The Kiwi's Face Their Demons

[Sancho Panza]

Hattip to Brendon posting over on Shaun Richards site

NZ Herald 20/7/16

David Hisco is the CEO of ANZ New Zealand, the country's biggest bank.

Auckland house prices and the New Zealand dollar are over-cooked.

Having been in banking since 1980 I have seen this movie before. The ending is pretty much the same - sometimes a little plot twist, but usually messy.

This one has some different characters involved. Record low interest rates in New Zealand, 40 houses being built a day in Auckland yet the city needing 60, deflation in some of our trading partners, political turmoil in Britain, Australia and the US, some banks in Europe in trouble; the list goes on.

In the quick snack media world we live, sadly many are making decisions based on the last headline or quote rather than research and facts. Here is a fact: property markets can and do go backwards.

Reserve Bank Deputy Governor Grant Spencer says the solution to Auckland's housing problem is a team game and that not all the heavy lifting can be done by them. He's right. Spencer has also suggested immigration policy needs to be looked at. Our creaking infrastructure might do with a period of catch up.

The Prime Minister recently told the Reserve Bank to get on with tightening loan to value ratio (LVR) rules. Part of the delay in it happening may be the Reserve Bank demonstrating that it won't be told what to do by politicians.

Record low interest rates have played their part in this problem. But, because New Zealanders aren't good savers banks have had to borrow from offshore to fund this rapid expansion in housing lending. And this funding supply is not endless unless banks want to pay higher prices for it. I doubt banks can keep lending at the current huge volumes anyway.

Finance Minister Bill English recently told an ANZ post-Budget breakfast that the
Auckland housing market was overheated and that some investors would end up losing money.

Salaries and wages have hardly changed whilst house prices have risen - this can't continue so it's a matter of when, not if, the market adjusts.

That may be true but New Zealand's issues go beyond housing. The strong Kiwi dollar, while great if you're heading overseas on holiday, is impacting our exporters. It's not helping with the recovery of the dairy industry. It also makes NZ tourism, one of our largest industries, far less attractive for overseas tourists.

The softness in the Australian economy, coupled with the fundamental changes they are going through with the end of the mining boom, makes our largest trading partner vulnerable. With the possibility of parity between the New Zealand and Australian dollars how long before they start buying their goods from cheaper sources?

There are storm clouds on the horizon for sure and when they break who knows what will happen.

One thing is certain, if employers start laying off staff because exports to an uncertain world are dropping, those people won't be able to afford their mortgages and when that happens they will sell their houses. If unemployment rises and the dollar drops, overseas investors will cash in their chips and sell, most probably in a stampede.

The Baby Boomers who have become property investors in recent years based on shallow deposits will soon realise what I'm already seeing - more and more rental properties where owners either can't find a tenant, or the rent can't cover the mortgage. Salaries and wages have hardly changed whilst house prices have risen - this can't continue so it's a matter of when, not if, the market adjusts.

New Zealand is a great country and we've come out of the Global Financial Crisis well compared with many. But logic tells me things cannot continue to run this hot.

Eventually, landlords will realise that getting a measly yield is not worth it, nor is leaving a property empty, and they will try to sell and take any possible capital gain. Nobody knows where the top of the market is but, as they say, nobody ever went broke taking a profit.

The solution probably lies in pulling many levers which will no doubt trigger other consequences. But things we can do right now include:

• Heavily increase LVR limits for property investors. The Reserve Bank wants most property investors around the country to have 40 percent deposits in future. We think they should go harder and ask for 60 percent. Almost half of house sales in Auckland are to property investors. Taking them out of the market will be unpopular amongst investors but it may end up doing them a favour. Of course this would mean less business for us banks but right now the solution calls for everyone to adjust.

• Weaken the New Zealand dollar. The Reserve Bank should look to weaken the dollar, making our export industries more competitive. That's good for employment and our balance of trade in the long run. The Reserve Bank in Australia are already examining unconventional measures to do this. The longer our dollar is out of step with the rest of the world we will slowly drift towards being uncompetitive. Rising unemployment and rising house prices can't co-exist.

• Voluntary tightening of lending criteria by banks. Since the GFC banks have been more conservative than ever on lending. But the current situation will see ANZ implement even tougher criteria for investment loans as house price inflation spreads from Auckland to other regions.

• Review immigration policies. Immigration has been great for New Zealand. We are a harmonious, diverse and inclusive society. But Auckland's housing, roads, public transport and schools are struggling to cope. Let's have an honest and sensible debate about immigration using facts rather than prejudice to see if we should push the pause button.

