) then they are definitely NOT "$50,000 ahead". NO-ONE who has bought their first home since about 2004, is financially "ahead" of a "renter". The only ones who ARE "ahead" are speculators who sell at a profit before the market tanks for good. Anyone who SOLD after about 2004, ANY property they bought before about 2004, has made money. The biggest returns occurred between 2004 and 2007. People who sold out before 2007 to be safe, have actually done very well, even if they could have hung in for a few more percent.
This reminds me of Mount Everest attempts. I noticed in a book on these, that a large proportion of those who have died on Mt Everest, have died near the summit, after refusing to turn back when they should have at somewhere past the three-quarters mark.
Renters $50,000 behind after 3 years.
Difference between 5.6% interest and 7% average = 1.4%
1.4% on $300,000 mortgage over 3 years = $12,600
These are savings locked in - & lost forever by renters.
Smart buying at suppressed prices by urgent sellers in 2009/2010:
House improvements that sellers could not get in sale price = $20,000
Wasted discretionary 'savings' that renters wasted on consumption rather than the compulsory mortgage repayments = $10,000 (human nature when has disposable $$)
Delayed costs on increased Lawyers fees, bank est fees, moving costs increased, desirable suburb premiums, scarcity of suitable houses: = $7400
All scientifically calculated at $50,000 loss! .....
Plus you are 3 years closer to retirement - you need a debt-free house in retirement .... you have delayed the inevitable ....
Plus how can you put a price on boring landscaping, 5ft fences, pink walls, barking dogs, annoying landlords/neighbours, wasted bond in limbo, living in area not so good for schools, not close to work so take car instead of bike, - when you buy you can control these things more so and have greater choice....
To be honest Philbest, like for like houses in good average suburbs could easily cost $50,000 more than they did at the bottom of the market 2 years ago.
Doing well in property isn't all about timing the "macro" events. Doing well in property is about finding the right property for you at the right point in time - "macro" events need to be considered but are far from the only consideration.
Sure, what I am objecting to is broad assertions and recommendations that allege "certainty" and "unable to fail" features that are not true. Wise old property investors would probably agree with both you and me. 10% capital gain per year, for long, is absurd to build into a business model - yet many people, including Hotchin and Serepisos types, literally did.
We do have a tax on property investment. If you trade properties for a living you will have to pay tax on any profit. Likewise, share trading doesn't have an exact CGT. if you buy a share at 50 cents and sell it for $1.00, in effect the gain is tax free. However, the Labour government introduced the FIF regime that catches most of these people out - with exclusions attached of course.
The IRD permit residential property investments if you can prove that you are not speculating. There is no actual number of rentals you can own before you fall into the 'speculation' bracket.
If you do fall into that bracket, then you pay tax on any profits.
This also applies to the 'mum and dad' investors who owns one rental between them. If they make profit on the annual rent less expenses, then they pay tax on it. However, generally one or two domestic rentals don't constitute a business, just as much as a $500,000 Term Deposit isn't a business either, just as much as owning a share portfolio isn't a business either - however the latter may fall under the FIF rules.
CGT on property in NZ is a joke. The test is whether you purchase with an intention for resale (a fancy term for buying for capital gains and not income). Proving "intent" is a pretty hard thing to do, and the IRD lacks balls to make decent test cases. So the better thing is to remove ambiguity and introduce a blanket CGT(family home included). I am happy to have CGT on shares as well, although there is a case to exempt NZ shares to encourage investment. Its all about making tax EVEN, its ridiculous to tax income fully and not capital. That favours the wealthy who tend to have more of their money tied up in Capital and inevtiably lead to over investment in property.
But if you follow the history of the Japanese property bubble that burst in the early 1990's, you will find that a CGT did NOTHING to stop this. The government raised and raised and raised the rate, and it never did anything to slow the bubble down.
Furthermore, there is no correlation in historical international bubble market volatility, with CGT rates. The correlation is almost all with the elasticity of "supply" of land for urban development.
PhilBest, I dont pretend to be an expert on Japan, but common sense tells you that people are attracted to invest in bubbles based on expected gains. Gains are bigger if you dont have to pay tax thus the incentive is increased. If CGT is introduced, the additional tax can be used to lower marginal tax rates thus increasing incentive to invest for yields (which currently get fully taxed DESPITE every non vested interest body crying out for change). A CGT would also help to deflate a bubble more quickly, as those who bought at the peak would be able to sell and realise a loss, reducing their cost. To some degree this smooths out the inequalities betweent hose who enjoyed the fruits of the bubble and those who got burnt.
I agree a CGT would not prevent bubbles, but it might reduce magnitude (eg USA bubble was never as bad as ours) - and remember that Aus HALVED CGT on assets held for > 1 year, many see this as a contributer to their bubble due to relative advantage of ppty v savings (I get crucified on my savings interest, 46% for Pete's sake).
I think the introduction of tax on interest was a very bad idea. Same with the introduction of company tax (I mean on undistributed profits - taxing dividends is fine - this is someone's income). Some proportion of the mess the world economy is in now, can be sheeted home to these 2 things.
Property investors selling out near a peak do very well.
Property investors who BOUGHT NEAR a peak, and "held", will be "behind" for decades in any economy with housing cycles as volatile as the British one, which I say is a classic illustration of an economy distorted by strict urban growth constraints (since 1947 in their case).
Again, talking about what you don't understand - no comparison to UK investment property market. Here, you can borrow 100% of mortgage for residential investment property, if you have enough equity in your home own. Any mortgage in the UK on a residential rental has to come with a 33% deposit no matter how much equity you have in your home.
I suggest that generally, UK residential rental investors are doing quite well at the moment. Mortgages at 3% and with only owing 67% on the first mortgage, then rents far outweigh the expenses. The cost of repairs are much less in the UK too, as the market is bigger and cheaper products and labour.
The NZ rental market is nothing like the UK. Less people rent in the UK compared to the number who own, per capita. Renting is not as popular as it is here, but the opportunities for a residential landlord are for a more sustained income.
Plus the CGT in the UK makes no difference to the ongoing property prices or any in the past - they also have stamp duty.
And "less people rent in the UK"??????????
On what planet??????
Perhaps you EXCLUDE the ONE THIRD of the population in the UK who live in "PUBLIC" housing, Frazcam? Perhaps "private" rentals are indeed "low" as a percentage?
It was widely reported in the media that David Cameron said recently that the average age of a first home buyer in the UK is 39 years.
So whatever is driving you, it sure isn't concern for intergenerational equity.
OK, maybe the figure fluctuates. But it was you who said in the first place that private rentals are not a high proportion of the total, and my response was that this did not mean that the balance was all private home ownership, because public housing is very significant in Britain.
Bear in mind, too, that a lot of that "private home ownership" in Britain, is of very poky, dilapidated accomodation that should have been bulldozed and replaced long ago. If you call this "the British Dream".........
I should also point out that many "home owning" households may consist of several "children" in their 20's and 30's still at home with their parents; also they may consist of 5 Pakistani families under the one roof.
"Three Cheers for Urban Sprawl" by Martin Durkin.
http://www.martindurkin.com/blogs/three-cheers-urban-sprawl
"....As a result of State planning restrictions, Britons are stuffed into towns and cities like battery-farmed chickens. We are among the most densely packed people in the world.......
"......to make matters much worse for the Brits, our urban areas constitute a mere 9 percent of total land use. That’s right - 90 percent of the people crammed into 9 percent of Britain. Compare that to the 13 percent of land devoted to ‘Green Belt’........
