A profound inflection point?

For several years I have followed developments in the property market with interest, and, at times, with regret for having remained on the sidelines, as prices have spiralled ever higher and higher. Finally we are starting to witness the beginnings of a reversal in prices, but the mainstream opinion amongst property investors at this point seems to continue to be that property prices will merely "slow" and that we are in for a soft landing.

However, the more I read and think about this, the more I wonder whether property investors have not come to grips with the profundity of what is happening globally in credit markets and the implications this holds for property prices globally. We could well be in the early stages of one of the biggest property market crashes in history with profound implications for the global economy.

At the inflection point of a huge bull market participants often are blind to profound changes that are taking place and are too slow to change their views. Often by the time they figure it out its too late to act and catestrophic losses have been realised. This is particularly the case for market participants who have not lived and invested through multiple cycles, and the problem is that cycles can take a long time to play out. The good times for property investors have lasted so long that it has come to be perceived as normal. This has played itself out time and time again in the stock market but never before have we seen something potentially of this scale in global property markets. Investors talking about a mere 'slowdown' and even perhaps looking at picking up bargains only a few months into the downturn have, to my mind, completely missed the fact that we have passed a pivotal inflection point.

Over the past last two to three decades, and especially during the last six years, we have had one of the biggest global property bull markets in history, with the amounts of money involved eclipsing the dot-com boom and indeed any other bubble to have ever come before it. Prices have risen by 10% a year or more (in some cases significantly more), but this is not normal! By virtually every metric property prices are unbelievably expensive, and history shows that every bubble has eventually reversed itself. This one is unlikely to be an exception.

People have misunderstood exactly why prices have risen by this much. (I have challenged many to explain what law of the universe mandates that prices should go up at 8-10% a year and not one has been able to offer a plausible explanation). Absolutely the biggest driver of this boom has been the willingness of banks and investors (in the case of securitization) to lend more and more money to people to invest in property on loose terms and at low interest rates. When banks start offering 50 year mortgages and 100% finance and the like, it becomes clear that peoples' ability to borrow yet more amounts of money has come to an end. And all this franetic lending activity has of course been accelerated by an unprecedented level of speculative activity in property markets in recent years.

An abundance of cheap credit and ever-loosening credit standards has driven property prices higher and higher. This is what has driven the dramatic increase in demand/money flowing into housing, as the natural economic growth cycle can only support growth in real house prices of about 1-2% at best (very long term measures have put house price growth at slightly less than 1% in real terms). Property price have gone up a long, long, way, and most property investors do not seem to appreciate that this has been driven almost entirely by debt-fueled demand and low interest rates. This is cyclical not structural!

What is most dangerous is that this trend becomes self perpetuating (which George Soros has pointed out), as higher property prices increases the level of perceived collateral to re-lend against, so more lending ensues. All this leads to a significant underestimation of the level of systemic credit risk built into the system, and is also why the developed west has been running such dangerously large current account deficits for so long!

Also important, rising prices also act to reinforce the perception that property prices always rise and is therefore safe to lend against aggressively. This belief is now being revealed to be erroneous and the implications are potentially huge because what we could see is a reversal of this credit-driven boom in prices. As prices fall, banks get more nervous and willing to lend less money, so prices fall further etc and the cycle can become self-perpetuating on the downside. This has already happened before in Japan where property prices have fallen for 14 consecutive years as it continues to unwind.

It always takes a trigger to turn things around and we have now seen this. The unravelling of the US sub-prime crisis has been the trigger, and now that the debt tap has been suddenly turned off its seems to me that a collapse in prices (not just a "slowing") is now virtually inevitable. We are already seeing this.

Furthermore, this could well be a global phenomenon not just a US phenomenon. The boom has been global and driven by globalised financial markets, and consequently the bust must therefore also be global. Already we see in the UK that prices are absolutely collapsing. Sentiment and psychology are central to booms and busts, and what we are beginning to see now is a reappraisal by banks globally about the riskiness of real estate lending which will now begin to play out for several years. Access to funds from "securitization" is now a thing of the past with the incentive problems of separating ownership and origination of loans revealed, and to top it off, the devastating credit losses in the US now mean the balance sheets of the global financial system has taken a big hit and credit rationing has begun. NZ and Australia will not be unharmed. Yes, NZ has not participated in sub-prime lending and securitization, but prices have nonetheless undergone the same debt-fueled bubble dynamics with valuation metrics absolutely off the charts. With the trigger flipped there is no going back and sentiment has turned.

What most concerns me about this is the level of debt involved. People investing in property have become completely oblivious to the tremendous amount of risk they have undertaken. A collapse of this nature has the potential to completely undermine western consumption and threaten the stability of the entire banking system.

Look at stock prices! Share market investors are waking up to the problem. The real risk is that with a reversal of lending and the wealth effect, consumption slows right down, slowing the economy and leading to job losses. This in turn further increases pressure on property prices etc. And to add insult to injury, inflation is now getting out of the bag. If inflation kicks up interest rates of 15% or more are not impossible (they are already 10% for floating mortgages). The fallout could be huge. I could well be being too alarmist here, but certainly for the timebeing there seems to be little justification for having any exposure at all to property given the considerable downside risks that are emerging and the still-stratospheric level of prices.

I hope I'm wrong. I wish money-for-nothing was the way the world works and everyone could get rich just borrowing lots of money and buying property. But unfortunately that is not the way the world works, and unfortunately history shows that when everyone comes to believe the contrary that a huge collapse is usually nigh. I believe the 'get-rich-quick' pundits who have populated global property markets in recent years are going to get their comeuppance. The scene is absolutely set for a devastating crash globally.

I'm interested in peoples opinions on this. This has really only just dawned on me and I've been slow to realise the ramifications. I'm not one to usually scaremonger but occasionally the doom and gloom merchants are right, and their case seems compelling. It may well be that they were right all along.

Dimebag,

Property prices never fall? Check out the news piece below dated 13 March 2008. Prices have fallen 10-20% in California over the past 12 months. Any investor with 80% leverage would be basically wiped out.

http://news.yahoo.com/s/ap/20080313/...ef=patrick.net



LOS ANGELES - Median home prices plunged in many of California's most populous counties in February, with Southern California leading the slide with an overall drop of 17.9 percent compared to a year earlier, according to new housing data released Thursday.

ADVERTISEMENT

The drops reflect a deepening housing crisis in the state, which saw home values soar during the housing boom then decline sharply in most areas.

Median home prices fell this year in 15 major counties, DataQuick Information Systems said.

The median price in a six-county area of Southern California fell to $408,000 — the lowest level since October 2004, when it was $402,500. That median is 19.2 percent below the region's peak price of $505,000 last summer, and it's 1.7 percent below January's median, the firm said.

In the nine counties of the San Francisco Bay Area, the median price fell 11.6 percent to $548,000 compared to a year earlier and 17.6 percent from the region's peak median price of $665,000 last summer. Bay Area prices were essentially flat from January.

Home sales volume also kept sliding last month.

Sales fell 39 percent from a year earlier in Los Angeles, Orange, San Diego, Riverside, San Bernardino and Ventura counties. In all, 10,777 homes were sold in February in those six counties, up 8 percent from January, DataQuick said.

Southern California's home sales volume has hit new lows every month since September.

The nine San Francisco area counties saw a similar slowdown, as sales dropped 36.7 percent last month from February 2007.

Some 3,989 homes were sold in San Francisco, Marin, San Mateo, Napa, Alameda, Sonoma, Contra Costa, Santa Clara and Solano counties. That was up 11.2 percent from January.