• Have a strong focus on infrastructure build, particularly in the growth regions. We always seem to play catch up in this country relying on bureaucratic formula to work out demand. There are smart ways to fund infrastructure that can spread cost across the generations if we choose to go that way.

New Zealand is a great country and we've come out of the Global Financial Crisis well compared with many. But logic tells me things cannot continue to run this hot.

Low interest rates give borrowers the best chance to repay their debt and that is what they should do, not use them as a chance to borrow to the max.

Now is the time for New Zealand to navigate carefully if it wants to remain as one of the world's better performing economies.

- NZ Herald

By David Hisco'

Much as I enjoyed the article I had to laugh when he mentioned 'voluntary tightening of lending criteria by banks'......

Probably New Zealands greatest export

Edited July 20, 2016 by Sancho Panza

[Foreverblowingbubbles]

I moved here 3 weeks ago and so far I've heard:

- banks no longer giving housing loans to people unless they can prove residency (apparently there was a problem with Chinese coming over, opening an account and getting a house loan without actually living here... So basically they weren't getting a reliable proof of address! I just arrived and heard this within a few days, when trying to open an account myself)

- increase of the deposit requirement to 40%

- finance minister talking down investment in Auckland property

- even the estate agents who have been showing us around advising us were best to rent rather than thinking about buying

- locals saying it's nimbyism stopping development from increasing the density

[thewig]

Is there a coordinated worldwide bubble popping afoot? If so where is the safe haven?

[spunko2010]

It's comforting to know that the little people who voted for Britain's "political turmoil" are responsible for popping a housing bubble the other side of the world.

[bobbo]

I think Melbourne will fall first then Auckland, but harder and faster. Not sure that it will be solely attributable to brexit.

[FrankCostanza]

Problem is the same everywhere.

[Pop321]

Problem is the same everywhere.

"Low interest rates give borrowers the best chance to repay their debt and that is what they should do, not use them as a chance to borrow to the max."

Super quote from the text which summarises the position for 118'ers.

Those BTL'ers who have used the last 10 years well should be sat on huge wealth.....those on 118 moaning about S24 have been greedy. Okay, all BTL is greedy but you know what I mean. So many 118 posts start with "I have been a LL for 20 years......" All I can help wondering is why on earth do they still have massive debts after all this time. (Ps I know about IO and MEWing...but only an idiot....surely?)

Anyway...back to thread, point is to see this in NZ suggests FrankC succinct comment that this is happening everywhere......is spot on.

[Silverfinger]

Is there a coordinated worldwide bubble popping afoot? If so where is the safe haven?

There is a cue in my name...

[Sancho Panza]

http://www.stuff.co.nz/business/industries/82378112/britons-and-americans-hammering-at-the-door-immigration-nz-figures-show

Britons and Americans hammering at the door, Immigration NZ figures show

There's been a massive increase in the number of Britons and Americans planning to come to New Zealand since Britain's Brexit vote and Donald Trump's political rise.

The surge in interest in New Zealand was confirmed as the Real Estate Institute compiled a chart laying bare the strong connection between net migration and house price rises.

Immigration NZ typically receives 3000 registrations from Britons wanting to work, study or invest in New Zealand each month, through its New Zealand Now website.

The correlation between house price changes and migration has stood the test of time.

But that leapt to 5005 in the 12 days immediately following Britain's June 23 Brexit referendum, in which Britons voted to leave the European Union, spokeswoman Emma Murphy said.

The department also normally received 7000 registrations from Americans wanting to work, study or invest in New Zealand each quarter, through New Zealand Now, she said.'

The Kiwi equivalent of Singaporean cash buyers in London I guess

[wherebee]

That ANZ blokes comments show there are still some very smart, factually based individuals in banking. Give that man a gold medal.

[HovelinHove]

One day my wife (NZ citizen) and I (NZ PR) will hopefully be able to move there. I am about to sell my property in Canada, spread the capital across Gold and CAD$ cash. Hoping for Brexit to really impact the UK market before everywhere else and hit the pound harder over the next year, then buy back in the UK and watch the rest of the world finally succumb as China goes under. At some point I suspect there will be a golden moment again when UK property has bounced back, the pound is climbing, but NZ is still wallowing at the bottom of the hole it has dug itself into. I am hoping I will be able to move there then.

[Noallegiance]

There is a cue in my name...

Fingers?

[Silverfinger]

Fingers?

[canbuywontbuy]

The key thing is - how FAR do prices fall? Will a downward correction have its own upward correction? In other words, going from an almighty high price down 20% to a still-unaffordable-to-the-average-punter price, but then the fall stops because there's enough buyers to service that 20% fall to make it plateau and even uptick...