".......The planning system, by limiting the amount of land available to build on, has created an artificial shortage of living space, forcing up the prices of houses and flats to such astronomical heights that many young couples can only dream of affording one. The less affluent dare not get a job for fear of losing housing benefit. There are families in London where the children sleep three and four to a room – a tiny room in a dingy flat. Children who have outgrown their cots are forced to stay in them, sleeping with their legs bent (I have direct knowledge of such cases). It is impossible to document the sheer bloody misery caused by the planning system - countless examples of diminished lives. Even well paid professional couples in London now struggle to afford dark, crumbling Victorian houses, in rough parts of town. Houses built for costermongers and chimney sweeps in the late 19th Century. But it goes far beyond property prices. Soaring urban land values have a knock-on effect, raising the cost of everything, from cinema tickets to shoes. The land and property shortage (artificially created remember) has pushed all prices up, reducing our quality of lives in a myriad of unseen ways. Meanwhile, the few remaining patches of green in our towns and cities are fast shrinking and disappearing. Gardens are designated ‘brown-field’ sites to allow more flats and houses to be built. Houses are horribly divided into tiny disfigured flats. School fields, parks and squares are shrinking and disappearing at an alarming rate, extra blocks of flats spring up everywhere, like weeds in the cracks. The shocking effect of Green Belts has been to empty our urban areas of green spaces, and yet, as State planners know fine well, these are the most cherished bits of green in Britain, giving far more people, far more pleasure than ‘the countryside’ (to which so few of us go). Worryingly, the London Planning Advisory Committee has decided that London has room for 570,000 extra homes.......
"..........As the private housing market was strangled, it was decided that instead the State would build inner-city accommodation for the masses. They were to be confined to urban areas, forced to live in high densities in high-rise blocks. Rather than chose their own home in a free market, ordinary people had to apply to the State to be housed and would be allocated one (a very nasty State produced home). By the 1970s around a third of the British population lived in State housing..........."
Frazcam,
I do agree, however, that ".....the opportunities for a residential landlord are for a more sustained income....." in Britain. This is because, as I have explained before on this site and others, the "first phase" of property price volatility after enacting anti-sprawl policies, is different to the later phases.
What has happened in Britain, is that each phase has become more volatile in "price" response, while the "supply" response has got weaker.
The actual SHORTAGE of homes has steadily increased. The "supply" response at the PEAK of each phase falls further and further short of the required ANNUAL construction rate to keep up with natural increase and stock replacement. The "supply" OFF-peak is "next to nothing".
The length of permission processes is so long, that developers have almost NO "window of opportunity" to make money from a demand shock. By the time they have permission, the "bust" has started.
Development has become a high-risk business, the number of players has decreased, and employment in "construction" steadily decreased for decades. The small "spec" builder has virtually disappeared. Larger players concentrate on cookie cutter style developments - there is little scope for "design and build". Most of the profit is in land value uplift and gaming the system skilfully, and actually building stuff is just a "necessary evil" sideline.
The housing stock has steadily got older and its condition poorer. Overcrowding-related health issues have increased. The amount of floor space per person has fallen, dropping to "lowest in the OECD" - lower even than Japan.
Because the later phases of a volatile supply-restricted housing market involve relentless and increasing actual shortages of housing, there is less disconnect between rental rates and house prices. So yes, landlords do OK in Britain, but it is probably harder to become one than what it is in the first phase of a supply-restriction-related market distortion.
Frazcam
"Here, you can borrow 100% of mortgage for residential investment property, if you have enough equity in your home own."
Do you think this is a good idea?
Would you be happy to be either a bank shareholder or term depositer in a bank that does this?
cheers
Bernard
I'm not saying that 100% mortgage is a good or bad thing. The point I was making is that with the required equity in your home, you have the ability to borrow 100% for an investment property in NZ.
Some people use that facility to good effect, some don't.
As regards to the second question, if you buy shares in any company, you are at the mercy of the board. If their business plan promoted the idea of lending to investors with sufficient equity, then as long as the dividend pay out was good and I felt the company was doing well, I would be happy with that.
If I invest in a TD, then I expect a lower return as the risk is lower.
Common sense really.
Ole' Olly you horny old bull...! I've been dodging your charge for some time now....but, I grow weary of the battle........should I go buy something..? ummmmmnnnnnahhh dunno....not because the market indicators are not there,....... but because I don't believe you can or should give iron clad "I told you so's " that carry a disclaimer.
A disclaimer so encompassing as to contradict your prophesy.
'Bubble bursting more likely than ever'
However I believe there is a risk of some considerable danger so I give this warning:
If we do have another boom - and the chances of that are increasing daily - encouraged by continuing low interest rates, plus earthquake rebuilding, leaky home renovation etc then the risk of the bubble bursting followed by a nasty crash seems far more likely than ever before.
So my advice is to tread carefully.
By all means enjoy any such boom. Do all the profitable deals you can find. Make money with both hands but be ready to press the ‘dump button’ at any time. In other words do not get involved in long-term speculative projects.
In my view the next boom (when it happens) will be shorter, sharper and could have a very nasty bite at the end.
Perhaps a boiled down version of this might lead some if not many to re-evaluate your appraisal of where the markets at.
Your own disclaimer suggests ....do it if you can afford it....don't leverage into it...don't become exposed to any sudden market shocks....etc...etc...
Precisely. That's been his MO all along. Throw out a variety of predictions to cover every eventuality (making sure that the articles are long, incoherent, and confused, just to muddy the waters further), then make a big production of gloating over the hits. Same way con-artists of the 'psychic' subset do it.
as I posted Ngakonui G ....if you buy, don't leverage to a point of exposure.
His (Olly's) whole boom scenario is fraught with trap doors as he himself points out .
So take out of that ....CAUTION is the key to the front door of that new renter/house/bach/ and when the increased cost of borrowing finaly lands with a bang....so will exposed leveragers,.
Be very careful - Olly certainly is. He doesn't say house prices are rising - rather:
Once again there are headlines that suggest the housing market is stirring and that prices are rising.
I would suggest you look at the data from REINZ's housing price index. That index has had input from the RBNZ (its index still neds a lot of work), and is by strata. Note the distortion of published REINZ median prices by high sales of strata 9 and 10 properties, and low sales of strata 1 and 2 properties. Note that this month's 'record' median price is higher than this months's median price for strata 6. The same was true last month.
Greater sales activity at the top end of the market is distorting median prices. Property prices are up, or down, depending on where in NZ and what housing strata is being referenced.
Here is something that would help landlords get a better return on their investment. Strong tenancy laws.
I want to be a long term renter, I'd like to be able to rent a house with some long term security so that I can invest my own time and money into it. I'm prepared to forego potential capital gains in order to avoid property risks.
In the UK if you have been in a rental for over 2 years, and are in good standing, i.e pay the bills and don't wreck the place then you cannot just be chucked out of your house.
Tenants in NZ have almost no rights.
It may sound counter intuitive but security of tenure would, i think, raise the overall standard of renters from 'those who can't afford a house' to 'those who would rather not take out a lifelong loan'.
Bernard - another question for your researchers. is there any evidence from around the world for or against the idea that strong tenancy laws make for a healthy rental market?
Andrew
from my perspective, the major item missing in NZ is security of tenure ie it is very difficult to get a lease for > 1 year. We should introduce 5 year, 10 year leases as defaults, with the rights of the tenant to rescind with 3 months notice (no right for landlord to rescind unless he can prove property damage). This will encourage landlords who are there for the long term, not the short term.