Even as prices fall, buyers remain slow to dive into the market, with many waiting for prices to fall further.

Others have been unable to find affordable financing because lenders stung by soaring mortgage defaults and foreclosures have cut back on the easy lending that helped propel the housing boom.

The dynamic has worsened the prospects for many homeowners desperate to sell as falling home values drain their equity.

Statewide figures were expected later Thursday.

More evidence of a systemic credit crunch across the entire mortgage market and the spreading to the UK.


http://money.cnn.com/2008/03/13/news...on=patrick.net

NEW YORK (CNNMoney.com) -- The credit crunch has finally hit the traditional mortgage market.

Investors are now shunning mortgage-backed securities issued by government sponsored enterprises Fannie Mae and Freddie Mac, which have been critical in keeping the real estate market from completely falling apart.

Some fear this development will make it harder for people, even those with strong credit histories, to get a home loan.

"Even if you have good credit, you don't know if they are going to give you a loan or not," said Joseph Mason, a senior fellow at the Wharton School of the University of Pennsylvania.

And for those who can still get a loan, the tremors in the mortgage-backed securities market has made loans more expensive for borrowers. As the prices of mortgage-backed securities have fallen, their yields have risen, leading to higher mortgage rates.

The national average rate on a 30-year fixed-rate mortgage was 5.96% Thursday, after jumping to 6.08% earlier this week, according to Bankrate.com. Rates on a 30-year fixed mortgage were about 5.90% a week ago. A borrower looking for a 5-year adjustable-rate mortgage would pay 5.71% today, up from around 5.03% a week ago.

"The cost of mortgage financing has increased dramatically and it couldn't come at a worse time," said Tom LaMalfa, managing director of Wholesale Access, a mortgage research firm. "We're going to see a further diminishment of available mortgage money."

Not just a subprime problem anymore

Rising defaults and delinquencies effectively shut down the subprime and jumbo mortgage markets last summer, but borrowers with good credit could still get conventional loans that met the agencies' criteria. That's because investors continued to buy securities - backed by Fannie (FNM) and Freddie (FRE, Fortune 500) - seen as safe since they carry an implicit federal government guarantee.

But the landscape changed in late February. Investors were spooked after Fannie and Freddie reported a combined $6 billion in losses for the fourth quarter as defaults rose.

A new round of fear washed over Wall Street last week when financial fund Carlyle Capital announced its lenders wanted more money to make up for the depressed value of the agency mortgage-backed securities Carlyle had put up as collateral for loans. An announcement by the Mortgage Bankers Association last Thursday that defaults had reached record levels didn't help soothe concerns.

This bad news comes as Congress, in an effort to stimulate lending in higher-cost areas, temporarily raised the size of the mortgages Fannie and Freddie can guarantee to as much as $729,750.

The situation has grown so worrisome that the Federal Reserve took several steps this week to inject liquidity into the agency mortgage-backed security market by allowing banks to trade these securities in as collateral for loans.

On top of that, to shore up their finances and regain investors' trust, Fannie and Freddie have been instituting new fees and stricter underwriting guidelines, making it costlier and harder to qualify for traditional mortgages.

In an investor conference Wednesday, Freddie officials sought to calm jitters by saying the agency has "significantly" increased prices, introducing new fees based on risk levels.

Prepare to pay more for a mortgage

Wholesale Access has estimated that all these changes mean 30% to 40% of borrowers who could have qualified for a conventional mortgage a year ago can no longer do so.

Fannie and Freddie are demanding higher credit scores and charging higher rates for those who don't have them. Until recently, a borrower with a 620 score might pay the same as one with a 680 score, said Victoria Bingham, chief executive with Pacific Rim Mortgage in Tigard, Ore.

But now that person might have to pay a half percentage point more. With today's rates, that translates into 6.75% for a 30-year fixed-rate mortgage instead of 6.25%, or $74 more a month on a $225,000 loan, typical for her client base.

Borrowers must also put more money down, especially if they don't have stellar credit. For instance, those with down payments of less than 5% need a credit score of at least 680, said Steven Plaisance, executive vice president of Arvest Mortgage Co. in Tulsa, Ok. Previously, he could make loans to people without big down payments if they had other strong points, such as stable employment.

Experts said they don't think traditional mortgages will disappear. But if they are harder to get, it will take longer for the housing market to recover as a glut of unsold houses could lead to even more declines in real estate values.

"Fewer buyers who can come into the market mean more homes on the market," LaMalfa said. "The absence of an increase in demand will put further pressure on prices."




http://www.guardian.co.uk/money/2008....interestrates


House prices across the UK tumbled in December at the fastest pace in more than 15 years as tighter mortgage lending and higher interest rates pushed the property market closer to the biggest crash since the early 1990s, the Royal Institution of Chartered Surveyors says today.

Surveyors are urging the Bank of England to cut interest rates without delay to attract buyers and help stabilise the market. The latest monthly snapshot of the housing market by the RICS compares the proportion of surveyors reporting a drop in prices with those who saw the market climb. The study shows 49.1% more surveyors reported a fall than a rise. November's level was 40.6%.

The survey offers the bleakest picture since November 1992, when the UK last saw a severe slump in the housing market as properties shed almost 30% in value against a backdrop of soaring interest rates.

Price falls were seen across the country, with East Anglia and the West Midlands showing the heaviest decreases. Only surveyors in Scotland reported some subdued price rises.

"The Christmas slowdown started much earlier this year and hit harder," said Jeffrey Hazel, of Geoffrey Collings and Co in King's Lynn, Norfolk.

Even in London, which has been at the forefront of Britain's housing boom, surveyors said the outlook for 2008 was not promising. "We need one or two very urgent mortgage interest rate decreases," said Arwel Griffith of Lexicon Surveying Services in Walthamstow. "Even that might not assist very substantially in the currently gloomy market."

Ian Perry, a spokesman for the RICS, said: "The housing market is clearly feeling the pinch from the credit crunch and the round of interest rate hikes in 2007."

The Bank of England raised interest rates five times between August 2006 and August last year to 5.75% to cool the rampant expansion of the UK economy, double-digit house price growth and decade-high levels of inflation.

Last summer's credit crunch, sparked by the sub-prime mortgage crisis in the US, has gripped the world economy, making lenders more cautious. This has made it difficult for many buyers to get on to the property ladder, dampening demand.

Meanwhile, supply to the market is edging up. The balance of surveyors reporting a rise in new properties to sell turned positive for the first time since May. The RICS said the looser supply was partly due to the extension last month of home information packs to cover all properties as homeowners brought forward sales of their homes to avoid extra costs.

But Perry said the underlying economic conditions were vastly different from the early 1990s. "Supply would have to loosen considerably before prices experience a significant dip," he said. "The coming months will be of great importance to the market. The Bank of England may have to cut rates further if the market is to remain in a stable condition."

The Bank's quarter-point interest rate cut last month did little to bring Christmas cheer for buyers, the RICS said, with the survey showing that 25% more surveyors reported a fall than a rise in buyer inquiries. But this has eased from 31% in October as first-time buyers wait on the sidelines in the hope that interest rates will fall.

Policymakers decided to hold interest rates at 5.5% last week as they juggled a potential economic slowdown with fears of inflation ticking higher after oil prices flirted with $100 a barrel this month and as food prices creep higher. But analysts forecast that borrowing costs would start to fall next month by a quarter point, possibly ending the year as low as 4%.

