By Greg Ninness
There was a great wailing and gnashing of teeth on Thursday when the Reserve Bank announced it was slightly loosening loan-to-value ratio (LVR) restrictions on new mortgage lending.
Much of the hand wringing was coming from real estate agents and valuers, two groups that have been particularly hard hit by the downturn in residential property sales that's occurred over the last year or so.
They have been railing against the LVR restrictions for some time, and must have been bitterly disappointed that Thursday's announcment was for just a slight loosening rather than a complete removal.
They were particularly aggrieved the Reserve Bank left the LVR limit unchanged for owner-occupiers, whether they be first home buyers or those who already own a home and are looking to move up the property ladder, at 80% of a property's value, meaning buyers would need equity equivalent to a 20% deposit.
But the effect LVRs are currently having on the market may not be as great as many people believe.
One of the main drivers of the property market when it was booming was the river of money flowing into it from China, but that flow has now largely been turned off, and there is no sign of it resuming.
Buyers reliant on getting money out of China are now mostly sitting on the side-lines, and whether the LVRs stay or go probably won't have much effect on them.
Another big group who have been very active in the market are those who already own a home and have been upsizing, downsizing and sideways shifting.
This group is also largely unaffected by LVRs because the huge uplift in property values that's occurred over the last few years should have resulted in a corresponding increase in their equity.
For this group, finding the 20% equity to put towards their next home should not be a problem, unless they have been particularly naughty and kept increasing their mortgage to the max, in which case they have only themselves to blame.
Although many in this group are increasingly choosing to stay put rather than make the next step up the property ladder, their decision is probably based on the perceived lack of capital growth in the market rather than difficulties caused by LVRs.
Which leaves first home buyers.
They of course are intensely interested in how much they can borrow, so let's look at a few numbers to see how they might be affected.
When it comes to affordability, the main problem is in Auckland, where the lower quartile house price was $655,000 at the end of October - and you won't get anything flash at that price.
According to interest.co.nz's Home Loan Affordability Reports, the combined, median, after-tax pay for couples aged 25-29 in Auckland who both work full time, is about $1615 a week.
How then would such a typical first home buying couple be affected by the LVR mortgage restrictions?
Under the current regime they'd need to scrape together $131,000 for a 20% deposit to buy a home at the current lower quartile price of $655,000, no easy task.
But if they did manage that, they would need a mortgage of $524,000.
The repayments on that (calculated over 30 years at 4.78%) would be equivalent to $630.50 a week, which would eat up 39% of the couple's take home pay.
At that level, the repayments would be considered affordable, but only just.
If the deposit requirements were reduced to 10% ($65,500), it would obviously make it easier for them to get that together, but it would push out the size of the mortgage they'd need to $589,500.
That in turn would push up the mortgage payments by almost $80 a week to $709.50.
At that point, the mortgage payments would eat up 44% of the couple's take home pay, which means their ability to service the loan would be starting to become marginal.
And if interest rates increased, they could face severe financial difficulties, which in turn, would be a worry for their bank.
Which is probably one of the main reasons the Reserve Bank is slowly moderating LVRs, rather than removing them in one fell swoop.
But as the example above illustrates, the main problem currently facing Auckland's housing market is not the imposition or lack of LVRs.
It's that at current prices, buying a home is marginally affordable at best for people on average incomes.
And if they are on low incomes, forget it.
With the speculative money that was fuelling the property fires a couple of years ago now out of the equation, there are still plenty of people out there who would like to buy a home, but not enough who can afford one.
That's why sales volumes are depressed and the inventory of unsold homes is increasing, at the same time the housing shortage keeps getting worse.
The market is simply running out of buyers who can afford the available stock, and sooner or later something has to give.
If you hold your ear to the market you can hear it creaking and groaning under the strain.
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133 Comments
Agreed, plus the Ozzy property market has come off the boil just as much as ours has. Their hottest market such as Sydney's is now starting to drop in value.
http://www.abc.net.au/news/2017-12-01/sydney-housing-market-trumped-can…
I wonder why Sydney's prices are falling? Could it be related to this by chance...
https://betterdwelling.com/chinas-pboc-announces-an-army-of-over-400000…
Here is how most property investors in Australia get their confidence in their property investment. (Could be similar in NZ)
- 56% extrapolate the past price history and assume it will continue into the future
- 11% buy properties as others are doing it "the herd effect"
- 34% buy due to advice or own analysis (the next question is, is this analysis correct or incorrect?)
Continued buying (without regard to how prices look compared to other key variables) by property investors and other property participants can turn a reasonably priced property market into an extreme property price bubble.
The sad part about this is that owner occupiers get caught up in this as they feel forced to buy at these price levels and potentially become collateral damage when the price bubble pops (I know of a couple in Ireland who are owner occupiers and now heavily indebted and in negative equity as they purchased near the peak of the property bubble).
https://www.domain.com.au/money-markets/most-property-investors-believe…
Another frequently used point to support their belief and confidence of continued upward property prices - population growth - as long as the population continues to grow, there will be demand for house ownership, and hence there will be buyers.
Common reasons cited to support their expectation of future property price increases in Auckland are
a) continued population growth,
b) continuing high immigration numbers,
c) current excess demand for housing over supply,
d) limited new supply of housing to meet the supply shortfall
e) rising construction costs
f) foreign buying
Yes, You might see commentators and influencers (for ex, an Ashley Church type) state that the Japanese experience with bubbles is not useful to understand because the NZ context is "different": Japan has an ageing population and non-existent immigration while NZ has strong immigration inflows. Similarly, the Ireland bubble experience does not apply to the NZ context because Ireland overbuilt and had an excess of supply, which exacerbated the crash.