Hi Andrew,
The RTA here is pretty strict. I could bore you for hours about how the RTA and the judicial system is set up for tenants against the landlords. It gives provision for anything going to Tribunal to interpreted by the Adjudicator in any way he or she sees fit. Not based on any fact. I know that the property forum websites will be pro landlord, but just look at some of the horror stories on there.
Hey Olly
By all means enjoy any such boom. Do all the profitable deals you can find. Make money with both hands but be ready to press the ‘dump button’ at any time. In other words do not get involved in long-term speculative projects.
Dump button? Oh yeah, you mean that button that shafts a fellow kiwi who's not as clever as you.
You're a class act, Olly. Merry Christmas, mate.
Beautifully put Haggis
For every winner there has to be...................
Still buggered if Iknow why these property threads get so much traction ,if only to confirm we are a nation of people buying and selling properties to each other ...foisting them on to the coming generations at grossly inflated values through fear.....of.......( )
A little ironic at times...clean money from a dirty concept.
Pretty easy answer Count. It is just like any scam, where they keep stringing you along in the hope your will get your original investment back. $5000 initially easily mounts up to tens or even hundreds of thousands fed to the scammer little bit at a time.
Everyone is looking for reassurance they haven't been scammed, but alas none is really forthcoming.
Christ-ove
the reason why so many of the " sheeple" mill around on here when Darth Hickey puts up some real estate porn is because none of them actually know what property is going to do, now or ever...they trawl through these posts speculating and postulating ( and masturbating p/ly) hoping to find evidence of a new property Messiah who can give them the magic sentence " now is the perfect time to buy a house".
but, of course, no self respecting Messiah can ever do that...because even they don't know !!!
i rented for the last 6 years by the beach in a near new townhouse just north of AK using the interest from my previous house to pay the rent.
i then looked at the diminishing returns i was getting from my cash deposits ( you're an unsecured creditor to a bank and they CAN freeze your deposit) and the looming financial storm clouds all over the world and bought a magnificent home ( emphasise HOME ) for 145K BELOW Gv from a stressed buyer.
i now own a tangible item that can't be taken away from me as it's freehold...it's wireless alarmed so i can lock and leave anytime and it has views forever.
the moral in the story is buy if you like the place as a HOME, don't over borrow if you can't freehold and get on with your life....irregardless whether the market crashes and my home drops 500K i'd still be buying and selling on the same dropped market if i ever sold so the odds would balance out...get on with your life..the messiah ( just like old wolly) ain't coming...not even for christmas
No one has mentioned immigration. It is a factor that doesn't figure (officially) in relation to house prices, yet John Banks says that Auckland is predicted to grow by another 1 million people and that this represents a "great oppurtunity". With Harcourts showcasing $800m of NZ property (that we know of) how could people not believe that the government will support property investors and developers over it's less well off citizens.
www.interest.co.nz/kiwisaver/52140/migration-policy-linked-inflated-hou…
such predictions of Auckland's population growth raise my ire. They are based to a large extent on the forward projection of past trends. Flawed, really flawed.
Where are all the jobs going to come from to attract such large increases in population? Where is the housing going to come from when the economics of housing development are so broken? People won't come en masse if not enough houses are being built. Simple.
The relatively rapid population growth of Auckland of the last 20-30 years has been based on some fundamental factors that will not apply in the next 20-30 years:
- large Pacific Island immigration and then high birth rates
- Baby boomer consumption peaking
- large immigration based on historic peaking in economic growth, as well as historic relative affordability of Auckland housing (until about 2005).
- plenty of capacity for both infill and greenfield development
etc etc
Forget about an extra million, Auckland will be lucky to get an extra 300,000
Forgt
I think John Key did well for national because he was trusted and trusted to not allow a situation to continue where property is favoured so fat pigs can wallow in it.
You can buy one property, get it revalued, use the equity to buy another property and then buy another and another. “And you do it all with OPM. Other people’s money. OPM. It’s like being high on drugs!” What’s more, the wonder of depreciation claims on the building and contents means “the government subsidises your investment! It’s delightful!”
http://www.listener.co.nz/uncategorized/house-of-the-rising-sum/
Olly seems to be learning in his old age a reasonably balanced and realistic prospective from somebody so bullish on housing. If somehow this market defies reality for long and gathers steam the consequences for NZ Inc are dire.
If external events unravel quickly there will be no such thing as a dump button however property is just not that liquid.
Problem is ppl like Olly are to busy looking upwards, as they walk along and banking their profits and not looking down where their feet are.....there will be a coyote moment...
I was reading up on the stock crash of 1929.............
When ppl realise there is going to be a long and nasty fall, no one will want to buy at any price....those that do want to buy will demand huge discounts making the drop self-fulfilling........
regards
Steven. Completely wrong.
People WANT nice houses (just look at the number of comments on this thread!).
People DON'T NEED stocks.
A company stock can easily have no value. A property always has an intrinsic value (if it's insured!).
Considering in most parts of the country (particularly ChCh) most property is well below replacement cost, the only way to get a nice house is either to buy an existing one at current prices or pay more to get a brand new one. And as the demand for nice houses isn't declining then neither are the prices.
Dreamers thinking house prices will halve or even drop 15% are sadly mistaken. Sectors of the market will fall (as they always do, apartments, dud locations, leaky buildings etc) but overall good property won't fall.
Oh Ollie you good thing !
Glad to hear you are putting up the cucumber sandwiches for high tea on this one !
You are a bankers best friend.... we love you Ollie
Keep pumping the market and get those plebeians to borrow more and more !
The bank profits, directors fees and return to prime shareholders funds just makes my mouth water....haw haw
Like how you included a "disclaimer", a wise legal move ol' boy. This makes the punters more comfortable with what you are saying, gives it more "credit", as they read it from their fake mahogany desks at some crappy office, located deep in the suburbs..... taste, what taste !!
We love the returns my good self and the old boys make, this end of the earth, why the populace are as gullible as sheep. I feel like bursting into song .... "Advance Australia Fair.... or that should be "Advance Australia banking" !! haw haw haw .....
Anyway must fly ..... back to the "hub", Manhattan awaits and more deals to "fleece the sheep" ! .... pardon the pun :)
toodle pip
Charles ESQ.
Pop the Dom on ice , Charlie , old chap ..... our flannelled fools have just wupped the Ozzie oinks ! ....... Haw haw , jolly good show . Well played men .....
.... keeps the plebian punters from focusing on the really important things in life , 'like making absolute bucket loads of dosh ....
Let them buy houses instead !
..... keep up the good " work " old bean ; Pip Pip
The Gummster
Ha, it makes me laugh to see people describing the NZ property market as "25%" overvalued.
Screw that, you could knock 50% off most of the damp, mouldy, noisy, non-insulated old piles of rubbish on the market at the moment and they'd still be over-valued...
I went to a friends apartment the other weekend - 2 bedroom apartment near Herne Bay. Very pleasant but nothing mega-flash, with a basic kitchen and bathroom. NZ$900K.
Un. Believable.
I have been trying for years, to find an explanation for the world-leading "productivity" of the US economy that explains why the US "recoups" the apparent "disadvantage" of low density urban form in its cities. 1 acres and larger are common for section sizes, not just quarter acre. LA is an exception.