Fallout
· London and the south-east, where million-pound homes became common and properties were snapped up in days, can no longer withstand the slowdown. Demand from the City is falling as bonuses and jobs suffer the effects of the credit crunch.

· The RICS says Scotland is the only region which saw price rises, albeit at the slowest pace since April 2005.

· While the RICS says the West Midlands is bearing the brunt of recent falls, Nationwide has said this was the most stable region last year.

· Northern Ireland, which is not covered by the RICS survey, was another red-hot market for housing, making it vulnerable to sharp corrections in prices.

· Northern Ireland and Yorkshire & Humberside were among the first areas to see price falls during the last quarter of 2007.

I can't find a better source for this chart showing significant house price declines, so check out "figure 2" on this RBNZ May 07 Financial Stability Report.

Also, an interesting report by the authors of the chart is found here:

Girouard et al (2006)

Thanks for that Lizard,

Have been watching some of Peter Schiff's commentary on You Tube - the link below is well worth a watch (as is any of his other commentary that is available), where he talks about (in 2006) the unsustainable nature of the US economy and how it will all come undone when the property market inevitably collapses.

http://www.youtube.com/watch?v=sDh3F...eature=related

Schiff is very impressive - not least because he predicted the current crisis almost exactly to a tee years before it all unfolded. The arguments he makes about the very bleak outlook for the US economy and property prices are extremely compelling, and how it is virtually inevitable that the US goes into a severe, severe recession. He has suggested property prices will fall 50-70% from peak levels in some hotspots. Before listening to his arguments I would have thought this was foolishly alarmist, but if you hear him out you'll see that this is actually a reasonable projection.

Prices have risen two to three fold while the fundamental underpinnings of the economy have gone backwards, and in a severe recession it is difficult to see how property would not revert to levels pre boom. A 50-70% decline over the next 3 years seems quite possible - prices are already down 20% in some regions and delinquencies are job loses are only just beginning. Falls of this nature will bankrupt the US financial system and plunge the economy into a deep recession. The USD will also collapse as inflation takes off. Interestingly though, he makes a compelling argument as to why this won't necessarily spell doom for the rest of the world, and in actual fact it may benefit.

His website is also well worth a browse.

http://www.europac.net/#

Interesting times,
Dimebag

Look at this arrogant w**ker Mike Norman try and laugh Schiff off the air for suggesting in late 2006 house price will fall in 2007! Everything he said began to immediately come true as this clip demonstrates (with subsequent news headlines etc inserted after the fact).

http://www.youtube.com/watch?v=yoZV5...eature=related

Not out of any economic textbook but heck one version of how the US economy works )I did post an another thread somewhere) I have keep in my journal now all seems too true



The biggest organised racket in the US rests upon the dream of owning one's home.

Hundreds of legally sanctioned scams operate under this ruse.

The US economy depends on continous expansion of housing construction and financing of all types. The Fed tries to orchestrate the triangle of the US, OPEC and China. OPEC supplies oil, which allows the US to build houses, which increases the money supply, which allows the US to buy ever cheaper junk from China and more oil from OPEC.The profits from this are then dumped back into the US, where they become more crackerbox-on-steroids McHousing at lower mortgage rates, enabling the cycle to start again

Break part of that cycle and its all over. It was nearly broke years ago but the likes of Bear Stearns became ever more creative with their 'legally sanctioned ruses'

Quote:

---

Originally Posted by Dimebag

Thanks for that Lizard,

Have been watching some of Peter Schiff's .........

His website is also well worth a browse.

http://www.europac.net/#

Interesting times,
Dimebag

---

Likes of Snoopy and Ratkin will be impressed that this guy selects PGW as a stock to hold in these times ....... OMG ... a yank doing this

Good stuff

Dimebag..... I to have also had a keen interest in the property market for many years. IMHO one of the greatest inflences in property price is the shortage of land, and therefore all up cost. I'm talking mainly in areas of say the North Shore. If you can find a site, price has been $300k++, then to build a 200m2 house @ $2000m2 making $700k+.
So I'm sure we are about to see property companies start to drop like flys, or just like the finance companies......

Quote:

---

Originally Posted by ari

So I'm sure we are about to see property companies start to drop like flys, or just like the finance companies......

---

At least then it might be possible to get a chippie or sparkie to do some jobs on the place without having to wait for 6 weeks and take out a mortgage to pay for it.... :mad:

YOTT

Exactly...my timing could not have been better, more luck than anything else after waiting 5 mths for Building Consent I am due to start building any day. Golden rule is no money up front for any subbie......and as you say, should be easier to find!

House price bubbles are a regional phenomenon in the anglo-economies. Not all markets are the same, is the first key observation.

The past 20 years, up to about 2005, has seen the world's central banks slowly throttle inflation out of the world's economies. This has changed, recently, with inflation pressures growning, from 2005 to the present. The prospect of recession in the US should cap some inflationary pressures but the Fed increasing the liquidity in the capital markets by lowering interest rates and accepting lower quality debt for capital adequacy reporting will keep inflation at current levels. Higher inflation, as the second key observation, seems to be here to stay. With inflation high, it is difficult to house prices collapse.

The third observation is that we are building and buying bigger, more elaborate houses built to higher insulation and facility standards by an industry incapable of demonstrating productivity increases with materials that are inflating in price. The commodities boom makes us feel richer so we want better housing stock which costs us more due to the commodities boom ...

NZ lenders are still in the market. The money is horrendously expensive <- this is the single biggest factor in the housing affordability stakes - the cost of a mortgage and NOT the price of the asset is the fourth key observation.

My view is that due to the above factors the housing market, in NZ, will not crash. There will be an orderly unwind as highly leveraged players take a bath due to increasing mortgage rates and as market uncertainty slows sales. Hence there might be patches of price weakness but it has to be remembered that constant house prices means declining asset value as high inflation chips away ...

New Zealanders may slow down the property churn to match Australia and the rest of the anglo-economies. Even the "investors" will find a way to cope with the high mortgage rates.

Just as the price run up in NZ (Queenstown excepted) was not a bubble; there will be no anti-bubble price run down.

Now might actually be a great time to buy property ...

Quote:

---

Originally Posted by Year of the Tiger

At least then it might be possible to get a chippie or sparkie to do some jobs on the place without having to wait for 6 weeks and take out a mortgage to pay for it.... :mad:

YOTT

---

Totally agree there! I can't wait for someone to have the time to undertake some 'smaller' jobs. Of course, I just may not be pushy enough?

I don't mind having to wait, but when they spend weeks telling you that they will be there in two days time, it does piss you off a bit...

Enumerate,

Thanks for your thoughts, but I must respectfully disagree. After a long boom, people will proffer every conceivable rationalisation for why current prices are not too high and will not fall. The same thing happened during the dot-com bubble. The fact that stocks were trading at ridiculous multiples to earnings, if indeed there were any earnings, was not considered relevant at the time. Likewise, the fact that property prices are unbelievably expensive relative to rents and incomes continues to be similarly dismissed as unimportant.

Clearly things have not been taken to the same extreme as in the dot-com bubble, but still, some figures are telling. The median house price in NZ is $340,000 while the median household income is $56,000, which is say $45,000 after tax. So the median NZ house price is 7.5x the average take home pay! This is unbelievable. The median household cannot remotely afford to pay for the median house.