JC no outside sources required Japan or otherwise
Auckland property was recently invested in heavily by the predominantly Chinese using grey money &/or cheap 1% loans from China.
This bubble has yet to burst
Just awaiting a catalyst and then it will
There is no upside for Auckland property right now
You can live in your home but it’s not going to increase in value right now
Worse in Australia you can use your retirement savings as collateral to buy rental properties
Many Australians have climbed on the ponzi property market following their friends & family
Greed creates more greed
So much for every Australian being well off for retirement That’s a fallacy
You forgot to add a forth large percentage who culturally relied on property investment (say for retirement savings by the NZ baby boomer), and a few outside countries who incentivise property investment over other investment methods as well. If it is so deep to be a culturally trusted method even if the herd was shirking it there would still be an encouragement to buy, regardless of public discouragement, regardless of ups and downs and regardless of financial risk and morality. Especially where a countries financial management made it far more rewarding. The fact it is still more rewarding only serves to highlight that the cultural aspect is not likely to change for a while yet. The country tried to improve financial investment education but the cultural importance of property is still there.
After every boom comes the bust.
No first time buyer should throw themselves into a miserable lifetime of debt servitude. Not for a lower quartile Auckland dump. Not now.
Better off investing in pitchforks and taking it out on the Chinese and boomers that wrecked their futures.
Let the property market burn to the ground for all we care anymore.
The coming rises in global interest rates will inflict great pain on those holding the bag.
"One of the main drivers of the property market when it was booming was the river of money flowing into it from China, but that flow has now largely been turned off, and there is no sign of it resuming."
But apparently not according to a former PM (who ironically sold his house to a Chinese buyer) and his government. The official record says 'just 3%" of the buyers' market.
The "official record" does not exist, the gatherers of the information, themselves, said it should not be taken as gospel, as far too many purchasers could not be identified. It also covered the whole of New Zealand when everyone knows that Auckland was the real driver of it, followed latterly by Hamilton and Tauranga, it was beginning to fan out from there, but the Chinese govt put a halt to it, and around that time, prices began to stall.
The Mad Knight is not responsible for the property bubble. He was lucky to have it under his watch and to have exited while it was in full steam. Govts are less prone to the angst of the masses during bubbles. People are happy and consumer spending usually powers up, which is ultimately good for the economy.
But even if money from China did only ever represent 3% of the money spent on NZ housing, how do we know that 3% isn't sufficient to tip a housing market into hyperinflation? Maybe 2% of people, having money to beat any other bidder is enough? This is never mentioned. Huge assumptions and generalisations are made about markets and the psychology of them. What tips a market from bull to bear is fundamentally based on a psychological factor that builds momentum. A sentiment that changes. How do we know that 3% isn't enough to start that snowball rolling?
And then if you take the top 3% of buyers, who could otherwise beat any other bidder, what is then the direct effect on the rest of the market? For all we know taking away the top 3% of upward pressure is sufficient to eventuate a complete change in sentiment from bull to bear.
Even if, as you say, it was only 3%, it was for the whole country, when we all know that it was actually largely concentrated in the Auckland market, with Hamilton and Tauranga a bit behind. Because of the concentration and the crazily OTT prices, sellers from those regions have been able to effect the prices in other regions that they have flown to, either physically or just their investment.
The ignition and follow through force driving housing prices has always been the tidal wave of buy-at-any-price chinese money flooding into the residential property market - try putting that genie back in the bottle
The Bitcoin effect
The best demonstration of that type of force has been recent explosion in the price of Bitcoin. The price is set by the last price traded. Doesnt have to be a great deal of volume. Although the actual volume of transactions conducted in cryptocurrencies is relatively small, the optimism surrounding the technology continues to drive it to new highs
The Domino Effect - Interest.co.nz 5 November 2012
It only needs 1 sale to trigger off a domino effect of up to 10 subsequent sales resulting from the first one. Multiply that by 100 or 1,000 or even 4,000 high-roller buyers, that cascades into a lot of sales
Probably the best example of that was provided by Basel Brush about three years ago (in 2009) of a non-resident Chinese buyer who paid $1½ million for a house out in Botany with a CV of $800,000. Purchaser was not even in the country. The transaction was done via phone hook-up. A case of price no object. That type of transaction is cash. There is no facility to arrange a local mortgage. It's cash talking.
That type of transaction then produces a "Domino Effect". The next purchase as the seller moves on somewhere else mortgage free. The one initiating transaction triggers off a series of transactions.
https://www.interest.co.nz/node/61864/property#comment-713561
Meanwhile Bernard Hickey is still mouthing off at Baby Boomers at Newsroom
"which means older home owners who move from one house they live in to the next would be able to pay much more for another house, thus pushing up the price of all houses and rewarding all existing home homers with yet more untaxed capital gains. That would make homes more expensive for all buyers including first home buyers, not just existing home owners"
https://www.newsroom.co.nz/2017/11/28/64074/analysis-dont-count-your-lv…
The anecdotes around Auckland a couple of years ago strongly suggest there were a lot more than the odd Chinese purchase here and there. Chinese real estate agents, real estate offices; Chinese bidders at every other auction. There was too much of this kind of activity to represent only 3% of the market - even allowing for those with residency/citizenship.
In my observation in NZ, 3% of all sales/monies spent is more than enough to inflate price expectations across the board. Word of mouth (i.e., what so and so got down the road or across town) has for many years (even prior to the sales information being readily accessible by the masses) been a hallmark of our RE market.
And add to that the manner in which valuations are updated for regulatory purposes - we have embedded the conditions for a perfect storm.
