I was surprised by the statement made by Westpac's Chief Economist this week.
"It is impossible to tell what is really going on with house prices."
His comments refer to the growing volatility in house price measures, especially from the latest REINZ stats of both median price and stratified median price index.
The latter a measure designed to provide a more accurate and stable measure of prices as it balances out the impact of high price suburbs vs. low price suburbs to ensure neither unduly skews the data.
This chart above shows the trend in both median and stratified price over the past 7 years - most noticeable is the rise of the recent 3 years.
You can also see the volatility in recent months from what has historically been a smoother trend in stratified price measure as seen in the red line.
In the Auckland market the volatility is more pronounced and also what is very striking is the direct correlation of prices (especially the median price) with the timeline of the implementation of the Reserve Bank LVR restriction.
The impact after the 1st October implementation has seen median price shoot up directly as a result of the significant fall in sales of lower priced property thereby pushing the median price up. The fall in January prices is a seasonal issue which can be seen regularly through the past years, although the scale of the fall this year is surprising.
As Westpac's Chief Economist Dominick Stephens says in his Home Truths report for April the fundamental issue is that the raw data of house prices is not a case of matching apples with apples, more its an apples with oranges comparison. On the REINZ Stratified House Price Index (HPI) he makes these comments reflective of the charts above:
The REINZ’s House Price Index measures average selling prices within each suburb, so it does adjust for where houses are selling. That’s normally good enough to give a pretty good idea about the true trend in the market. But in the current circumstances the HPI may have been skewed. The RBNZ’s mortgage restrictions have drastically reduced sales of low- price houses, while leaving sales of higher-priced houses broadly unchanged. To the extent that this has created a skew to the composition of sales within each suburb, the HPI will be rising faster than the true trend in house prices.
As I have written in the past I believe that REINZ should take on the challenge of collecting and aggregating more granular statistics on property sales - they are in the best position to do so as they are the incorporated society with almost all real estate agents as members who collect data on every sale in NZ at the time the unconditional agreement is reached.
Even without changing any collection process they could today provide far more accurate and valuable information on property prices.
One of the fundamental problems with there data reporting today is that they currently aggregate all property types together - be it a 1 bedroom unit, a studio apartment, a 5 bedroom home or a 20 hectare lifestyle property - to the Real Estate Institute they are all just a house - that is dumb!
Take a look at the divergent make up of property in Auckland across the major districts as defined by REINZ as seen from the composition of listings on Realestate.co.nz today.
Certainly across Auckland two thirds of properties for sale are houses, but within Auckland city over 1 in 3 of all properties are apartments.
One in ten of all properties on the market across the Auckland region are units or townhouses - these certainly have a very different price profile than regular houses or lifestyle properties.
In the outer areas of Auckland Lifestyle properties make up more than a quarter of properties. Think on the fact that within Manukau a $4m lifestyle property in Whitford is seen by REINZ as the 'same' as a $219,000 single bedroom unit in Papatoetoe.
All sales records remitted to the data system at REINZ currently have the following fields (some of which are completed by the selling agent - certainly all should be mandatory):
- Unit Number
- House Number
- Road Name
- Suburb
- List Price
- Sale Price
- List date
- Agreement date
- Unconditional date
- Type - Residential House / Apartment / Home & Income / Unit / Lifestyle
- Bedrooms
- Land Area
- Floor Area
- Valuation
- Valuation Year
This is the data set for existing data - upon this set of data, better more accurate sales and sale price analysis could be undertaken to allow economists, property buyers, property sellers, investors, real estate agents and other could make better informed decisions.
Maybe then we could avoid the statement that an economist feels that its virtually impossible to know what is going on with property prices.
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The above article was written by Alistair Helm, and is republished with his approval. The article was originally published on Properazzi here
35 Comments
I never thought I would ever agree with Alister Helm on much, but this time he has made his first step in the right direction.
The property market is not one big market where the median price says it all.
It is an amalgam of scores of smaller markets all going at different speeds and at different times especially in Auckland.
Until we know what's happening in the house market as compared to town houses, as compared to units, as compared to apartments, as compared to do-ups, new, old, retro, lifestyle etc etc we will just be groping in the dark.