OR, do prices fall through the floor (50%+), and become truly affordable again?

I ask this because around the English speaking world (at least), prices have smashed upward through so many levels, that prices are going to have to unwind a LOT.

[Eddie_George]

There is a cue in my name...

[Sancho Panza]

The key thing is - how FAR do prices fall? Will a downward correction have its own upward correction? In other words, going from an almighty high price down 20% to a still-unaffordable-to-the-average-punter price, but then the fall stops because there's enough buyers to service that 20% fall to make it plateau and even uptick...

OR, do prices fall through the floor (50%+), and become truly affordable again?

I ask this because around the English speaking world (at least), prices have smashed upward through so many levels, that prices are going to have to unwind a LOT.

I think you've answered your own question.

[TheCountOfNowhere]

The key thing is - how FAR do prices fall? Will a downward correction have its own upward correction? In other words, going from an almighty high price down 20% to a still-unaffordable-to-the-average-punter price, but then the fall stops because there's enough buyers to service that 20% fall to make it plateau and even uptick...

OR, do prices fall through the floor (50%+), and become truly affordable again?

I ask this because around the English speaking world (at least), prices have smashed upward through so many levels, that prices are going to have to unwind a LOT.

It's just not possilbe for property prices to collapse 50%+ in this modern world.

They aint building any more land.

http://www.housepricecrash.co.uk/forum/index.php?/topic/225068-human-being-is-not-particularly-good-at-learning-from-history/

"The terrible brilliant property crash of 1997 led to almost 70% drop of home prices in nominal terms for 6 consecutive years."

Is is what would have happened all round the UK without 0.5% IRs and government support of the banking system.

House prices now way beyond the levels that make any sense in large parts of the country again.

A collapse is inevitable.

Edited July 25, 2016 by TheCountOfNowhere

[Silverfinger]

I do like chocolate a lot, but I prefer to get it at the source, between Kilchberg and Rueschlikon, on the shores of Lake Zurich.

And there is another hint hidden, too.

[billybong]

http://www.stuff.co.nz/business/industries/82378112/britons-and-americans-hammering-at-the-door-immigration-nz-figures-show

The Real Estate Institute's chart showed how house price movements had closely tracked migration over the past 20 years, sometimes with a slight lag.

Or it could be that migration increases after an increase in house prices. According to the chart migration seems to track house price movements and sometimes with a slight lag.

There seems to be no mention in the article about the effect of credit on house prices or how rich overseas buyers etc might be an influence.

Incidentally per head of population NZ annual housing approvals seem to be roughly twice as high as Britain's.

For 2014 it was 21,000 housing approvals for a population of about 4.5 million - with the population increasing each year at a slower percentage rate than Britain's.

http://www.radionz.co.nz/news/national/234768/rise-in-number-of-homes-being-built

Edited July 26, 2016 by billybong

[steve99]

I think Melbourne will fall first then Auckland, but harder and faster. Not sure that it will be solely attributable to brexit.

ANZ are one of Australias big 4 banks. Why are they not talking this line in Oz which is a much bigger speculative/investment market than NZ ?

[Sancho Panza]

http://www.radionz.co.nz/news/national/309978/average-nz-house-price-tops-$600k

'QV's national house index rose 14.1 percent in the year to July, with the national average price hitting a record high of $602,434, fuelled by low interest rates, strong investor activity and high immigration.

Hamilton, Queenstown Lakes and Tauranga experienced some of the highest growth, with Hamilton values rising 31.5 percent - twice as fast as Auckland, at 16 percent.

QV said prices in the country's biggest city have accelerated by 5 percent in the past three months, and the average Auckland price was just shy of the million dollar mark at $992,207.

Average prices are now 45.4 percent above the previous market peak of late 2007. Values in Auckland were now 81.6 percent higher than in 2007.'

Nothing to see here,move on.

[Sancho Panza]

http://www.newshub.co.nz/nznews/5-reasons-not-to-buy-a-house-in-auckland-right-now-2016082417

'

But after considering the five reasons below, you might just conclude that buying a house in Auckland at the moment could be a million-dollar mistake.

1. The "ring-fence" metropolitan urban limit around Auckland will be dumped

In the 1980s, Auckland Council forced all new houses to be built within a metropolitan urban limit. Fast forward 30 years and Auckland has virtually run out of land to build on.

The recently passed Auckland Unitary Plan has re-zoned land the size of Hamilton currently outside the ring-fence which will see 111,000 new houses built.

"The immediate increase of land supply to fill a shortage will decrease land prices in Auckland," says former Reserve Bank Governor Don Brash.

2. Inevitable mortgagee sales are on the horizon

Such land price decreases will be worst felt by the homeowners who have purchased houses for prices well in excess of valuation.