Bryan Bruce debunked the 3% figure by interviewing an international tax expert expert who categorically stated that it’s nonsense to use that metric to gauge the level of foreign buying.
https://www.youtube.com/watch?v=HzSAmOQuyjU&t=1344s
What that 3% figure represents is “fake news”. Information deliberately intended to confuse and mislead. Information willingly accepted and repeated by our complicit pro-neoliberal MSM. It'll stand as a testament to the lies of the previous neoliberal government and the mess that they left the country in.
By the way, we need to scrap the wealthy migrant visa. Most other OECD countries have done. Have a look at the above youtube video. In Canada the data (recorded since the 1990's) shows that wealthy migrants declare less tax than any other immigrant group including refugees! They do however invest in unproductive assets (like housing).
And now over in Australia....
abc.net.au article: Sydney property goes cold as 'Chinese capital flows fall'
Rapidly cooling house prices in Sydney and the sudden withdrawal of Chinese investors from the property market may lead the Reserve Bank to cut interest rates, according to investment bank Credit Suisse.
Credit Suisse said the Reserve Bank was in a difficult position because of lack of timely and accurate data about Chinese capital flows, but the drying up of offshore investment is "a very big risk" to the economy.
"We understand that policy needs to be set on what is known, rather than what is unknown, and Chinese capital flows are a very big unknown because of the absence of high-quality and timely data," it said.
"But the issue for us is that the recent shift down in Chinese capital flows is having a visible, negative impact on house prices and consumer spending now."
link: http://www.abc.net.au/news/2017-10-31/sydney-property-cold-as-chinese-c…
When the population at large has convinced itself that investing all of its current and future earnings predominantly into one asset class and that it is the mark of wealth and success, what else should we expect them ( via the Central banks) to do? The property market madness is a creature of our own making.....it will also be the making of our demise. A drowning entity will clutch at straws....
This Canadian Plunge-O-Meter might be useful: http://www.chpc.biz/plunge-o-meter.html
Key phrase: in the spring of 2005 there was a 4-6 month plateau period while buyers and sellers twitched like a herd.
Mogador. That chart is a classic. I have said for months now that Toronto has been crashing in price. But our regular R.E. agent Tothepoint aka Zachary Smith aka Yvil etc etc etc has consistently said that Toronto has nothing to do with Auckland. But what do you know they have both crashed 200k !!!!
2018 - THE YEAR OF THE CRASH ( or is it already here ? )
NEVER USE R.E AGENTS ( sell privately )
A cursory look at the REINZ charts over the past two decades, shows multiple occasions where there has been rapid price growth always coinciding with rapidly increased sales. We have accumulated 240Billion in mortgage debt, possibly closer to 300 when the Bank of Mum and Dad are included. We have a nation where housing is part of the DNA, those living in Auckland have a mutated variant, We blame the Chinese for the most recent surge in prices, yet cannot give any hard factual data, obviously they were not to blame between 2002-7. We blame housing shortages, yet rents do not reflect this. We have with all due respect ,housing 'affordability' indices, where Ken and Barbie are used to propagate the data, seemingly to comfort those that have already taken on vast mortgages or to give notion that 25-29 year olds buy homes, when the average age of a FHB is decidedly higher . We have a nation and in particular a city that would collapse economically if interest rates were to rise moderately, a balance sheet recession would ensue and the economy would take decades to recover.Whatever is around the corner , one fact remains and that is the debt. Thankfully we are not the only nation facing the same problem. We have a sector of the economy from the banks to media to the agents to the unscrupulous squirrels who have made vast wealth from Kiwis selling houses to one another, as if they were pizzas, and suddenly because houses are selling less frequently , but still selling, there is a problem, what circuitous concern.
This article aligns with what so many on this site have been commenting over the past 6 months.
All the levers suggest that a correction must be inevitable and that it needs to happen.because of the basic fact that the population cant afford the current pricing.
I suspect the govt will secretly be wanting a slow release of the bubble whilst less immigration may push upn wages until the 2 meet in the middle.
However sometimes these things have a mind of their own and if the market was to "burn to the ground", we would all feel it in one way or another
Regardless of what FHB can afford, who in there right mind would buy now anyway ? Prices have crashed 200k since March this year, and the Avalanche has not even fallen yet ! Wait until early next year when the panic sellers join the already massively increasing listing stock.
2018 - THE YEAR OF THE CRASH ( or is it already here ? )
NEVER USE R.E. AGENTS. ( always sell privately )
Just read this one http://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=119…
How could they achieve this without using their own cash? And those rentals can cover all the mortgage? unbelievable.
They are young, disciplined savers and hard workers ... these imports discovered how money can be made in the property market at the right time, something many locals don't even comprehend! ... BTW, they are not the only example....
The key to the calculated risk is accepting that carrying a huge debt is not your problem , Your bank should worry about that - so when people get over that fear and invest wisely ( with good risk management and calculation) they succeed
this couple took advantage of a rising market to its full - The same cannot be achieved in a stagnant or slow market (unless you come across a real bargain or have some extra cash)
there are Lots of Rentals in the regions returning 6-8% gross pa and there are some which yield more than that - in few years they will be quite comfortable and happy having debt of $2-2.5 M ... no sweat !!
Clever buying new under valued properties - text book investment example - well done!!
Yep Eco Bird, has gone totally nuts!! Obviously an RE's desperate attempt to convince local buyers that saving up for that vastly over inflated AKL multi million dollar property when it's only worth a fraction of the price.
Has she not herd of negative equity or does she simply not care? I think it's the latter to make that sale!
We are Hamilton's greatest property entrepreneurs. The Bank of New Zealand made borrowing money to buy property so easy and our ultimate dreams of material fulfillment are coming true! If it all turns to मल we will board the first plane home to the folks. The BNZ will clean it all up but they'll never find us lol.