Consider the median household trying to buy the median house with a 10&#37; deposit, and a 30-year mortgage with 9.5% interest. The annual payments on this mortgage would amount to about $31,000, which is 70% of household after tax income!! Even if 20% was put down, payments would still amount to 60% of after tax income. I don't have figures on average rents, but I understand that they are only generating rental yields of ~3-4% compared to interest rates of closer to 10%. This is surely not sustainable.

So if prices are so unaffordable how did they get this high in the first place? The key point to consider is who the marginal buyer of property has been in recent years. The marginal buyer is the one who sets the price. I would argue that the marginal buyer has been (1) property speculators drawing on existing equity in other properties to leverage themselves into a new property in the expectation of large capital gains, or (2) wealthy immigrants using savings to buy properties, combined with constraints on new housing supply, or (3) irresponsible lending by banks to first home buyers who simply cannot afford the properties they are acquiring.

There has also been some "trading up" activity by people using existing home equity to buy into a more expensive house with the aid of additional debt, but this trading up behaviour requires somebody to buy their old house so in aggregate this should not push up median prices.

These are the only potential explanations. However, net permanent and long term immigration has fallen off a cliff recently and is now at close to break even levels, and the other sources of demand rely on aggressive lending by banks and a continuation of speculative demand. With prices having flattened off and begun to fall, as well as the significant developments emerging internationally, banks are tightening lending standares and speculators are becoming more cautious (or simply cannot obtain financing to pay previous prices).

Consequently, house prices must fall simply because with tighter lending standards there is now an absence of buyers who can afford to pay current prices. They will not collapse overnight. What we will see is a widening of the bid/offer spread, as buyers can only bid to the level they can afford while sellers will continue to hold out for yesterday's prices which they erroneously perceive their houses to be worth. Consequently, the inventory of unsold homes and days it takes to sell should be expected to skyrocket at the market turning point, which is exactly what we are seeing. Prices must now undergo an extended period of correction.

The abolute most new home buyers can realisticlly afford is 50% of household income (particularly with the rising fuel and food prices, and the cost of living generally). This suggests the median price should be closer to $220,000 (35% below current prices). Even 50% of household income is a stretch. House prices have received a boost from both an expansion in household income through the increasing prevalence of double-income households and by a willingness of households to commit an ever-growing portion of income to mortgage service. The ability of households to pay even more towards a mortgage has now come to an end.

On top of this, this is while the economy remains strong, with record-low unemployment and income growth. There is an absence of any margin of safety in current house prices. What if the economy goes into recession and unemployment jumps and incomes fall? The correction could be severe. Indeed, if house prices start to fall we will likely see a sudden slowdown in discretionary consumption as the wealth effect reverses and the punters stop borrowing and spending up large and start saving money and paying off debt. This should trigger a broad slowdown in the economy.

Yes, the migration tap can potentially be turned on. But it relies on NZ being able to attract high-income/net worth people to live in NZ despite our low incomes. Some will come and this could provide some support in major centres such as Auckland where supply constraints are real, but not in small provincial centres. Furthermore, there is a real risk NZ experiences emmigration which would further compound the bear case.

As for the inflation argument, our reserve bank is much more focused on controlling inflation than the fed and will aggressively hike interest rates if inflationary pressures continue to build. Yes, house prices will go up with inflation but so will interest rates, and the punters' monthly payments will go through the roof!! Stretched consumers will simply not be able to afford to pay the morgage and default activity will be high. Prices will fall in real terms (they fell 40% in the 1970s in NZ) and this is what really matters, as any inflationary gains will ultimately be paid for by homeowners in higher interest rates in any case.

Dimebag

Dimebag – thank you for your thoughtful comments. Very much welcomed.

Needless to say, the issue of property has as much social and emotional connotations as anything else. However, what happens to property as an investment class will have much less to do with how government addresses such social connotations (increase land supply, affordable pricing, etc.) than what investment fundamentals may dictate. The bottom line is that property values will revert to the mean, i.e., to their long term trend – either as a shock or as a gradual trend.

Beyond all the nonsensical catchphrases (e.g., “property never falls in price because they ain’t making any more land”, and other halfwit justifications), property prices (or the return from it), will respond to a simple formula:

Total Return = growth in economy + rental yield + growth in speculative expectations

The growth in the economy may be around 2%, rental yield 5%. For 2008 and beyond, one may be forgiven to think that the “growth in speculative expectations” will be pretty much negative or zero at best. However, given the simple fact that the law of return to the mean will catch up sooner than later, it implies that the speculative returns will be negative. Therefore, unquestionably, “total return” from property will be negative.

Nevertheless, this does not necessarily mean that the price of property will become affordable again, where affordability is measured as repayments no greater than 30% of BEFORE tax income. Whether in NZ, in Australia, in USA, or anywhere else, owning a property is not a right but a privilege. This, unfortunately, is not fully understood or acknowledged for the simple reason that property is a highly emotional issue. Again, if we look at property as simply another asset class, nothing guarantees that such an asset class will ever be (in average) commensurate with 30% of before tax income.

Salary growth will never catch up with property growth for one simple reason: NZ has not increased productivity at the same rate as the increase in credit. This is the same as saying, property values have increased at a rate comparable to the rate of increase in credit but salaries have kept behind because NZ has not increased productivity at the same rate. Again, in other words, the amount of money/credit in circulation has increased in NZ (and the US as well) to such an extent that NZ’s asset backing (including property) has increased in price to equate to the amount of money in circulation.

Who has been responsible for such an increase in liquidity? The answer squarely points to the massive amount of liquidity injected by the Reserve Bank from 2002 to mid 2007, when Bollard resisted increasing the OCR. But Bollard is only half responsible for this. He has been given the mandate of ensure the implementation of Keynessian economics in the false belief that it is possible to stimulate growth by increasing liquidity. The RBNZ modified by Cullen clearly points at increasing liquidity in order to decrease the real value of the NZ dollar and foster employment while increasing the target range for inflation. This simple change is one of the key factors in the increase in property prices – huge liquidity and huge credit expansion leading to huge price increase to equalise credit to asset backing.

Some things can be done to avoid a property crash and pain in the unsophisticated property investor:

1) Opening the immigration tap is NOT an option. The reason is that because of NZ’s quasi 3rd world features, it is not attractive to top immigrants (world demographer Harry Dent confirms this views). NZ has to compete in the global marketplace for top labour – and NZ cannot compete. NZ is the default choice to those that cannot access a better country. Therefore, we get the second/third tier of immigrants – those who would end up opening a convenience store in the city centre and a $2 Shop in a suburban mall. This is not the group that will rescue NZ property.

2) What NZ can (and will possibly do) is to generate inflation. High inflation will be the panacea of the home owner because inflation will liquefy debt and will push property prices up or cushion a steeper fall. This is what NZ government has been gearing up for through the ballooning public service. There is no better way of generating inflation than increasing the size of the welfare state. With inflation, home owners will see their debt decrease in real terms but the proles will be oblivious to the fact that inflation is an additional tax on them – a tax used to rescue a property market collapse.

RBNZ is not that concern with inflation, despite the rhetoric. The real reason for high interest rates is NZ’s need for overseas funding to support individual borrowing. A low OCR will leave NZ without overseas funding. Arguably, the OCR is low in relative terms to NZ’s country risk – NZ’s risk is much greater than that implied by just 1% difference in OCR versus Australia’s.

Overall, I believe that property prices will revert to the mean (will decrease) but the pain of borrowers will be cushioned by a perverse mechanism of increasing liquidity and fostering inflation, which is a covert way of taxing everyone.