This is because the RAW cost of land when "planning gain" is minimised, is well under $10,000 per acre on average. This is why 1 acre sections in US fringe developments are $35,000 and half acre ones $30,000 (most of the cost is the "cost of development" and a modest profit). But in LA and Portland and Britain and NZ and Australia and Ireland, the raw land is more like $1,600,000 per acre, most of which is "planning gain". Hence an eighth of an acre is like $230,000 and a quarter acre $430,000.
But I simply cannot find any conclusive study that proves the low density to REDUCE "productivity", and I am concluding that the low cost of land and the light restrictions on land use and development, MORE than compensate for the still minimal effect of low density on, say, commuting times.
The fact that so many people in these cities in the USA still drive gas guzzling vehicles, is a factor of their very substantial "discretionary incomes" compared to people unlucky enough to live in inflated-land-price cities. If you "control" for this, then US energy use is not meaningfully "less efficient" than that in high density cities with similar income levels. The number of people without jobs also has an effect (Europe has for years had more of these than the USA) and the number of 2-earner households (The USA has for years had more of these than Europe - and of course a 2 earner household cannot locate as ideally to 2 jobs as a 1 earner household can locate to 1 job).
Urban planning that forces housing costs up at the same time as reducing space per person, only "reduces consumption" of anything by de facto taxing people higher and leaving them with less money to spend. The tax is not paid to the government, but nevertheless it is a straight out "taking" - people are paying large sums of money for "nothing". The amounts of "planning gain" and incumbent property owner/investor capital gain "paid into" by the young, COULD have bought a heck of a lot of infrastructure and "green" energy and capital improvements. But had it been framed in public as a tax on the young for these purposes, there would have been an electoral revolt - even the older generations would have been disgusted at the rip-off of the young that was involved. But the young have PAID anyway, for "nothing", and there is barely a peep of protest.
All for the sake of providing a few farmers on the urban fringes a lotto win before they retire. Even the banks don't score as handsomely out of this racket.
The fact, observable everywhere in the world where there are urban growth containment policies, is that the escalation of urban land prices under this racket, is always greater than the ability of people to "trade off" space to keep within what they can afford.
The few remaining undistorted markets in the world, have a LOWER median multiple house price AND a far larger average amount of space per person. A one-eighth of an acre section in NZ or Britain, costs literally several times as much as a 1 acre section in many US cities (regardless of pre-or-post-crash conditions. The US cities without urban land rackets had no price bubble).
The result of fringe homes being $150,000 houses on $250,000 sections instead of $150,000 houses on $50,000 sections; is that a decent apartment near the CBD is $1,000,000 (almost all of which represents gold-plated land value) instead of under $200,000 as it is in the undistorted market.
The biggest irony in all this, is that FAR LESS people have the "choice" of living near the CBD, under the "inflated land price" model. Economist Jan Brueckner says in a paper entitled "Urban Growth Boundaries: An Effective Second-Best Remedy For Unpriced Traffic Congestion?":
".......failure of the Urban Growth Boundary to appreciably raise densities near employment centers is the main reason for its poor performance, and this failure will persist regardless of whether the city has one or many such centers......"
There are numerous other similar academic findings from economists listed HERE:
http://www.performanceurbanplanning.org/academics.html
I confess I am copying and pasting comments from an earlier thread. Just anticipating arguments.
I'll stop now - there are still several more HERE, where various further arguments were raised, if interested parties want to look:
I don't want to omit this in particular: there ARE some people out there with letters after their name arguing that "supply doesn't matter, only demand matters, in urban economics", but they are dead wrong and deeply culpable for the mess we are in, because of the confusion they have caused and the smokescreen they have provided for the economic illiteracy of the "growth planning" advocates.
When the NZ Govt introduced an auction system for car import quotas in the early 1980's; the result was: the price of imported cars went up, car dealers bidded higher and higher for quotas each year to try and stay in business against each other, and then when a certain point was reached, the cars prices with the quotas costed in were finally too expensive for buyers, and the "successful" dealers (in terms of winning the quota auction) went broke.
If regulatory interference in supply had nothing to do with this, the price of imported cars would have gone up anyway, because "that was what the NZ public were willing to pay anyway". The price of urban fringe sections would be "that high anyway because that is what the public would be willing to pay for them".
So "the price the public is willing to pay" for a necessity, always excuses the outcomes of anyone interfering in supply of anything? We should try it with milk and bread.
Urban growth always takes decades for a city limit to move 1 whole kilometer along its entire edge. Therefore, in the absence of regulatory boundaries or other proxies for them, your land banker classes have to carry their land holdings for literally centuries if they want to lock out developers who would otherwise build affordable housing. Otherwise, any Bill Leavitt type can simply buy a farm at farmland prices another 1 km beyond where the land bankers have "cornered", and put affordable houses on $30,000 sections. The cost of driving the extra distance to get there, will always be FAR less than the cost of inflated price housing closer in.
The fact that this is POSSIBLE, means that "land bankers" actually do not bother. This is the reality in the cities in the USA where there has never been a price bubble. This is what stops a price bubble.
Greenies everywhere locally now have the chutzpah to turn citizens into KGB informers on each other because trees are now so scarce in urban areas that they must be declared sacred and not touched. This happens to be the consequence of the elimination of decent backyards and gardens because "raw land" is hundreds of thousands of dollars an acre instead of $4000 per acre. There is no lack of trees in "sprawling", "auto dependent" suburbs in US cities.
The Greenies have the chutzpah to insist that the cost of urban growth containment must land entirely on humans. Having banned large-lot suburbs where humans DO co-exist with nature, they demand that humans STILL co-exist with nature by setting aside some share of the urban areas for trees and enclaves for "endangered species" of worms. Even though the land is now costing people over $1,000,000 per acre instead of under $10,000.
Philbest, you're exaggerating the facts again.
Good quality raw flat land in the NZ boondocks can cost $10,000+GST an acre as pasture.
For an edge of town block to cost $1,000,000 an acre it would need to be fully developed into multiple sections which on it own would cost in the hundreds of thousands to acheive. Realistically a ready to go block (for development) on the edge of a city like Christchurch is unlikely to be much more than $100k an acre.
Yes planning is too restrictive, but in many NZ cities land on the fringes is available at low prices, proving it is more just a demand issue rather than a planning one.
In Invercargill, Oamaru, Dunedin etc existing sections are available at under $30,000 (in less desirable suburbs). And in some cases a $1,000 if you look hard enough.
Yet the supply of cheap sections does not translate to a supply of cheap houses. It cost so much to build.
Cheaper sections will have little impact on existing house prices.
You can't compare rust belt dereliction or Texas/Georgia style sprawl (Houston, Atlanta etc are the biggest cities geographically in the world), land there is cheap because if you took Auckland it would be like expanding the city limits to Hamilton - but people want to live in Auckland not Hamilton or Huntly (where of course quarter acre sections are $50,000 already!).
The beauty of Houston/Atlanta type sprawl, is that they are really like hundreds of small towns, highly polycentric. No-one needs to drive from the new urban fringe at Huntly, to the Akl CBD for work.
When the land price curves for the entire metropolis are close to flat, COST of houses closer to the "new job" anyone gets, is not an obstacle to them moving closer to it, unlike in cities where the planners are trying to enforce monocentricity.
Some of the low land and section prices you are referring to, are NZ's answer to the post-crash prices of Detroit. This is simply no equivalent to the US low density, low regulation city with low and STABLE urban land prices throughout. When your State's main urban economic powerhouse has seriously overpriced land as well as comparatively low GDP per capita (compared to the low priced economic powerhouses), that is not something to celebrate.