Yet another article courtesy of the NZ Herald that serves as a timely reminder it's all about to crash.
Here's a classic from across the ditch. Even went so far as to buy land in Scotland just so she could be called a Lady! : https://www.dailytelegraph.com.au/newslocal/sydney-property-investment-…
Yes I noticed in that article you linked, the young investor was also an Real Estate Agent. Not surprising that a lot of these over leveraged properties will come unstuck over the next few years. They also appear not to have recognized what has driven the property market so rapidly in the last ten years (Chinese foreign buyers) has now come to an end. That will result in a lot of unsold property flooding the rental market making it extremely difficult to maintain rental income and cover your highly over inflated mortgages.
That coupled with falling property prices will also result in negative equity. This is how property investors become unstuck.
I'm going to wait at least a year before even considering re-entering the NZ property investment market for it to bottom out and see what impact the new government changes will have for Landlords (Getting rid of negative gearing, Foreign buyers ban etc..)
Sorry Eco Bird you do realize that you are barking mad! Your quote: "The key to the calculated risk is accepting that carrying a huge debt is not your problem , Your bank should worry about that"!
And then... You quote:-
in few years they will be quite comfortable and happy having debt of $2-2.5 M ... no sweat !!
As an RE you are the problem!
@Eco bird. Even they got 6-8% gross yield but after other costs such as council rates, agents’ management fee, insurance and repairs etc, they just make even. Unless they pay interest only mortgage, they have to top up cash monthly. I know properties outside AKL usually have a higher rental return but the capital gain is not attractive in the long term. In Auckland, except for some apartments in the city, it’s hard to get a positive cash flow rental property at moment. That’s why the property investors had left the market. But first home buyers should prepare to buy if there is a good bargain.
@ Cherrytree, I shall only reply to your sensible comments, the other comments just show how ignorant and shallow they are ...some suffer from RE fobia ..lol
Properties in the regions like LH, Whanganui, HB, and Taupo maybe Rotorua and others could actually yield over 6% .. some run down homes return even more .... Of course all their loans are Interest only to maximise expenses claim ( that is the secret of the trade) - Only silly and noob investors put their investment loans on table payment scheme and pay principle - No serious investor wants to pay back his loans until the last day in his business, they are eager to borrow more to invest more, use other people's money to make a profit...
Your loan does not change over time and repayment stay the same while the rents appreciated by more than annual inflation rates. So you may top up a little in the first year or two but then it goes smoothly. Again provided that you have done your homework and bought and undervalued property or a bargain .
As i said , you cannot do that easily now in Auckland as the numbers are bigger and the market got saturated, however this sort of buying and investing works well in an appreciating and buoyant market - no cheats , no fake valuations, all is legit .... and Lender are NOT STUPID to dish money around willy nilly !!
This is not a game for the faint hearted - you do your homework and take a calculated risk - then you find a lender who would lend you $$$s after running through your financial position in boring detail and ensure their security, So why not borrow as much as you can and invest in an appreciating asset ...?? you would be Fool not to do that ( you don't borrow to pay o/s travel or a new car etc) - Some people cannot comprehend this at all . This business needs discipline, education, and solid nerves.
I bought 3 brand new units off the plans in Hamilton in 2014, they have appreciated by 60% to date and they return 7.5% gross today, so not only they pay their way but return positive income ..
This is not a short term game like buying and selling shares or even businesses - this is buy and hold for 10+ years to reap the reward.
Most property investors have millions of loans on their books, they sleep quite comfortably at night with sweet dreams, paying loans back would be the furthest thing on their mind.
Thanks for the long reply. But you can only make money like this on a booming market or hold for a long term (yes 10+ years is fine). Also this strategy only suits someone like you who would like to take risk and very serious about properties investment. For most people, I would not suggest they do this especially at current situation. As for young kiwis without owning home, they should take this opportunity while the market is slowing down, more properties for sale and less competitive buyers. Some good bargains are there. Personally I don’t think there will be a crash especially in Auckland. Maybe I am wrong but for FHBs anytime is a good time to buy if they can afford it. For investors, depend on personal circumstances, you may have better investment choices than properties.
Agreed on all your points, This conversation was never aimed or meant for FHBs to follow especially people who do not have such business and risk appetite ... ( although i read somewhere that Millennials are getting together in groups to invest in property as a means of raising deposits in future).
I also agree that FHBs should look at buying now, or in the very near future, and lock (fix) mortgage payments on the current low rates.
cheers
@ Cherrytree,
Property investors slowly left the Auckland market since 2013 and the boom in Hamilton and Tauranga was the result of Aucklander buying properties there.
They have stopped buying in Auckland and maybe elsewhere because of uncertainty and because of the 40% LVR combined with lender restrictions and recalculations of total loans ( portfolio) in the event of any activity ... so some do not want to make any move ( buying or selling) until LVRs are eased or removed... Most investments in Auckland would have some sort of negative return at first - I had that in 2003, but as I said that is not the worry.
Eco Bird, we take different views about what is going on. I think this is a credit bubble bubble created by reckless lending and a belief that when it comes to property “ya can’t go wrong”. You think it’s fine that borrowers on modest incomes with no other material assets can borrow millions
of $ to buy property secured only by the value of that property (which value is being constantly pumped up by ever larger loans).
If it’s a bubble, it’s going to unwind. Australia is plainly a bubble, and when that implodes we (ie our banks) will be taken down with it. There is a serious risk of an event occurring which will be devastating for our country and it’s economy. And the collateral damage of that will be mainly inflicted on young people, especially the less skilled, who enter the workforce at the time the bubble unwinds.