Dimebag:

I agree you calculations make it nigh on impossible for first home buyers. But I don't think it's correct to calculate the corrected median house price based on what the first home buyer can afford.

Instead of a 90% mortgage I guess the figure used should reflect the median amount people own of their houses. Given that steepness in increase in prices recently it's probably closer to 55-65% i'm guessing.

Irresponbile lending or not, ultimately the current house prices must be close to affordable to the "median" otherwise there would be alot more panic than we see.

Goodness me, an intelligent thread on sharetrader! I was beginning to despair. I'm actually trying to sell my place at the moment due to a shift from Wgtn to, sigh, Akl. We've had a few reasonable OK offers but have turned them down as I tend to agree with Enumerate more than Dimebag on this one.

To clarify, I think prices here on average are over valued, maybe by as much as 30% as suggested by a simple discounted rents model, but the average will likely mask all sorts of regional and intra-regional variations. In Sydney and Melbourne, the pattern has been that weakness in property markets has mostly been seen in apartment markets and outer suburban areas (in real terms I believe prices in Western Sydney have now been falling for over 6 years). In contrast, prices for fee simple homes in relatively upmarket areas have held up fairly well whilst rents have boomed. House prices in the resource rich states have continued to boom.

IMO the dynamics in the NZ market will likely play out similarly to the Oz experience. House prices in most of the provinces will likely remain robust as long as the agricultural boom continues (I've seen some analysis that suggests it may have more legs than the hard commodities). Prices in outer suburban areas in Wellington, Chch and especially Auckland will likely to a huge hit. The holiday home market, especially for houses not actually right on the waterfront also look very vulnerable. But prices for fee simple homes in desirable inner city locations and internationally desirable spots around NZ could hold up quite well.

Reasons:

1) IMO inner city homes remain cheap as chips in NZ. My wife and I earned an enormous (by NZ standards) income while living in Europe but could not hope to afford a decent home in an inner city location without working for +10 years; let alone one that has a seaview or a great backyard which is easily affordable here. Over the ditch in Sydney or Perth likewise we would be struggling (even given higher salary levels there) to buy something of comparable quality. This is a major factor why we decided to settle back in NZ and I'm certainly not alone in this regard!
2) Relatedly, when we are looking at inner city and lifestyle location you probably really do need to take into account global prices and incomes. I've already spent 4/10's of my working life offshore and will likely spend a few years more at some point. Like a lot of kiwis my lifetime income is significantly higher because of offshore earnings and its my lifetime income that factors into decisions like buying a house.
3) There are a couple of 'shock absorbers' out there that should especially cushion the higher end. The most important is the exchange rate. It is exceptional and unjustifiably high according to the RBNZ and if history repeats it will tank when they do ease policy. This will be huge boon to those with substantive offshore wealth looking to enter into NZ property (be it kiwis abroad looking to return, kiwis here with offshore wealth or potential new immigrants). Second, NZ's after tax incomes for upper income earners are actually quite high (from memory around 5th in the OECD). They're going to get higher still going forward with the tax cuts. Another absorber which will benefit all property holders of course is that interest rates are likely at a cyclical peak. We could easily see the OCR come down under 500 basis points over the next few years. If the down cycle in property finally kills kiwi's love affair with property as an asset class it might actually stay there ;-)

Compare my previous post a couple of days ago with what Brian Gaynor published today in the Herald:

"New Zealand is in a particularly precarious position because we have taken full advantage of the global liquidity explosion to borrow heavily for consumption purposes and to invest in residential housing.

With the contraction in global liquidity expected to continue, the next big issue for the domestic economy is the Tokyo housewives and their New Zealand dollar deposits.

If these investors take their money home there will be a reduction in New Zealand liquidity, we may then have to offer higher interest rates to attract alternative liquidity and the kiwi dollar could come under pressure at the same time.

This is not a particularly attractive proposition for highly leveraged domestic companies and individuals."

http://www.nzherald.co.nz/section/3/...ectid=10499497


As mentioned, the fact that RBNZ is keeping rates at a so-called "high" level (whichis low given our country risk) has more to do with borrowing needs (mainly for unproductive purposes) than inflation.

Property is NZ's favorite investment class. So many 20s/30s years olds come back from the O/Es flushed with enough cash to buy 2-3 properties in a pretty desirable country, so how could there be crash with such constant demand.

For the property market to tank in NZ, you'll real a real economic shock especially to the to the rural sector. All these media reports are rubbish and over-hyped about a property correction or crash, it hasn't happen, prices are still high.

Quote:

---

Originally Posted by Tok3n

Property is NZ's favorite investment class. So many 20s/30s years olds come back from the O/Es flushed with enough cash to buy 2-3 properties in a pretty desirable country, so how could there be crash with such constant demand.

For the property market to tank in NZ, you'll real a real economic shock especially to the to the rural sector. All these media reports are rubbish and over-hyped about a property correction or crash, it hasn't happen, prices are still high.

---

Re the O/E's flushed with cash... I've been working in Europe for 8 years now and, at least anecdotally, it's starting to get much harder for O/E people to get the big money jobs. 3 of my friends in the UK are losing their IT contracts next month (with no new contracts lined up at this stage), the bank I work for has got rid of about 80% of our contracters over the last year.

If the lay-offs and hiring freezes become more ingrained, the days of NZ O/E'ers raking in the big bucks may be over (for most) for the time being. Also the NZ'ers I've talked to who were buying houses 5 / 6 years ago are more inclined to be selling, rather than buying, houses in NZ at the moment. The general consensus is that the property market in NZ has peaked, so cash up while you can and switch to another asset class for a few years.

We're clearly in the midst of a global economic shock at the moment. At least in the UK it's much, much harder to get credit than it was a few months ago. Because of this (and general sentiment) the pool of willing & able buyers has shrunk dramatically.

The supply of houses on the market is increasing -- some homeowners can't remortgage when they need to, many others are toiling with higher interest rates and big increases in food & energy bills. Many of these people have to sell urgently and are being forced to accept offers far below what they would have got 12 months ago.

As you say, prices in NZ are still high. Way too high when compared to what they should be based on affordability. The next couple of years is shaping up to be a difficult time for many of the world economies.... the possibility of stagflation is growing ever larger. I wouldn't be surprised to see median house prices in NZ and the UK dropping 30-40% from their peak over the next 5 years...

Quote:

---

Originally Posted by patsy

As mentioned, the fact that RBNZ is keeping rates at a so-called "high" level (whichis low given our country risk) has more to do with borrowing needs (mainly for unproductive purposes) than inflation.

---

You're on to it Patsy

Thanks everyone for your considered thoughts.


AJ

AJ has raised the point that property owners in general have much lower leverage than the 80% or 90% used in my affordability example. The latest BNZ economics report actually quoted leverage being just ~25% of asset values.

While this is true, it is undeniable that property prices are set by the marginal buyer, and the marginal buyer is either a highly leveraged speculator or first home buyer, or immigrants (or returning ex-pats) who can afford NZ's high prices. With tightening lending standards, the price the marginal buyer is able to pay is declining.

Yes, many owners have high levels of equity in their house, but for them to realise this equity, they require somebody else to step up and assume their position. For this to suppport property prices overall, there needs to be an increasing availability of credit, but where is this increased credit going to come from? Money is getting more scarce, as patsy & Brian Gaynor's articles highlight, and was the original point made in this thread. Also, with property prices falling some of this "equity" will quickly vanish.