Put simply: Who would pay the $1.1 million someone paid in 2014 for a house worth $800,000 when a similar home in a new subdivision 10 minutes away can be purchased bang on valuation for $700,000?

As a result, potentially thousands of homeowners may find their home is now worth less than what they paid for it. This could result in a flood of mortgagee sales, which often result in houses being forcefully sold at bargain prices.

3. Foreign buyers and investors are facing the chop

Labour leader Andrew Little has committed to banning offshore ownership of New Zealand properties, "even if that means disobeying the Trans-Pacific Partnership Agreement to do so".

Recent data shows up to 30 percent of house sales are to non-IRD registered buyers, which is code name for foreigners. This will reduce demand.

One Asian property investor, who wanted to be referred to as "Angela", told Newshub she's selling all 25 of her Auckland properties because of a "fear of house price drops" and the "possibility of more tax on her profits".

Labour has committed to "significant tax reform", which is likely to see the introduction of a capital gains-style tax, which will see a large proportion of investors leaving the virtually tax-free Auckland housing market in search of higher returns elsewhere.

4. Interest rates are expected to drop further

This month the Reserve Bank cut the official cash rate to a new low of 2 percent and Reserve Bank Governor Graeme Wheeler signalled more cuts are on the way.

Dr Brash also expects that interest rates "will stay low for the foreseeable future".

This means a lower portion of household income is spent servicing the mortgage.

5. The Auckland Unitary plan means a new style of housing

The Unitary Plan is designed to see 422,000 houses built in Auckland by 2040, many of which will be family-style apartments.

Currently with a budget of around $700,000 you'd be lucky to secure a run-down property in south Auckland. But if you wait a few years, you might find comfort in a modern, insulated property that's zoned for good schools and requires little maintenance.

Newshub.'

[Blod]

In threads like this where there is evidence of HPC someone always proposes that the drop will be short lived because of the underlying demand.

That's how logically things should work, but the trouble is bubbles by their very nature aren't logical. The loss of confidence in house prices has traditionally been recovered by just lowering rate a bit. In the past the markets only question as a bubble popped was do I wait a little long just to be sure I'm not catching the knife as it were. Spool forward to our current predicament, instead of raising rates as soon after GFC as reasonable central bankers took the neo-classic economic route and didn't. A further issue is that their domestic banks have been forced to turn to foreign funds to support their bubble, that will stop. Like here for those investors to regain confidence takes years.

Once the various central bank blown housing bubble begin deflating these nothing left to stop them.

[Guest TheBlueCat]

I really do hope that New Zealand finds the relevant demons and faces them more quickly than the Australians have.

[Sancho Panza]

http://www.radionz.co.nz/news/top/320192/auckland-house-prices-fall-4-percent

' Auckland prices fell 4 percent last month, following the introduction of tighter lending rules.

Average prices for the region were at $825,000 in November, a slight drop from the record high in October.

In an attempt to ease pressure on the local property market, Auckland-specific lending restrictions were introduced on 1 October, requiring investors to have a 40 percent deposit to buy property.

The new policy was put into place following calls for the government and the Reserve Bank to take action on the Auckland housing crisis. Economist Shamubeel Eaqub had said the Reserve Bank had been complicit in creating a housing bubble.

"We have more debt in the economy relative to the size of the economy ever in history. And I think it is completely reckless and the Reserve Bank has failed in its fiduciary duty.

"And it shouldn't be allowing the banking system to lend this kind of money and we should expect the Reserve Bank to be far stricter in terms of the lending restrictions that take place in terms of mortgages."

In September Bill English told RNZ he expected the new restrictions would have some initial impact on rising prices, but he was not sure how long for.

"We've found that these tools for controlling demand can have a limited impact, but the long-term solution is just more houses on the ground, and buyers starting to believe that house prices won't keep going up because they can see more houses being built."

Early reports indicate that this may be exactly what is happening. The Real Estate Institute New Zealand (REINZ) said the underlying trend for Auckland prices continued upwards, rising at a compound annual growth rate of 13.2 percent, despite the drop in the median monthly house price.

REINZ's latest figures also showed that national median house prices have continued to rise to record breaking levels, but the pace of growth is slowing overall.

The nationwide median price for houses rose a seasonally-adjusted 13 percent to $520,000 in November, from $459,500 the year earlier, but fell 0.2 percent on October.

Ten out of 12 regions had record high median sale prices last month, except Auckland and the Central Otago Lakes.

On a seasonally-adjusted basis, the number of sales in November was little changed from October, at 7576, but down 7.5 percent on the year earlier.'