I don’t know if you had kids or grandkids who are of that age. Thankfully, I don’t. But I hope you do, so that you can sit down with them one day and explain to them that it was people like you that pissed away their life chances
Yes, we do take different views and ... our analogy and way of thinking is quite different.
I have two FHBs in my family and we talk about this often and their views do not agree with yours either. After all they will inherit a portfolio of properties after I am gone and will end up much prosperous than I was.
You don't seem to understand how banking , lending against property, and risk works ....for some reason you seem to think that banks dish out and lend money easily just to fill their lending books, well that is not true .... you also seem to just generalize and assume that the sky will fall anytime. You prefer to deal with this in a very emotional way which doesn't help solving practical issues. Maybe PT will solve it all by returning NZ to a State Housing Camp, .... you are right, I dont believe in Santa either !!
But not everyone is on that same page you are singing from ... if a disaster happens of that sort everyone will suffer whether they own a property or Not ( through inflation and lose of jobs etc) - Actually, Renters will get away quite lightly in such an event as they don't own a real estate to lose.
I have seen bubbles unwind in 2000, and 2008 and we lived through that and came out much stronger at the other end. I believe that the coming one will be no different. In fact , all indicators show that the world economy has recovered and is back where it was in 2007.
Doom and Gloom claims are everywhere, even when facts on the ground point to the contrary ( it is a feeling good sentiment) . However, any sort of investment is a personal decision and risk profile that an individual can tolerate ( including retirement decisions)
Yes, I guess we agree to disagree !
https://www.marketwatch.com/story/financial-crisis-is-now-officially-ov…
Deutsche Bank has been calling the Crisis Over since 2012, and has backed its view with its money. Today, Deutsche is basically broke; on life support. So if they are your yardstick......good luck!
(For instance http://fortune.com/2016/09/27/deutsche-bank/ )
bw, these two are just for you :)
"We will not have any more crashes in our time." John Maynard Keynes, leading British economist, in 1927.
"There will be no interruption of our permanent prosperity." - Myron E. Forbes, President, Pierce Arrow Motor Car Co., January 12, 1928
Man has once again succeeded in creating a super colossal sized global, interconnected casino.
In return!
When strippers in Australia are trading Bitcoin and yakking about it on social media, we are reminded of Joe Kennedy’s shoeshine boy touting his investing moves in 1929. The time to have been raising rates was back in 2013 and going forward. However, Ben Bernanke wanted to pump up asset prices of all kinds – and he took full credit for the bull market in stocks and housing and for the other effects of low rates. The fact that savers and retirees were the ones to pay the price for his quantitative easing and bull market seems to be lost on him and much of the rest of the Fed.
(John Mauldin)
Its certainly a bubble when the markets totally ignore warnings from the Fed. The following is from the July 2017 minutes; “Since the April assessment, vulnerabilities associated with asset valuation pressures had edged up from notable to elevated, as asset prices remained high or climbed further, risk spreads narrowed, and expected and actual volatility remained muted in a range of financial markets.” Now the situation is even worse.
In March 2017 during Donald Trump’s Congressional address, he took credit for boosting the stock market nearly $3 trillion since he took office. In August 2016, he campaigned that it was all a big bubble!
https://www.cnbc.com/2016/08/09/donald-trump-on-the-stock-market-its-al…
Crazy stuff eh?
The causes of a housing market bubble. How many variables do we have present in the Auckland residential real estate market?
Once you've established that an above-average rise in housing prices is primarily driven by an increase in demand, you might ask what the causes of that increase in demand are. There are several:
1. An upturn in general economic activity and prosperity that puts more disposable income in consumers' pockets and encourages home ownership.
2. An increase in the population or the demographic segment of the population entering the housing market.
3. A low general level of interest rates, particularly short-term interest rates, that makes homes more affordable.
4. Innovative mortgage products with low initial monthly payments that make homes more affordable. (To learn more about mortgages, see our Mortgage Basics tutorial.)
5. Easy access to credit (a lowering of underwriting standards) that brings more buyers to market.
6. High-yielding structured mortgage bonds, as demanded by investors, that make more mortgage credit available to borrowers.
7. A potential mispricing of risk by mortgage lenders and mortgage bond investors that expands the availability of credit to borrowers.
8. The short-term relationship between a mortgage broker and a borrower under which borrowers are sometime encouraged to take excessive risks.
9. A lack of financial literacy and excessive risk-taking by mortgage borrowers.
10. Speculative and risky behavior by home buyers and property investors fueled by unrealistic and unsustainable home price appreciation estimates.
All of these variables can combine to cause a housing market bubble. They tend to feed off of each other. A detailed discussion of each is out of the scope of this article. We simply point out that in general, like all bubbles, an uptick in activity and prices precedes excessive risk-taking and speculative behavior by all market participants: buyers, borrowers, lenders, builders and investors.
Eco Bird,
"this couple took advantage of a rising market to its full - The same cannot be achieved in a stagnant or slow market (unless you come across a real bargain or have some extra cash). "
Just wondering how long do you think it will take for property prices in Auckland to double from current price levels? 7 years? 10 years? longer? shorter?
Reminds me a little of this Australian saga:
http://thenewdaily.com.au/money/property/2016/02/10/investment-property…
The Australian couple the Moloney's went from being Australia's Property Investor of the year for 2012 to financial ruin 4 years later, underwater by several million dollars.