Further, the low level of leverage is likely the result of a significant proportion of the elderly and older baby boomers sitting on a house with the mortgage fully paid off. Yes, these people could afford much more expensive properties if they took on a mortgage, but remember, for them to "trade up", they would first have to sell the property they were in. This will not support property prices from a "median" perspective. And the reality of course is that many folk in this demographic have little desire to move.

The marginal buyer relies on debt financing and bullish speculative expectations. Already we have seen the tide of sentiment shift, and the average punter is often much more savvy than they are given credit for and is all too aware that prices are falling. First home buyers with cash are sitting tight on the sidelines with expectations that prices are going to fall over the next 12 months, as are budding speculators. A quick drive around the central suburbs of Auckland will confirm that new listings are cropping up left right and centre, but there is a complete absence of buyers!

This shift in speculative expectations is at least as significant as anything relating to affordability issues. A huge source of marginal demand has effectively dried up overnight. This itself should be enough to bring prices down at least 10-20%. The media will have a field-day as the data comes through and leverage punters will start to panic. The second round of price falls will result as banks begin to become much more cautious as banks tighten lending standards across the board in response to the declining value of their collateral and increased risk aversion, and the widespread effects of a weakening economy, higher defaults, and rising unemployment.


Skinny/Token:

Skinny and Token have raised the argument that prices may be more affordable on a "lifetime income" basis than a NZ income basis, and this could skew affordability statistics. This is an interesting point and I don't have the statistics to refuse it, and must be true to some extent. However, is it true to the extent that it can justify a abberational multiple of house prices to income?

There is a high risk that arguments like this a levelled to rationalise high prices. Sure, there are some ambitious and enterprising NZers such as Skinny who go overseas and come back with a small fortune to pour into domestic property, but is this really the norm? We are talking about median prices here. And even if that is the case, Corran's very interesting post points out that things might be about to get a bit tougher in these markets.

Furthermore, even if NZ prices are cheap relative to overseas, I believe international prices are destined to become a lot cheaper in the next few years as well, not just NZ prices. In fact I don't have a strong belief that NZ prices will underperform international prices, just that they will get dragged down with every other overvalued Western property market. At the margin, I believe things are getting much worse and the outlook for property markets in general, across the Western world, are increasingly bearish.

I do accept the point that NZ has "quality of life" value to offer to immigrants and that this leads to higher demand for NZ property. But this has always been the case. And our immigration statistics would seem to indicate that this is becoming less so. Indeed, the exodus of NZers moving to Australia is alarming.

Furthermore, we are talking here about median prices. I take your point that the high end may enjoy some support (as have premium areas in Sydney etc as you point out), as may some regions enjoying peculiar prosperity (such as dairy properties). In general, however, I think things are in for a significant correction.

Also Skinny, I have to disagree with your NZD argument. Peter Schiff makes the compelling point that a decline in the exchange rate is bad news for a country as it makes its citizenry poorer - particularly a country like NZ which is highly reliant on imports of foreign products. A fall in the NZD will decrease NZ's purchasing power and increase the cost of our imports, creating domestic inflation. Domestic inflation will further reduce housing affordability. Furthermore, interest rates may even rise, not just due to the RB reaction to higher domestic inflation, but also to continue to attract foreign capital in the face of a loss of confidence in the NZD - such liquidity from international investors has been the lifeblood of our property market.

Enumerate,

Also, to address some of your other arguments:

I disagree that the affordability issue relates to high interest rates rather than high property prices. The two are intimately related -the issue is that prices are far too high given the prevailing level of interest rates.

Also, people may increasingly be developing a preference for more "elaborate housing", but does this matter if people cannot afford these properties? Demand is a function of willingness and ability to pay. Ari points out that the replacement cost of a house on the North Shore is $500k plus the value of the land. Again, this is irrelevant if people can't afford to pay that much. Perhaps the value of the land has to fall. Or perhaps people will have to adapt - move out of NZ, out of Auckland, etc. And land shortage issues etc is a problem peculiar only to Auckland and perhaps Wellington to a lesser degree. There is plenty of land to develop in other regional centres.

Dimebag

OK, by reading this thread, I'm stuffed, first home buyer, low deposit etc etc. So what will i do? tap the parents for cash? If the bank comes knocking wanting an injection for a negative equity situation, what should I do?

So the person that buys my place at mortgagee auciton, will get a great place, would the bank want to sacrifice a 30% hit, if I can still pay my mortgage?

Well, if they want to take the hit, thats fine, as I won't have lost much in comparison, I'll walk away and move on.

Mr D holds, (perhaps unwisely, however he has to live somewhere, and will work to do so)

Quote:

---

Originally Posted by MrDevine

OK, by reading this thread, I'm stuffed, first home buyer, low deposit etc etc. So what will i do? tap the parents for cash? If the bank comes knocking wanting an injection for a negative equity situation, what should I do?

---

If it plays out as it did in the late 90's, the banks will allow a negative equity to continue so long as you are meeting your repayments. What happened back then, was that interest-only mortgages were almost impossible to get as the banks were wanting principal to be reduced without you lowering your home. It was mostly over-extended speculators who were forced into mortgagee sales...

Hey Dimebag, I would be (and indeed have been in a previous life) the last person to publicly defend the level of house prices in NZ; but as usual the media are being very sensationalist and undiscriminating about the current correction and my previous post was to point out that the median is not necessarily a good gauge of all markets. An example: over 2001 -2003 Aussie papers carried doom and gloom stories about falling house prices - complete nonsense for households living in Brisbane and Perth.

Regarding the offshore wealth point it is *much* more significant than you might think. Unfortunately, SNZ do not collect very good data on it (in principle foreign asset holdings are only collected if intermediated through the NZ funds mgmt industry), but there are a few sources around from which you can construct your own back of the envelope calculations which suggest they are out by a decent multiple (which as an aside is sorta interesting for our NIIP position and the true sovereign risk premium which should be attached to NZ assets). I'm not going to go into any numbers here but think about the issue from a first principles basis:
1) NZ capital markets are very shallow and offer limited diversification options.
2) Until recently the NZ funds mgmt industry was held (often for good reason) in very low regard
(1) and (2) imply there is every incentive for those to look offshore to build wealth holdings.
3) NZ's foreign born population is over 20% and our immigrant base is mostly skilled and semi-skilled experienced professionals. It is inconceivable that as a group they have no direct asset holdings offshore (which is what is 'recorded' by SNZ).
3) A significant fraction of NZ's domestic raised population will offshore at some point and save (directly and/or through a pension scheme). Again, these sources of wealth are not captured by SNZ.

Regarding the exchange rate, an appreciation for sure is wealth enhancing for NZ consumers as it improves our terms of trade. But exchange rates can still get mis-aligned from the perspective that they get bid up to levels that leave the current account in an unsustainable position (i.e. imports are 'too high' and exports are too low implying an unsustainable debt dynamic). Most economists would argue that this is the situation currently, even given the high level of international commodity prices. When the currency corrects it will be a blow for h/holds, but the blow will be cushioned by the fact that a correction will no doubt be a boon for many producers (exporters and those engaged in import competing industries), implying a healthier labour market.

Finally, I saw some comment here that NZ interest rates are high because of our offshore borrowing rather than domestic monetary policy. Both factors are at play but the monetary policy factor is without doubt by far the most significant factor. The differential between the NZ and US 10-year bond rate (a measure of the risk premium on NZ assets) is around 150bp. The differential between 90-day rates here and the US (a measure of relative monetary policy stances) is massive at around 500bp.