Something else that complicates the issue of "how much" IS "planning gain", is that development contributions and other fees, represent a "share of planning gain", rather than an addition on top of that. Alan W. Evans explains this in his book "Economics, Real Estate, and the Supply of Land". So the price to which raw land is inflated, is not the whole story - exactions actually represent a reduction in the price that incumbent owners can obtain.
Hugh, I'm certainly not confused. Development and construction costs dictate housing costs, these are inflexible except for a few changes around the margins that could be made with reduction in compliance costs.
Clearly you don't understand that in NZ markets where land prices are for all intents and purposes neglible, the supply and cost of new homes is not significantly less than anywhere else in NZ.
Take Kingswell Invercargill, here is an 855m2 section for sale at $16,000 (flat and perfectly fine) - dozens of sections are on the market under $30k in the area (all from historic subdivisions - pre 1980s):
http://www.trademe.co.nz/property/residential/sections-for-sale/auction…
Here's a new house in the same area on the same size section for $439,000:
http://www.trademe.co.nz/property/residential/for-sale/auction-38414672…
Lots of land rezoning is only going to shave maybe $30-50,000 off the price of a new home. Cutting levies and fees could probably save $25,000.
Don't get me wrong, I would like to see fees and levies cut, but I don't want to see indiscriminate rezoning, however sensible rezoning is key, but in no way would it make any significant change to existing house prices.
By the way, as I've said before I'm not at all concerned about the value of our existing assets - the income the properties generate versus the debt (which will become neglible anyway once EQ settlements occur) is more than adequate.
The biggest problem is NOT "developers sitting on land". The developers are just the meat in the sandwich. Alan W Evans discusses the Portland experience in his book "Economics and Land Use Planning". Portland drew an Urban Growth Boundary with "20 years supply" of land for urban growth within it. 4 years later, prices began to inflate.
Evans says this is because:
- at any one time, approximately half of farmers will not want to sell their land, period.
- developments typically take about 4 years.
- developers like to have secured their next development site before they have completed their current development
- longer permission processes cause developers to act earlier to secure their next site
- farmers being approached all of a sudden by multiple interested buyers, "get wise".
That is not rocket science, yet planning advocates are in denial and most economists cannot see reality for all the fancy formulas they bury themselves in.
Developers, furthermore (Evans discusses this too) find they are now in a "high risk" profession, at the mercy of speculators and incumbent land owners with monopoly powers. The cost of RAW land that they must finance while doing the development, is now literally hundreds of times what it used to be. Property cycles are much more volatile and timing becomes much more important. The window of opportunity for money making is narrowed not just by the length of "boom" cycles, but by the length of permission processes.
Many developers end up going out of business, and the trade tends to concentrate more and more in fewer and fewer hands. The small "spec builder" is squeezed out altogether. The "supply" response during each "boom" of the property cycle, gets less and less and the PRICE response gets more and more volatile. This is literally the fact in Britain (where Evans comes from, and the main subject of his books). Actual shortage of housing gets greater and greater, and pressure on social housing and accomodation supplements increases.
The disincentive "marginal tax" for leaving social housing and ceasing to qualify for accomodation supplements (by getting a job or increasing one's income) entrenches increasing amounts of welfarism. This is a vital ingredient in Britain's now-terminal economic decline.
While housing remains expensive by any and every metric used, many people still view it as a great investment. Opinions based purely on perspective, without fundamental grounding.
Silver on the other hand is cheap by any and every metric, and is rubbished by most as a poor investment. Opinions based purely on perspective, and contrary to fundamentals.
"There is no means of avoiding a final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as a result of a voluntary abandonment of further credit expansion or later as a final and total catastrophe of the currency system involved."
- Ludwig von Mises
I hope all you so called investors enjoy managing tenants who have a hard time paying their rents, yet still destroy your property.
What is the stimulus for your property value to do anything but go sideways for the next 10 years? I recommend gold, as we pass through a time period that is a combination of the 1930's and the 1970's. It's called "stagflation" and may hit hyperinflation.
You are witnessing people direct more of their money to food than rent increases, and government rent subsidies will not keep up with inflation. So why play this game? By reductions in interest rates, prices have only gone sideways. That translates into a 25% loss in value of property, more if you factor REAL inflation in things like food and record petrol prices we now pay. Let's call it a 30% loss since 2007. Forget Auckland, wh what about the rest of the country? 30% is fair.
Ollie, places so much hope on banks. Would you place your future on what the banks are gonna do next? It's all a game of uncertain hide and seek. The only way to win is not to play. Too much has to be sorted out, and the MF Global fallout is much bigger than anyone realizes.
So I hope you enjoy cleaning toilets for your tenants, and repairing damaged rental property, for a gain that doesn't keep up with inflation- becasue the prices are already inflated. And it isn't "your" property until you've paid off the loan. For the first 7 years of payments, you are just renting your property from the bank, against your loan. Why? For capital gain? Ha! What will stimulate it? Your properties will be worth the same today as it will be 10 years from now. Where will the fresh blood suckers come from to buy your dogs?
Have you noticed the price of iron ore has gone down 30% in the last 60 days- in Australia? Aussie banks just downgraded? Isn't that going to affect our market? You deceive yourself if you think not. I don't even read Ollie's articles, anymore. It's pointless.
If you think we are somehow special, then I wish you the best. I don't enjoy property management, and I will be more than happy to buy your properties from you (excuse me- from the bank at a mortgagee sale, not the first but the SECOND mortgagee sale) a few years from now, long after all of you "property investors" go bankrupt.
Until then, and for probably some time, I will remain a happy renter, and we watch the religion of property investment in NZ die.
"Sacred Cows make the best hamburger" -- Mark Twain
Indeed.
Here is the url again, for the benefit of everyone following this thread:
Ludwig von Mises quote for the win! Glad to see a surprising number of comments on here that mention his important yet often overlooked contribution to economics. Especially when we're constantly bombarded by Gareth Morgan's economically illiterate pro-socialist ramblings almost daily.
Which is funny because Alan Greenspan probably is closer to Von Mises in outlook than anything else.....then of course we have the "Greenspan put" which aimed to stop a recession/bust.
Von Mises is not alone in the warnings of such an event, Keynes with his liquidity trap work, Minsky and now Steve Keen in particular see a huge bust coming.......
I could ramble on but there isnt much point trying to discuss much with someone who see's Von M. in such a "glow".
regards
This clown Olly sure likes to cover all his bases now eh! "house price predictions AND NOW "bubble pop" predictions also JUST so he can make the BS claim of "i told you so"!
All these stats tell us is:
1: A great deal of mugs want to live in Auckland at any cost
2: People actually believe being deludedly positive or optimistic will change the global debt crisis alone. Without even questioning how money is created from thin air at the stroke of a bank computer key and the decades long consequences of that are now right on our doorstep
3: The "can't wait any longer" crowd have taken a gamble they will regret in the very near future
To then state " Within the next couple of years the recession will be five years old and if history is anything to go by, it should be soon coming to an end."
My god, what an ignorant fool! WW3 anyone? WW2 was a direct result of global recession. Hitler used that extremely well to rally the hatred our grandparents witnessed
Hmmm, I have family in Vancouver, BC and also in Dublin, Rep Ireland... the property they bought was purchased way off peak, yet if they sell now, in both instances it will be at a loss, one of them significant like 70%... Who would have predicted a collapse in BC and a dead celtic tiger...?
Fortunately that probably won't ever happen in greater NZ and certainly not ever in Ork-land... but it does make one feel slightly queezie at the thought of it ever happening here, doesn't it?