And this has been released in the mainstream media for all to see - while they are hopefully on holiday. 10.21am today!
http://www.stuff.co.nz/business/money/9959525/NZ-bubble-going-to-burst
Surely Forbes are not in possesion of the 'facts'
I can only imagine that in this scenario OBR will be a disaster, once depositors are aware of the risk of a complete loss of savings there will be a run on the banks. Starting with those with higest LDR ratios. The only way to stop it will be currency controls and higher interest rates.
https://www.interest.co.nz/bonds/62807/new-zealand-banking-system-has-h…
Try these
http://www.fool.com.au/2014/01/31/exposure-to-foreign-markets-makes-anz…
http://www.businessspectator.com.au/news/2013/9/25/reserve-bank-austral…
Tick Tick Tick – Aussie Banks’ $15 Trillion Time Bombhttp://barnabyisright.com/resources-articles/tick-tick-tick-aussie-bank…
Crikey, Forbes is a high profile publication read by the truely wealthy.
Methinks the tone of panic is a tad overdone. Whilst I do expect house prices in NZ to be under downward pressure over the next few years I just cannot see the same level of stupidity everywhere that we had in 2007. The last crisis was pretty severe so the next one will probably be less so, as far as the general economy is concerned. So muddling through will be the order of the day.
Unless the Parties That Like To Tell Everyone What To Do get into government of course. Nationalising the electricity market might just have unintended consequences.
If you want, look at the BRICs for that effect, or say Cyprus. Money rushes out, economy satggers, over-priced housing?
Though Im not so sure the rush will be that bad for us, initially at least.
When that happens its going to be interesting watching the retail rates rise so "investors" dont run while the OCR drops to hold our economy up.
regards
If we substitute the term 'Chinese Investor' with 'Japanese Investor' and think 1990 - we already have a fantastic local example of how bubbles burst.
Japanese investors purchased NZ ski fields, timber industry and real estate - until their bubble burst. My Japanese friend flew by helicopter from one viewing to the next.
Only after that fabled central Tokyo block - valued up there with all of California - crashed back to reality did the helicopter rides end.
Nothing new. Change your mortgages to fixed.
In 1991 my Japanese friend stated "In another years time we will be back to where we were". What followed was 23 years of deflation.
Yes. I think when the bubble does burst is when the money flows back to wherever it came from. So all asset prices go down to some extent but mainly the NZD goes down too. The money seems to flow in steadily over time as each investment is deliberated over; but it flows out rapidly in order to repay the debt taken on previously. It's all borrowed money, so when the NZD starts falling in earnest it spooks the horses and everyone tries to sell NZ in order to settle the debt in the originating currency before any hedging runs out (if there is any).
The time to buy NZ is when the NZD is low, but you need cash to do it with. New Zealand export facing businesses are then in a stronger position as their staff have just taken a significant wage cut without noticing it. So, if the NZD falls 40% their staff have taken a 40% wage cut without a murmur. Clever stuff, whoever thought of it.
23 years that hasnt ended yet either....interest rates for japanese housewives? miniscule.
What are we into 6 years now? Yet I have not seen many maintream "economists" aknowledging just how japanese the world looks.
Mortgages to fixed...hmm yes maybe. What I'd assume on is a nasty short term spike and then a collapse where no one wants debt due to deflating prices. The Q is what does that spike look like? 1 year? 2 years? If its such a short term thing then fixing too early isnt a good idea, it could expire in teh middle of the mayhem.
regards
Hi steven, I see your still promising doom and gloom.... how many years has it been now? By my count 3, and in that time we've had a boom in houses and a rock star economy not to mention the best performing stock market on earth.
I don't mean to pick on you but I think a reality check is good once in a while.
regards
The world has not recovered from 2008, despite massive cash injections. What those cash injections have done is caused bubbles in most if not all assets. JK etc dont understand why the world and NZ isnt recovering, I mean NZ inflation is at 1.5% ish now after 6 years?
NZ shares consist of hollowed out companies, as some commentators are saying we need the SOE's in the share market to offer something substantial. Oh and the share market bubble can be attributed to the cheap Fed Cash as well.
Pick on me? LOL, you have constantly tried to shoot the messenger, you simply dont want to listen and dont want others to as well....simple I reality check the data.....I dont listen to what ppl want to happen I look at was it happening.
regards
GDP growing at 3 percent plus, roaring trade with China, house price inflation running at 10 percent plus (higher in Auckland), unemployment lowering... I could go on. I pay very close attention to the business world and that includes commentary, to say I dont listen is just not true. I just dont agree with you on this point. You are what I woukd call a perma-bear but come 2018 I'll be a bear too, for now im a bull.
Can't quite bring myself to agree with you
Current shenanigans are totally different compared to the "japanese carry traders" of the 1990's
This "new-wave" is buying its way out before their own masters lower the boom, and, they aren't looking to go back. They're here to stay. You watch.