We can argue affordability forever, but to me prospective home buyers need to sort out wants from needs.

If you need to live in Manhattan, New York, you will need to live in an apartment.

If you need to live in some of our cities in NZ you may want a house but you may need to buy an apartment. Talking to an Auckland inner city building manager last Friday and he has seen lovely apartments for sale for under $250,000. With a 10% deposit and an interest only loan, why can't a young couple afford that? Cheaper than rent.

Quote:

---

Originally Posted by Arbitrage

Talking to an Auckland inner city building manager last Friday and he has seen lovely apartments for sale for under $250,000. With a 10% deposit and an interest only loan, why can't a young couple afford that? Cheaper than rent.

---

You're kidding, right?

Those inner city "lovely apartments" are most likely 1 bdrm studio types, rental perhaps $300pw, $350 at most, 6% yield if you're lucky.

Interest only mortgage on $225K @ 9.7% fixed rate = $420pw. Not to mention rates, insurance and maintenance which will add another $40pw approx.

Thus ongoing costs of owning that lovely $250K apartment are about 50% more expensive than renting the same apartment.

There is almost nowhere in larger NZ or Australia cities where buying is cheaper than renting. Interest rates are too high and yields are far too low.

SEC

Quote:

---

Originally Posted by skinny

In Sydney and Melbourne, the pattern has been that weakness in property markets has mostly been seen in apartment markets and outer suburban areas (in real terms I believe prices in Western Sydney have now been falling for over 6 years). In contrast, prices for fee simple homes in relatively upmarket areas have held up fairly well whilst rents have boomed. House prices in the resource rich states have continued to boom.

IMO the dynamics in the NZ market will likely play out similarly to the Oz experience. House prices in most of the provinces will likely remain robust as long as the agricultural boom continues (I've seen some analysis that suggests it may have more legs than the hard commodities). Prices in outer suburban areas in Wellington, Chch and especially Auckland will likely to a huge hit. The holiday home market, especially for houses not actually right on the waterfront also look very vulnerable. But prices for fee simple homes in desirable inner city locations and internationally desirable spots around NZ could hold up quite well.

---

There will be a key difference between how the dynamics of the NZ and Aus property markets will play out. It is no coincidence that the property market in the Aus resource rich states has boomed because they also have the highest net migration rates. If net migration is zero or negative as is now happening in NZ you take away a fundamental component of property demand. The property market in the smaller dairying provincial cities may continue to boom but as a % of the NZ market it's quite small.

You mention about all that overseas wealth held by NZers. I'm not sure what your point is - perhaps why NZers hold so much overseas wealth is because NZ is a lousy place to invest at the moment - stockmarket that has never recovered from 1987 crash, currency and property currently too expensive and people are waiting for the inevitable correction - *then* it may be time to repatriate some of that money, but certainly not at the moment.

Also, I agree with Corran, not *every* Kiwi on OE is an investment banker or IT specialist who has made a motza then intends to return to NZ to splash out on beachfront properties. Tens of thousands of tradespeople have moved to Aus/UK for their "OE" and will not return. The hundreds of thousands on OEs who worked in the hospitality industry generally don't make a killing, but many don't return anyway.

SEC

Dimebag – I thought it might be useful to add some facts to this thread to avoid ending up in a barrage of unsubstantiated opinion and ad hoc evidence (as someone brilliantly said in another thread “you don’t need facts to have an opinion”). Let’s have some facts rather than opinions:

1) NZ housing stock amount to 1,550,000 residential properties (this clearly excludes productive farms –around 14,000- and commercial properties), and the average number of people per property is around 2.45. Given that the average NZ immigration over the past 5 years (the property boom) has been around 12,000 per annum, I cannot see how such a small relative number can have any significant effect on property prices. If the net number of immigrants followed the same people-per-property ratio, then every year there would be in average demand for 5,000 properties (round figures), which would mean an impact of 0.3% on the housing stock. Even if every immigrant lived by him/herself, the impact would be less than 1%. This is insignificant and cannot be the driver for some 12% annual compounded property price growth over the past five years. I trust these figures kill the conventional notion that immigration is behind, and can sustain, high property prices. (SEC – your example of Australian commodity-based cities may be true but we cannot transplant such conclusions to NZ given the figures above).

2) The statistics available from the Department of Internal Affairs, show some interesting (albeit disturbing) immigration figures:

a) 63% of immigrants applied for permanent residency while being already in NZ and after being in NZ for at least two years. This should not take anyone by surprise: the figure shows that the majority of immigrants are the young students that come to NZ to study and accumulate immigration points once they graduate. Can anyone confidently say that the hordes of foreign faces loitering around AUT in Auckland’s CBD are those with deep pockets scooping up NZ properties? I doubt so.
b) 22% of immigrants are on the family reunion category. So, who is in this category? The families of those that came under (a) above plus the bulk of Pacific Island people’s families. I let you draw your conclusion about the depth of the pockets of this category of immigrants. In any case, the study done by Victoria University on NZ wealth and savings patterns, show that the net worth of Asian families is 32% lower than European families, and the net worth of Pacific Island families is 68% lower than European’s. This immigration category cannot drive high property prices.
c) 12% of immigrants fall in the professional and business category (either born overseas or returning NZers). Let’s emphasise this again: 12% of a net 12,000 immigrants (2,400). At 2.45 people per property, this category demands 1,000 properties per annum or 0.06% of the housing stock. Are these the ones that are supposed to be supporting property prices!!!??? G-i-v-e m-e a b-r-e-a-k.

3) Let’s turn to a completely different statistic. The RBNZ accounts show that for the period 2002 to 2007, the increase in M3 has been 125%. Please let me reiterate One Hundred and Twenty Five Percent. NZ’s economy has been monetarised to death. NZ’s economy has been monetarised because NZ believes that by increasing the money supply, growth will follow. Where has this 125% increase in money supply gone to? Very simply: 100% price increase in housing over 2002 to 2003 plus some 19.5% into goods and services inflation.

4) Point (3) above shows that having kept interest rates low during 2002 to 2007 pushed the demand for credit for housing (one of the ultimate unproductive assets). NZ had no need to keep interest rates artificially low during that time. By artificially creating the conditions of low interest rates, NZ has fostered the demand for credit. This, plus the increase in the top tax rate created a “nuclear bomb” = NZ borrowed to the hilt to take advantage of leverage plus effective tax reduction through property investment.

5) Currently, 35% of NZ households own at least two properties so the pool of property investors is huge – and possibly greater than the pool of first home buyers. That’s why there is no political incentive to do anything affecting property investment.

6) Because the pool of property investors is huge and they have done so by leveraging themselves, the risk of a property decline is significant. For property prices to revert to their mean, a 25% decline should be expected. A decline of 25% is very easy when there is leverage. However, 25% decrease in inflation adjusted dollars may mean a few years with no significant increase rather than a dip of 25%.

CONCLUSION: Property prices have increased because of the increase in money supply and credit during 2002 to 2007 has created a generation of property investors. Immigration has had limited, if any, effect. Property prices should decline by 25% when they revert to the mean, also assisted by the negative effect of leverage on households.


PS: Dimebag – you obviously liked Shiffer’s arguments. His book “Crash Proof” describes how the USA economy is at the edge of cliff because: (1) the indiscriminate availability of credit, (2) USA is a society that shifted from being a net producer to net consumer, (3) increasing money supply and currency debasing, and (4) a property bubble. Any parallels with NZ?