I know!!!! I was just about to post this myself. I can hardly say it surprises me, but it still has the capacity to shock. I doubt they have much income between them but the bank still handed them $1million. And how did they get it? Buy, revalue, releverage, buy more, repeat. And this will be what lots of buyers are doing. 9 banks turned them down, thank god for that. What a house of cards. Oh well at least the bank can take comfort they bought in blue chip areas...like Rotorua and hawera. Prices would never fall there. Wow
FYI, here is how it is done - property investors call it recycling equity ... https://www.krispedersen.co.nz/Mortgages/Property+Investors/Recycling+E…
Easy,
1) Hamilton in 2015 with 2 jobs which pay typically higher at an entry level than the most advanced teacher and no student loans (as expected for NZders to train significantly before they can be considered for the work),
2) kiwisaver grant (which immigrants can also pick up once they meet the checklist),
3) quick revaluation to produce an instant jump in value,
4) a bank that will let them borrow against that new value without more equity on original loan... etc. After that it is rentals covering the mortgage payments all the way to more debt than the original property loan together. It is almost a recipe for pain before the GFC. But if they manage to sell then the capital gain will have them paid off and with a tidy packet,... they just have to hope the market does not drop and interest rates do not rise... and that neither suffer time out of work or medical injuries. Seriously the bank should be hanging their head in shame but they will be banking on the debt being carried by the couple regardless of what happens and with the properties as security to boot, plus there is always the NZ public willing to give them money to pay out the company bonuses in a pinch.
Please everyone, just calm down!!
Obviously lessons have been learned and I think this will work out just fine for all concerned, after all – this is clearly a very different outfit to the BNZ that operated in the late 80’s:
“Before that, the last big taxpayer bailouts were Air New Zealand ($885m in January 2002) and a $1b bailout of the BNZ in the early 1990s.”
With the NZ government covering the banks failures and risky loans no wonder they are keen to keep going down the profit mine to dump more debt onto the public. When you have no responsibility you want no regulations as they would require more work to have in place and limit the profit to be made immediately.
“.... and Lender are NOT STUPID to dish money around willy nilly !!”
It’s extreme to be sure – currently having a quick reread of “The Big Short” – Michael Lewis.
Again, it’s extreme – but it really did happen – another interesting read is Doug Noland’s weekly commentary – and his reference to the “blow-off phase” of speculative markets – may or may not be happening in Auckland / New Zealand – take it too much to heart and you’d never do a thing in your life – just take it in for what it’s worth.
Interesting times….
Indeed ... remember they are cycles... so riding dangerous wave is not easy and should not be attempted without knowledge and support.
I said before , many use the same principles and measures in dealing with money and debt - that is how they have learned at school or from their parents - apparently, we are living in another world of debt where everybody owes everyone else and everyone is in Debt ... just numbers circulating around ... calling for debt repayments is not on the table at the moment, the money printers are still working hard. ... Its a number game!
"take it too much to heart and you’d never do a thing in your life" - depression at the lack of integrity in the field or just nerves at blowing capital which cannot be regained given a likely downturn? There are people who gamble everything but the choice not to throw it all on black has never been doing nothing, normally there is a calculated decision in gambling on other forms of investment. Just holding money alone is generally losing money, and using only your own money as capital is the attitude for those who took the slow bus. The big short was nicely written as it highlights there is a lack of personal & corporate responsibility being considered in speculative markets but that has always been the case. Do the first few people to cash up in a ponzi feel responsible for those who came after? Were those involved in South Canterbury Finance's demise feeling responsible, certainly they did not take on that responsibility. When the NZ taxpayer can bail out a large downturn then most would be following the mantra "when you don't have to be responsible, you don't have to care". Letting someone else worry about the downturn, or accidents, or even paying back the loan. The speculator does not need to be the one to get the capital, if can be captured from someone else. It would be interesting to see what other risky loans BNZ has been taking on. A DTI would be a nightmare for them as they would actually have to loan more responsibly, which is never the way to large profits. Actually it does make sense given their response to the suggestion of a DTI.
" The speculator does not need to be the one to get the capital, if can be captured from someone else" ... !!
I gather that you are not very familiar with lending processes as you have assumed things that are not factual.
However, Banks in NZ do not make risky loans - Property used as security is considered a safe loan both to owners or investors - each is scrutinized differently ... they do calculate and price their risk, and if you don't qualify and pass their stress test then your application is refused.
To compare US banks or institutions to ours is totally unfair .
It may surprise you that banks do apply their own DTIs to owners occupiers ... and run through investment properties with a very fine comb ( after discounting rent revenue, and counting expenses ..etc) add to that the 40% LVR .... they take serviceability of any loan very seriously !!
So in all, banks are not silly and they know what they are doing without emotions.
Our banks are not like other banks. Other banks are reckless. Our banks are prudent and kind. Other banks engage in reckless lending, but our banks make loans only after great due diligence to high quality borrowers.
Wow. These are the dumbest set of comments ever posted here. And that’s saying something.
Final thought for the evening – what would the residential property market look like if lenders were forced to operate in a non-recourse loan environment.
Certainly the transfer of "risk" would be interesting, however I really don’t know the answer – hazarding a guess - “very different” would be my take.
I'm not seeing anything in the way of distressed sales currently. Searching for places that are very cheap in Auckland reveals many, many places for under 500K however when I check their RVs they are often asking over that figure. If I see a lot of entry level places asking for around their 2014 RVs I will think there has been a significant contraction in prices however anything over 20% above the 2014 RV I would consider a fairly normal asking price.
For example here is a little place you can buy for under 500K:
https://www.trademe.co.nz/property/residential-property-for-sale/auctio…
Yet the 2017 RV is 480K. Even if the asking price were 350K which is 20% above 2014 RV I wouldn't think that was indicative of a particularly harsh crash. It is close to a railway line after all. However 350K would be a nice price equating to about $300 a week in interest. Perhaps this would be an acceptable level for a correction to settle at, that is 20% above 2014 RV. With the current levels of employment and interest rates this would open up a lot of opportunities for FHBs and enable them to pay off significant amounts of their mortgages. Also they could find do-up bargains and places where you could add value.