Of course the best way to make your property assets to go up is to get other ppl to buy at the insane prices we see....while "bigdaddy" and SK are not the brightest penny on the block, Im sure Olly with the ups and downs he has gone through has well worn exit strategies....personally though I think its now very late in the game....
regards
From his writings I dont think he has got up to speed on how the global financial system is now so highly interlinked that there will be no such thing as a EU depression.....once it starts it will be global.
or the ppl I read and the logic they put forward are wrong....Olly's way is not how I would bet....
regards
More nonsense from Olly. Yes he's been right that house prices and rents would rise, but so what? The upwards movement has been minor, and I'll bet you his prediction of rents doubling in two years is way off the mark.
As for his view that another boom (even bigger than the last one) is occuring, well thats just laughable:
All in all, these and other factors and we end up with an (un)holy mixture which could result in an even bigger boom that the last one.
In fact its so laughable I'm not going to waste my time and energy arguing why there won't be another "boom"!
Indeed I would question the value of publishing such rubbish here Bernard - I know you are all for a variety of opinion, but those opinions should be based on credible evidence and logic. This lacks both.
there are some sound reasons to argue the possibility of some mild house price inflation over the next few years, but no such reasoning to support another boom
Research has proven that economist's predictions are correct approx 50% of the time - I'd say Olly N has a similar strike rate...flip a coin.
If you read his articles closely...you'll notice that he tries to cover both sides of the argument...he's definitely pro-property...but he will waiver onto the other side of the fence just to cover all bases.
But the facts are - property is severely unaffordable compared to incomes - particularly in Auckland - what other outcome could you expect when you draw a boundary around the city (i.e. MUL) and then make it difficult to build high density within the MUL....morons.
If you read his articles closely...you'll notice that he tries to cover both sides of the argument...he's definitely pro-property...but he will waiver onto the other side of the fence just to cover all bases.
Ricardo exactly - he's very crafty and slippery, but nowhere near as clever as he thinks
And your point that property is severely unaffordable leads to a question as to how realistically, and indeed how mathematically, could property actually boom again in a manner more extreme than the last boom, in the face of likely minimal income growth in the next few years. We've got to current high house prices on the back of a whole lot of social and economic phenomenon which cannot extend much further - most mothers returning to the workforce quickly, people taking on second jobs, boarders, WFF etc. What realistically can extend the house price to income ratios further, save sending little kids off to work etc.????
the fact is housing can't and won't boom again
So, we just need to remember two key Olly predictions for the next couple of years - house prices to boom, and rents to double.
Lets keep those in mind and come back say at the end of 2013 and see how he fared
I'll bet you he fared very poorly
That's not much choice historically. Of 400,000 dwellings in Ithsmus 1/3 renters x 4% usual vacancy means there should be more like 5,328 choices at any one time.
Of those 2395 only 667 are classified as a house. Of those only 565 are 3 beds or more and only like 100 are for under $450 a week. How do low income families afford housing?
Well, just to add to the great property debate, I lodged my objection to QV on the latest RV valuation on my house. OK, land value went up 5% while Improvements went down slightly. Listed all the improvements, including the previous owners renovation (listed in councils building permits) which they did not get capital gain on. So hoping for a slightly higher RV....
All the arguments flying around property .... don't mean a thing ..... when you have willing buyers, coupled with willing lenders, matching willing vendors. Try to find a house on Trademe, any Real Estate website, that is in a desirable suburb anywhere in NZ that a middle-class family would want to live in, at any price under $400,000 - you won't find it.
Therefore, a modest, yet comfortable, well decorated, in a good school area, house in the $400k-$600k band, financed at 80% or better is very very unlikely to fall in value/price in NZ - unless we get unemployment up in the 15% + bracket or interest rates in the 10% + band. Any couple with good jobs can easily afford nice homes in the 400-600k band.
Unlikely Scenario: Buyer to Agent - "Oh we're not going to make an offer because the price is more than 3 x my income". Yeah right.
Well, the agent will probably tell you to go look in an appropriate low socio-economic area e.g. 3 x $80,000 = $240,000 - should buy a cross-lease 2 bed Keith Hay home in Otara.
Or add your partners income: say $120,000 times 3 = 360,000 - might buy a 3 bed, modest home on 600m site in Papakura
The market is not buying the 'rule of thumb' - why not offer $5000 for a 2005 Corolla instead of $12000? Why not offer $150 for your groceries instead of $300. A WOF & Service = $200 - used to be $30 - who cares - life is expensive - get used to it.
life is expensive - get used to it
.......
Neville Bennet:
We need a land tax to broaden revenue (and lower income tax) but particularly to check large accumulations and to increase output. I have argued this before.
A useful quote comes from Thomas Jefferson, one of the drafters of the American constitution
Another means of silently lessening the inequality of [landed] property is to exempt all from taxation below a certain point, and to tax the higher portions or property in geometrical progression as they rise. -- Thomas Jefferson
I think a case could be made for a light tax on rent: the great earlier economists believed so.
Ground rents are a species of revenue which the owner, in many cases, enjoys without any care or attention of his own. Ground rents are, therefore, perhaps a species of revenue which can best bear to have a peculiar tax imposed upon them. -- Adam Smith
With the editors indulgence, I will write further on land in economic theory to stimulate debate on our predicament. I will particularly address the thought of the great John Stuart Mill who said:
"When the sacredness of property is talked of, it should always be remembered that any such sacredness does not belong in the same degree to landed property. No man made the land: it is the inheritance of the whole species."
But I think we need to go further and increase community control of land. My text will be from J.S.Mill:
“The land of Ireland, the land of every country, belongs to the people of that country."
http://www.interest.co.nz/rural-news/53668/opinion-land-crisis
THIS is a thoroughly convincing argument against urban growth restraints and in favour of land taxes, dating from 1964:
http://www.masongaffney.org/publications/E3Containment_policies.CV.pdf
Having finally got to the end of the comments, I'm surprised that no-one has stated the obvious:
Go buy a section, pay for a house to be designed, geotechnical report, council fees, and then pay a builder to build a house for you. Then compare how much it cost, compared to a fully built house for sale next door. I did that recently. It costs a lot more to build a new house than to buy one already built.
Prices of building materials are not falling. Labour costs might fall a bit and bare land costs might fall a bit. if existing houses in established suburbs are already below replacement cost, they should not fall much further. The cost of building a new house is always going to be the benchmark for the housing market in an established suburb.
A new build always takes a little time to recover from a little over-capitalisation initially. Then after 2 or 3 years actually recovers well above the comparable older house - as many buyers desire new (ish) but don't want the hassle of overseeing a new build.
Anyway, a fresh well built new house (with eaves and treated framing) is a great place to live in. You don't have to undo other peoples rubbish, concrete paths, weird door alignments & other imperfections always part & parcel of older houses.
Many of the successful PIs built mid-level homes in new subdivisions over the last 10 years, get the depreciation, attract good quality tenants, and have a good resale value after 8 - 10 years ie still new-ish. Also you can gain on buying sections at the beginning of a successful subdivision - before demand drives prices up.
For a change I actually like Ollie's article. There's not the usual dribble and he backs up his claims with other 'independant' sources.
I don't get the logic of the guy though "be ready to dump your investment real quick when the bubble bursts". Property by it's very nature is a long term investment, when the "bubble" pop's you'll be saddled with a house nobody can afford and no hard cash to buy groceries.