Ah so you accept there will be such an event but you are guessing just when, in an era of ever increasing instability, both frequency and amplitude. So really its a gamble that there will be a bigger fool when you decide to exit.
2018 is probably the outer limit, 2020 anyway, so you maybe right, the Q will be is it a guess or good reasoning because you have never given reasons.
So my reasoning is the peak oil plateau has at most 6 years to run and the longer it runs the bigger the drop off when it does. The area under the crude oil bell curve is fixed, all that's left is how humans effect that curve in a temporary manner.
regards
Timing markets is always a gamble.
Be fearful when others are greedy and greedy when others are fearful is a good broad place to start (buffets quote not mine).
Others consider a peak or turning point once all the bears have become bulls; I.e when there is no one left to convince.
2008 is still fresh in ppls minds. This crazy bubbles everywhere guy is another illustration of that. Caution is still very high. There is huge amounts of money on the sidelines waiting until they think its 'safe' to get back into the markets. These are my reasons for not taking a massive bet on the world economy falling apart again, or nz economy falling apart.
When you look at the P/E of most companies and how the US stock market has "recovered" its pretty clear that someone is gambling with what I can but assume the FEDs money. Then yes there is a lot of I assume private money in US Treasurys, when that exits that market if you are not first you look to take some significant losses...
Then given what is an already over-heated market, just what is the "safe" money going to be buying?
I'd suggest a second scenario for that money. Simply its sitting safely waiting for a second 1929 and once that has bombed out rush out and buy, buy buy aka the Great Depression where those with money could buy at fire sale prices.
Of course unlike the 1930s there wont be a recovery, there isnt the energy to underwrite it.
Hence the losses of capital given the limited returns will be staggering IMHO.
I agree on Buffet's comment btw....in context.
regards
There has always been booms followed by busts, always will be. The most important thing is to pick what and when, I am of the opinion that we are in a strong growth phase with several years to run yet. When the next down turn happens it will be mild and short lived.
And my reasoning, house price inflation in Auckland (and now elsewhere) will pump money into the economy, growing trade with China, our growing population, foreign inward capital flows increasing, dairy intensification, all these factors point to economic growth. Why 2018? Because previous boom bust cycles take approx 10 years and the full cycle will likely play out from bust in 2008 to end of boom in 2018.
I agree peak oil will be a significant challenge for humans, as with all others things, timing is crucial. Despite what you might thing I do consider your comments on peak oil and im interested in your opinion on timing for my own selfish reasons. There are other info sources that I consider and you seem to be shorter than most on your timing predictions.
"If the New Zealand dollar’s overvaluation was to abruptly correct and even overshoot to the downside (a possible result of the Fed’s taper), New Zealand’s central bank may be forced to hike its key interest rate to prevent further declines."
So he recons the feds tappering of massive qe is going to make the usd more attractive than the nzd even when we are rising interest rates??
His whole senario relys on this happening, and for people to sell nzd heavily. Yet the only reason he states is the tappering mentioned in the above quote which is really drawing a very long bow.
If he studied the nz economy a little closer he would see ag is not 5% as all the services he mentions and finance are all related to our ag. The only thing that would cause our "bubble to burst" is something like foot n mouth.
Or in 5 years if we go on a building spree to fix a fictitious housing shortage and end over build and end up like ireland. But starting from here that's a long way off.
Hi Andrew, im not following your logic, why woulx tapering, or a end to qe, result in money being withdrawn from the new country it was invested in? The money has been 'printed' nothing changes that fact, there's no reason a chinese or US investor would remove money from say NZ post tapering. Quite the contrary, they're likely to leave it here for the same reason they sent it here in the first place.
Without the OBR depositors were at risk, look at cyprus as an example.
For me the OBR wakes ppl up to the fact that their money is at risk...
Bank run either way.
Im not sure however that the NZ (Govn - edited) can stand idly by...the carnage and voter loss will be huge...so they will step in as lender of last resort and can kick the losses to their kids and grandkids. I wonder how much of that capital "protected" will be foreign, adding insult to injury.
regards
try this for some fun holiday weekend reading
http://www.forbes.com/sites/jessecolombo/2014/04/17/12-reasons-why-new-…
"In short, the four major banks have largely become the Australian financial system," he said.
Hockey is facing the strongest calls yet to impose a tax on the big four banks, to force them to pay for the protection this unofficial guarantee provides.
Read more: http://www.smh.com.au/business/big-four-dilemma-looms-but-failure-is-not-an-option-20140418-36wnh.html#ixzz2zJT3F4CH
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