The issue I see at the moment is people want to make too much on a property where as just making 30K in a year by doing a bit of a tidy up and painting would be reasonable.
This bubble built up over many many years, it may take many years to unwind. The market turned 6 months or so ago. Give it time.
I also think you are missing what is happening here. The banks were lending like crazy, and now they aren’t. The are under capital constraints via their Aussie parents and have also themselves come to the point where they see their recovery values on an enforcement are at risk. There has not been a large drop in incomes, but there has been a material reduction in willingness or ability to lend. And as total mortgage lending shrinks, so will house prices.
I didn’t say they’d stopped, I’d said they’d reduced their lending. And doesn’t the recent lending data bear this out? The Aussie banks are under pressure for capital. We are the collateral damage of that. The data showing house price falls mirrors the reduction in lending. As you would expect, the 2 are directly correlated.
Well, Melbourne, Hobart, Brisbane and Canberra all went up last month and Sydney and Adelaide are hardly declining. I don't think things are as bad as many commenters here believe. Even the Canadian market looks pretty good with Vancouver still on the rise and Toronto fairly stable.
This is happening now. All these cities went up last month. This has always been my argument, right from the very beginning of commenting here, what is actually happening right now. This is why I follow the sales so closely. All of us, Eco Bird, TTP, Ex-expat, Yvil, THE MAN 2, DGZ are just making observations concerning what is going on right now.
I am sure you have the best of intentions with your number crunching, but your figures to me not massively useful. I would look at the agregate figures which give a much better aggregate picture. But the most important figures to me are the aggregate debt figures from RB. When those figures materially decline then house prices will inevitably fall. If they don’t fall, then prices won’t fall. But given banks current approach to lending, it’s pretty clear to me which way the are heading.
What Zachary is saying is that the Australian property market has plenty of life in it and that even a part time wall paper hanger earning $14,000 and no English can still borrow every dollar he needs to buy a house for $895,000.
Zachary! Australia's housing market is deteriorating by the day. IT'S HAUNTED!
Popcorn anyone? Plenty here.
Or rather, his view is so long as this nice shiny bubble hasn’t popped then neither the banks, APRA nor anyone else is concerned about what happens next. The pressure being put on banks by APRA to increase capital is a fact. And I think that the banks have become more conservative with their lending is a fact. All that matters to ZS is what prices did yesterday and the day before, and the day before that. He can’t see past his nose.
And I thought the generally accepted view was that prices were now falling albeit slowly and slightly in Sydney, but I’ll defer to others on that.
I'm not sure what a part time worker has to do with this. All I know is that the Asia-Pacific region is up and coming with a lot of wealth being generated by millions of people. The region is going to experience massive growth in air traffic over the next twenty years and the gateway cities are going to become very important because of this.
For goodnesss sake. So you are saying we can sustain household debt at 170% of income cos “the future is bright” and “this time is different”. If household debt ie mortgage debt falls below the current level then house prices will fall, as the prices have been pumped up by that mortgage debt in the first place.
Ok so your view is that we have now moved to an indefinite period where household debt will be maintained at a rate that is about 150%(?) of the long term average. This is the thing that will mean “this time IS different” Interesting. Of course if you are wrong and the number falls materially below that we may well face a financial crisis like we’ve never seen. I wonder if you typed that with a straight face. It certainly gave me a chuckle.
Zachary,
How would this level of debt in aggregate be sustained under these two possible scenarios?
1) interest only loans are no longer extended or rolled over. Banks insist that borrowers must make debt service payments based on an amortising loan (i.e. principal and interest) based on 25 years and the current interest rate.
2) interest rates rise by 2 percentage points from current levels. Interest only loans are no longer extended or rolled over. Banks insist that borrowers must make debt service payments based on an amortising loan (i.e principal and interest) based on 25 years and at the higher interest rate.
Zachary, Mr Otton is one of Australia's finest property spruikers. Add to the mix the numerous home improvement shows and hello, we have one hell of a big suckers market with plenty of enthusiastic brainwashed buyers:
Mr Otton made more than $20 million over 3½ years by charging 7200 investors between $3000 and $26,000 for tickets to attend "boot camps" and other events. "I'll share with you the same strategies I use to buy properties for $1 and create cash-flow income – without ever stepping inside a bank or saving thousands for a deposit."
http://www.smh.com.au/business/property/property-spruiker-rick-otton-en…
There is indisputable evidence a serious correction could be imminent and that a lot of people could lose everything and more. The wise will take notice NOW and rearrange their finances NOW.
http://www.abc.net.au/news/2017-07-19/apra-lifts-bank-capital-requireme…
However, APRA's target appears to be lower than many investors feared, with Westpac joining the other major banks with share price gains between 2.5 to about 3.5 per cent.
As for customers, it seems likely any impact will be negligible.
""It is close to a railway line after all."" Born in a station master's house the first 5 homes were in sight of railways and the 6th (Crewe) within earshot. I love Birkdale, North Shore and it has so many great features but the only negative to my Kiwi paradise is no railway line just over the back garden fence.
Otherwise everything you write is spot on.
Thanks Lapun, yes, I like the sound of a train as well.
I try and take a reasonable view about what sort of house price would be acceptable but the gloom and doomers are very reluctant to enter into that conversation. I get the impression they want a sort of cultural revolution where landlords and REAs are rounded up and incarcerated and houses are given away freely based on need. This has actually happened in some countries like China and Cambodia.