Cheap interest rates might look good today allowing property to be over valued currently by 25% but what happens when interest rates double and your house there-fore isn't worth as much as you brought it for?
If history tells us one thing Ollie it is that in uncertain times it is impossible to foresee the future. May your merry rant today not be the ruin of you in the future.
Ollys just an old dinosaur past his time who made his money in another era, if he was to start today from 0 with the same ideas he would be broke in a few years. The world is changing because it has to, the western world has experienced a massive property bubble which is correcting, it may seem like a slow correction while we are in it but looking back in 10 years’ time it will seem fast enough. The only thing possible to support further prices rises is credit increase which equals more debt. I know that many of my generation see this as a four letter word after watching their parents be mortgage slaves their whole lives, so if we are not going to take on these massive amounts of debt who is, at the moment it is just more baby boomers selling to each other and a few of their children who they infected with the property disease. Most of us are still virus free and can outwait them, on average they will die before we have to buy, in fact we never have to buy if we don’t want to. Then the only option will be for them to leave it to us in the will, it just gets better and better. O hang on maybe not because at this rate they cant afford to pay it off in their lifetime so we will just be left with a big debt. Good one baby boomers you stuffed this country for generations, that includes u Olly.
People like Realistic should remember that Dinosaurs survived and thrived for billions of years and had big teeth.
At least Olly has the guts to give a frank opinion.
Instead of hiding behind a nom de plume he presents his views as he sees them and has turned out to be more often right than wrong.
Many others have done the same but have proved spectacularly wrong despite having the best advisors that money can buy. For instance the Governor of the RB promised rising interest rates for years only to have them ending up at the lowest level in living memory ( and likely to go lower still)
Garath Morgan is another who predicted the end of civilisation as we know it and bangs on endlessly about the redistribution of wealth- now that he has made his pile - thank you very much.
There are any more examples of people calling it wrong, from the finance companies with all their supposed skills, the developers with theirs, and from the "instant wealth" peddlers of dreams most of whom ended up broke and disgraced.
We need people like Olly, even if his views are disagreed with, if only to be able to debate the issues.
This is where you go wrong Olly IMHO,
"Within the next couple of years the recession will be five years old and if history is anything to go by, it should be soon coming to an end."
You look at short term history....too short.
The age of fossil fuels has led to 150years of expansion....some minor blips along the way sure...In 2006 we past peak oil....in 2008 we had $150US a barrel which killed the global economy.....so we will have a saw effect downwards for deacdes....now we will contract over the long term.
"Time and again, in almost all the previous booms and busts people endure the hardships for a maximum five years before becoming restless."
The Great Depression was 10 years and we only came out of that because of WW2...it like today was a credit/debt event.......ignore the charts and history at your peril...IMHO.......
A prime example is to look at Japan's history for the last 20~25years....
"The end result is always the same. Despite the rhetoric, Governments print money and printing money eventually leads to inflation sooner or later. Just look at property prices over the last 25 years, if it’s proof you are wanting."
see Japan.
The key here is when and from what base.....so to my mind we will see a (mean) 60~75% drop in house prices and that will take 3 to 6 years to play out......at that point yes the Govn will start to print and then house prices will start to reflate......maybe.....
"Real estate is all about timing. If you can get the timing right you will profit mightily. I rest my case."
Indeed, and timing is knowing when to exit...to take the profit and run.
In a deflation event, cash while the drop occurs is king....once on the bottom then move out of cash. Cash will start tp lose value and the Govn will want to take it.....gold or property then make sense IMHO. Gold is risky because Govn's will want it....that leaves property....
regards
Sorry, I shouldn't have made such a flip comment.
The worst aspect of all this, is that urban growth constraints make ANY economy behave just like Japan or any country that HAS "run out of land" (at least to feed themselves if not house themselves).
It then becomes a theatre of the absurd, with the same activists who urged the urban growth restraints, claiming that the outcomes are PROOF that we, with our 4 million people, are "running out of land" - because, look,. our economy is doing the same thing as Japan's.
In THIS academic paper, the author criticises the government of the island of Trinidad for creating similar conditions:
http://info.worldbank.org/etools/docs/library/115504/toronto99/assets/t…
True, and long may it stay that way. It's an oasis of tranquility. Great beach, tennis courts, bowling, park, playground, enough shops for basics, plus a general absence of trouble makers because it's thankfully too boring for teenagers.
As for the mansion example, a load of BS, or at best an outlier example. Give us the address and I'll see what the truth is.
Forgot to comment on Selwyn. It's not there yet, but has done a lot recently to improve its relevance to the local community now that the Principal and Board have changed. I would consider it in a few years for my youngest, but right now I chose to go Private for the eldest. An interesting trend I've noted is people moving into the area to be close to the Catholic schools. They lament the lack of quality family homes. Kohi's dirty little secret is that its housing quality is very patchy, as its topography.
Aside from being close to the sea it's difficult to see how Pakiri and Kohi or other higher value Auckland suburbs for that matter have the same market dynamics. I want to know which Kohi mansion has lost value steadily over the last 10 years, even during the boom years.
As a first home buyer in her thirties, it seems to me that commentary (often conflicting) such as the above has one of two effects.
Either we are too terrified to do anything with our savings so we allow it to go backwards, or we are terrified that the market will leave us behind, and so we invest.
Many of you "we've been around during the last fall(s)" are telling us to leave our money out of property - some are saying rent, many are warning of another bust... but what appears to be absent is any suggested alternative to property investment.
My question for you is this: if you had saved $100k by working overseas, had come home to NZ and were faced with the present market, what would you do?
There are no finance companies left to invest in (what a shame), the sharemarket seems to be as likely to tank as the property market, there is no value in savings... and it seems to me that property remains the only way in which you can leverage your own salary, borrow from the banks, have the opportunity to invest much more than you would be able to invest in anything other than property, and hope for the best.
Or are you all saying - leave it where it is for another 5 years and allow it to be eaten away by inflation?
Any words of wisdom appreciated.
"but what appears to be absent is any suggested alternative"
That is correct....
IMHO we are heading into a situation that will be like the Great Depression if not worse. Everything is a bubble...and no where is totally safe.
"if you had saved $100k by working overseas, had come home to NZ and were faced with the present market, what would you do?"
That was us 15 years ago......we bought a house....anyway.......
IMHO I would,
a) I assume where it is is in a bank deposit. I would open at least 2 if not three bank accounts and make sure I could do internet banking between them. Dont fix for a time period....you need to be able to move it literally overnight.
b) Talk to a professional about being paranoid.....you want cash or cash like investments, so consider Govn bonds with short maturities......avoid all company bonds, they are all toxic....
Not 5 years....enough months until we know if its going to be severe deflation or not, the risk is huge IMHO....so just play safe for a while.....Ive sold all my shares and paid off debt and Im in cash....so,
c) Be liquid.
d) Houses are not appreciating in value fast anyway....core inflation is 2%...there is no rush to buy....you might lose a little by buying later but save a lot by not buying.
regards
"caves" LOL....think under bridges. Fools rush in where angels fear to tred springs to mind. Simple, ppl/couples who want a single home and are buying now, or have bought in the last 7 or 8 years are going to get badly burned IMHO.....I feel sorry for these.
On the other hand, frankly if PIs spend the rest of their lives under a bridge, I dont care, they did it knowingly.
regards
Hi Jt1
Thanks for giving us something immediate and real to chew on. Macro points-of-view don't mean a lot unless you're prepared to translate your opinions into action, or inaction.