Zachary Smith, eco bird, tothepoint, robert redford, yvil, all the same RE agent trying to manipulate the forum. Stop trying to pretend you invest in property. You Dont, it is obvious by your comments if and when anyone even bothers to read them. Auckland Houses have crashed 200k since March this year ! Just the same as Toronto. Your selfish agenda to try to manipulate new investors and FHB is disgusting. The true cost to a persons health and well being when they lose all they have due to taking FAKE advice from a con man like yourself is devastating . Get some morals. People , dont even think about buying a shred of real estate anywhere. Its very simple , the market has crashed 200k since March and the Avalanche has not even fallen yet. Wait, wait, wait.
2018 - THE YEAR OF THE CRASH ( or is it already here ? )
Any fool who pays 4% compounded to flipping agents in a mugs game of leverage on shonkey , leaky, shaky houses, overpriced and funded by taxpayers, needs to exit Government...immediately.
It ain't Real Estate it is Monopoly, a kids game for so-called adults. About time someone called it quits and leave the gambling to other in-debted Nations.
About time we called it quits, as insanity is repeating stupidity, over and over again., until the penny drops...it don't make cents...in more ways than one. Dollar for dollar, the printing presses are humming. Some have a yen for it...not me.
From RNZ yesterday re conditions in Australia:
"Australia is at growing risk of a home price crash because of the high number of mum and dad property investors, inflated prices, record household debt and an economy that appears to be losing momentum, a new report says.
Hedge fund Watermark Funds Management warned conditions in the Australian housing market were similar to countries which experienced property busts after the global financial crisis, including the United States, the United Kingdom, Spain and the Netherlands."
The country would not be in this situation if the government has stayed out of the property market altogether..... They have really screwed this one up and are now terrified of a crash. They failed to act two years ago before the market really went out of control and it's too late now. I fear the worst.
(From the comments section of your link)
Latest RV has house = $250k and land $500k. Replace house would be roughtly $350k with todays builders and the real value of the land? Well growing strawberries (previous use) would be maybe $1k. So potentially the $750k could be say $360k.
The same applies to similar property another 20km farther out. However when/if market collapses (or sees reality) my house remains 15 min drive to the CBD and the outliers remain 40 minutes to CBD. No big deal if the infrastructure (motorways, buses, railways) was in place. But it isn't and it won't be for a long time so I will just hang on to my Auckland home - price will go down but not too far and the mortgage is under $250k.
My point - a collapse of prices will vary by location.
National or Labour all seem to be struggling the housing issue against the speculators. Potential reason and the root cause is that the housing has been tradable asset with our proper tax regulations not only in NZ but also worldwide. If this fundamental is not changed, the issue won't be resolved. For example, if the valuation is changed in every 3 years and if the property is not a owner occupier, currently there is no tax system exists to collect that extra money over 3 years. Secondly, when anything is sold there is no tax at all (except the 2 years rule). Therefore, any person or company used to invest money in something like education or research, are now shying away because of this heavenly trade asset. After the tax system is revised, the money is potentially going to be invested other parts of the economy or can be used to build new homes. In that case, it will be a win-win situation for government and economy.
FYI, here is some historical property price analysis from a property valuation firm conducted in late May 2017. Based on this analysis of historical property prices, they expect property prices to bottom out at a level which is 10% below peak prices over the next 4 years and then increase a further 50% in the future.
Excerpts:
Once adjusted for inflation, which was very high in the 1970s and 1980s, the research shows that the current cycle is following a similar pattern to those in the 1970s, 1980s and 1990s.
These cycles were not as dramatic as the 2000s cycle which was a bit of a super-cycle, Quinlan said.
“In this cycle, prices have followed pretty much the same pattern as the 1990s, which peaked 5.25 years into the cycle, fell by 5% a year after the peak, and slowly recovered to only a 2% loss by four years after the peak.”
At the end of each of the previous four cycles, the research shows a “real” fall in values of -38%, -6%, -7%, and -14% respectively – but the 1970s and 1980s value falls were masked by inflation.
Quinlan said that we are 5.5 years into the current cycle so, assuming it is a “normal” cycle, the market will lose 10% or so from current peak prices over the next four or so years.
But, going by past cycle patterns, there is likely to be a small “dead cat bounce”, which looks like a recovery but isn’t, in the years after peaking before the market finally peters out.
“This time round, a dead cat bounce will look good in a year or two, but that will peter out. This type of bounce is pretty common but the renewed interest tends to fade out as people realise that things still aren’t sustainable.”
The good news is that the cyclical peaks in real terms have been 160% for the 1970s, 138% for the 1980s, 138% for the 1990s, 186% for the 2000s, and 151% for this cycle, he said.
“Add inflation at 1% a year and house prices will likely increase by about 50% over the next cycle.”
Property Institute chief executive Ashley Church is not convinced that we’ll see even a 10% drop in house prices.
He said there has been an ongoing upward trend in New Zealand’s housing market cycles with the exception of the end of the GFC.
“Also, the cycle patterns would be similar if the market drivers were the same – but they are not. This cycle is being driven by a big spike in immigration and a real need for labour.
"That is different to those previous cycles. For example, the booms in the 1980s and the 2000s were driven primarily by speculation.”
https://www.landlords.co.nz/article/6149/capital-gain-time-over
The Economist recently showed NZ's housing market as overpriced by 112% relative to rents. Wow!
Even the landlord subsidies & tax settings the taxpayer generously make to landlords only really make sense in a rising market.
Interesting times.
Both the Helen Clark & John Key governments were happy to get three terms on a the back of a ponzi housing scheme. Jacinda Adern mightn't be so lucky.
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