My 20 cents worth is for your to read widely and form an opinion. As usual, always look at the worst case scenario in either of the future worlds you have decided it is likely you will inhabit and make sure anything you do won't absolutely sink you. But PLEASE don't do anything simply because of fear of being left behind, or boredom or twitchy trigger finger or a combination of all 3. After all, you have to live with yourself if the future does come up with your worst scenario.
The biggest mistake you could make is the path of 'hope for the best' without plan for the worst. The one huge advantage you have in your favour is that you are after your first home. I'm glad you're not calling it a house. Putting down roots for you and yours may well have you erring on the side of Olly, painful as it is for me to say that. Economic cycles don't have any sympathy for their biological compatriots.
All the best.
This recession is different, heres why. Over the last 30 years or so every time a recession has loomed on the horizion central banks reduced interest rates and pump in liquidity to markets, this activity always caused a boom in something from dot com's to realestate. This time after the lowest interests on record, no kick start of the global economy has occured. Also over the last few decades debt has grown massively both goverment and private debt.
The combination of massive debts a slump in asset prices has caused losses to banks that have yet to be owned up to. New liquidity flooding into banks is not being circulated through the ecomomy, as banks try to rebuild balance sheets, so no increase in economic activity acitivity to cause growth, as as result asset prices slump futher and bank losses get bigger.
Goverments have tried the world over to prop up their economys creating ever larger debts, now we are seeing the result of this cycle show up in european countries. Their banks are lagerly insolvent. At some stage one or two will run out of cash they will either fail or need a bailout. Most european governments cannot afford bailouts any further. Thats where we're stuck today.
To say that things have always got better may have been tru in the past, but past cures have masked the structual problems across the western world of not enough productivity to support inflated standards of living, now the debt's are so large no private investers want to lend to countries like Greece, Itaily, Protugal, Ireland and probaly others, any more.
Basically the game is up, because the outcome of the pending collapse is so great politician the world over are trying find a way out. There is none that wont be painful.
They may prolong but some thing will pop up and cause the collapse as the west is broke. Printing is the solution for the USA and UK but that won't end well either. So Olly, I think this time is different and yes property may rise some what in NZ for a while yet and that will only mean a bigger fall when it comes.
New Labour leader, David Shearer. has been .... shock,horror .... caught building a new house in Auckland! http://www.3news.co.nz/David-Shearer-From-warzones-to-the-political-frontline/tabid/419/articleID/236428/Default.aspx
.... " Well, you know, I consider it every kiwi's birthright to own their own patch of soil in Godzone- & building your own is the way to go for customisation & security (not to mention a bit of capital growth - heh heh, dirty word amongst socialists I know, but I'm not stupid)"
Another brilliant interview by Olly.
A clear mind with fresh ideas unlike some of the whingers and whiners who hang around this site.
David Shearer should grab him for the next committee on housing to knock some sense into those lame duck Labour politicians.
Olly would sort out the housing debacle inside 6 months.
Another brilliant interview by Olly.
A clear mind with fresh ideas unlike some of the whingers and whiners who hang around this site.
David Shearer should grab him for the next committee on housing to knock some sense into those lame duck Labour politicians.
Olly would sort out the housing debacle inside 6 months.
By all means enjoy any such boom. Do all the profitable deals you can find. Make money with both hands but be ready to press the ‘dump button’ at any time. In other words do not get involved in long-term speculative projects.
Silliest thing I have read, essentially you are saying you can get out before everyone else.
If their is supply issues in Auckland would it be a good idea to sell all the state housing in Panmure / Glen Innes / Orakei to the public and use the funds to build more state housing else where? I'm sure with the sale price of one house you must be able to build 2 equivalent houses? Win win situation?
So his idea of the global economic crisis is that it all suddenly ends when people decide they are bored with it all!???
Infact what you'll see is complacency or 'boredom' and people glazing over fear instead of selling stocks into it is more often a precurser to a significant pull back.
Lets play the Last Post again! To sum up, basically there has been a lot of hot air, as there are numerous reasons why property prices will go up a bit more, and there are also factors that mitigate against this. The net result is that for next few years, there will be a fairly stable property market in NZ, not withstanding some areas where few people want to work and live where there will be more decline in prices.
Pressing the "Dump Button" as Olly recommends does not mean walking away from any obligations.
He explained to me that the "dump Button" is a common expression among experts.
It means that while investigating a deal during a due diligence period and finding it not to your liking then drop it and not let pride get in the way.
It can also mean that if a deal goes sour then bail out, cut losses, and move on.
Olly's advice is absolutely the right in times like these.
So, to summarise & complete this posting:
Don't get Left Behind.
or
Don't get left with high debt, rising rates & low(er) values
Your Choice
You heard all the arguments for and against right here ....
Come back in 7 years & tell us which strategy worked ...... maybe both could ....
ANOTHER CONSTRUCTION BOOM?
Thats what Westpac are predicting today, as reported in the Herald, based on the Chch rebuild, and the "housing shortage" in Auckland.
I can't talk for ChCh, but as for Auckland I fail to see how a boom will be realised when:
- the planning system to facilitate such a boom is so lacking
- financing for development is still a problem
- the actual development economics of residential development are so generally poor
Perhaps Westpac know something I don't, however they seem IMHO to be basing predictions of an Auckland construction boom on a rather simplistic view that there will be a boom because there is a shortage.But they fail to describe, given the limitations outlined above, how that boom will be realised.
Building is too expensive - but it's not going to get any cheaper.
Eventually existing houses will rise in value to the point at which a new build becomes relatively attractive.
Then there will be increased res construction - but by that point all the crusty old villas in Avondale will already be worth 1 mill each!
Westpac argue - very mistakenly I think yet again - that the cost of building a new house relative to existing housing is competitive, and that is a strong basis for their argument that construction will boom. I think they might be making the mistake of looking at aggregate region wide stats - the market works at a finer grained district level, so they should be comparing the costs of building a new house in Remuera with the costs of buying an existing house in Remuera etc. When you look at it that way, building new really struggles relative to existing, and I think Westpac once again are going to be well off in their forecasting
And honestly what is this Hugh bloke on about?
People do not want to live in sprawling wastelands of shopping malls and boredom.
Zoning limits are necessary for a city to retain critical mass, efficiency and a bustling center of culture entertainment and commerce.
There is no property bubble – guys – rather a clearance sale !
264 comments - zh zh – and the “NZproperty Economy” is just starting to happen, when all these thousands of unhappy, stressed and wealthy people from Europe/ UK/ USA ask the NZimmigration department for entry - to escape unrests in their own countries.
There is also interest to buy property from Asian countries – even here in beautiful, but remote Kaikoura.
My God – listen carefully an house auction: $ 268’000.- $ 269’000.- $ 300’000.- $ 350’000.- $ 380’000.- $ 385’000 last bid $ 415’000.- for a “Big Old Shed” on 1’200m2 sold in Reefton to an Asian guy, who put 10- 15 of his country man in it- who do gold digging- carving up hills.
I strongly suspect that certain extremely confident Australian players taking the “long” positions against the international hedge funds, “KNOW” too much. How this will end, I have no idea, but I don’t believe that “QE” is EVER a consequence-free “solution”. Nor do I see a direct link between QE and the propping up (and further inflation) of a property price bubble, as being free of consequences. But if you are a pessimist forever wondering “WHY” the Aussie property price bubble never bursts in spite of everything the whole world now knows, my explanation is a likely one. I suspect NZ is "benefitting" from this covert prop-up of Aussie Banks, and possibly even the RBNZ is participating.
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