Quote:

---

Originally Posted by patsy

CONCLUSION: Property prices have increased because of the increase in money supply and credit during 2002 to 2007 has created a generation of property investors. Immigration has had limited, if any, effect. Property prices should decline by 25% when they revert to the mean, also assisted by the negative effect of leverage on households.

---

So the MP's who have periodically spoken out over the last 5 years, blaming the 'foreigners' for the decline in housing affordability for home-grown kiwis, have got their facts wrong?! :confused:

Quote:

---

Originally Posted by patsy

1) NZ housing stock amount to 1,550,000 residential properties (this clearly excludes productive farms –around 14,000- and commercial properties), and the average number of people per property is around 2.45. Given that the average NZ immigration over the past 5 years (the property boom) has been around 12,000 per annum, I cannot see how such a small relative number can have any significant effect on property prices. If the net number of immigrants followed the same people-per-property ratio, then every year there would be in average demand for 5,000 properties (round figures), which would mean an impact of 0.3% on the housing stock. Even if every immigrant lived by him/herself, the impact would be less than 1%. This is insignificant and cannot be the driver for some 12% annual compounded property price growth over the past five years. I trust these figures kill the conventional notion that immigration is behind, and can sustain, high property prices. (SEC – your example of Australian commodity-based cities may be true but we cannot transplant such conclusions to NZ given the figures above).

---

Your number of residential properties used to come up with the conclusion that immigration has not led to price rises is a little misleading. Sure there might be 1.5M+ residential properties, but how many of those are actually available? From memory the turnaround time for residential property is approx 7 - 8 years - so about 200K properties per annum were actually available to the 12,000 net immigrants - actual demand perhaps 6,000 properties (3%). Still a small fraction though but since the majority of them move to Auckland it might be 7 - 8% of demand there. It's a moot point now since net migration in NZ is now zero and moving into the negative.

For the Australian resource rich states, net migration has been running at up to 3% of population (cf 0.3% for NZ). Running the numbers for WA and QLD like I've done for NZ would show definitively how net migration on that scale can impact house prices.

SEC

Check out Kieran Trass's key drivers of the residential property cycle. Those make sense to me at least.

http://www.hybridgroup.co.nz/MarketI...etInfluencers/

Quote:

---

Originally Posted by Steve

So the MP's who have periodically spoken out over the last 5 years, blaming the 'foreigners' for the decline in housing affordability for home-grown kiwis, have got their facts wrong?! :confused:

---

Of course! It's just the usual populist, xenophobic, hate-rich response that the NZ proles love. Just try to explain to them how increasing the top tax rate plus the implementation of development (Keynessian) economics has led to a property bubble.

[QUOTE=patsy;191132]CONCLUSION: Property prices have increased because of the increase in money supply and credit during 2002 to 2007 has created a generation of property investors. Immigration has had limited, if any, effect. Property prices should decline by 25% when they revert to the mean, also assisted by the negative effect of leverage on households.


Patsy,

The following link provides a fairly strong correlation between immigration and property prices. In light of your conclusion, do you have any comments?

http://img.photobucket.com/albums/v2...mmigration.gif

Quote:

---

Originally Posted by Arbitrage

[

The following link provides a fairly strong correlation between immigration and property prices. In light of your conclusion, do you have any comments?

http://img.photobucket.com/albums/v2...mmigration.gif

---

Yes, I do have a few comments:

1) The chart shows the fluctuation of "number of properties sold", not the fluctuation of property prices. Housing stock turnover is not necessarily an indicator of price changes. If you still don't believe this, then you just have to read the latest figures of January house sales in the USA - sales increased by 1.2%, prices decreased by more than 11%.

2) From my Statistics 101 course: correlation does not imply causation. If the chart tries to "demonstrate" that immigration is the cause for price increase, then this is a typical case of How to Lie With Statistics.

3) Also from my Statistics 101 book: Both variables may be driven by a third influencer (a "mediating" variable): the strength of the economy. The strength of the economy may be behind both turnover and immigration numbers.

Following from my previous message, implying that immigration is the cause of property turnover (as it appears to be suggested by the chart) is as silly as implying that property turnover is the cause of immigration - one could also draw this (wrong) conclusion from the chart. Both conclusions are invalid - again, correlation doesn't imply causation.

In any case, let's keep in mind Dimebag's original question: will/can property prices fall by a significant percentage in months to come? The suggestion was that, as a result of the decrease in immigration, property prices will fall. The tacit conclusion from this was that the property price increase we've experienced in NZ was the direct result of immigration numbers.

If we were talking about the generic and theoretical drivers of property prices (whether in NZ or elsewhere), immigration numbers do have an effect on property prices. However, as the data presented showed, this effect was marginal, at best, in NZ.

The driver of property price increase in NZ has been the implementation of expansionary policies, in particular during 2002 to 2007.

Some more interesting food for thought for this thread:

"Bernard Hickey: Capital gain? Forget it - for quite a while"

http://www.nzherald.co.nz/section/3/...ectid=10500252

Patsy,
You say immigration has marginal effect on propoerty prices and yet one of Bernard Hickeys caveats is that prices could strengthen if the govt boosted immigration. Good way to advertise his website with a headline like that.

For the last 3 years many pundits were predicting a fall in property prices. It got delayed a few years and now looks like it may have arrived in some places.
So now we have the same pundits trying to predict how big that fall will be.

Since everyone including my taxi driver is doing it, I thought I would put in my prediction. I personally believe that the property market is a complex beast and averages and medians across the country have limited value. Some numbers are based on very small data sets of stock. So some of my picks for the next 12 months are:
Invercargill: -8% (low demand negative popn growth)
Queenstown: -15% (descretionary second properties)
Christchurch East: +2% (popular area away from the Easterly winds)
Wellington Central +5% (election coming, influx of new staff and politicians)
Coromandel beachfront -15% (see Queenstown)
West Auckland -10% (low income, low equity, interest rates hurting)
Central Auckland apartments +5% (still affordable, and supply reducing)

If anyone would like to correct these figures or add their own predictions, I would welcome their comments.

Great thread , Dimebag always was a class act ! ... although could never agree with him that Pacific Retail Group was the best stock on the NZX !!.

I've purchased 8 residential investments over the last 24 months , 4 in Wanganui all under $175,000 ... 1 in Maori Hill, Dunedin for $367,500 and 3 here in Blenheim where I live for $290,000 , $380,000 and $325,000. All are villa's or California bungalow 1930's style houses.

A new housebuilding company ( Highmark Homes ) has just arrived in Blenheim and have been advertising heavily on the local radio ... 160sqm brick and tile for $187,000 , the chaepest in the market they say ... the average section price here in Blenheim is around $160,000 so with a bit of land-scaping, fencing, drapes and appliances there is not going to be much change out of say $375,000 ... add in the carry cost of owning the section for approx 9 months before you move in and paying for half the house for 3 months before you can use it and you could see with a few delays just the financing of the thing before you move in could easily be $25,000. So there you have it a small bog stand 2.4 stud 3 bed brick and tile piece of boring rubbish in a sub-division where everyone is trying to "keep up with the Joneses" for $400k.

I cannot see how my well located in nice suburbs , beautiful character villa's with heaps of charm all well under $400k generating rent instantly the day I buy them can fall 25-30% in value. There is no way the major cost components of that new house such as land, wood, wiring, glass, brick and labour is going to fall 25% in cost in this environment. So will new houses just stop being built ... possibly .... great , the demand for all existing homes will exceed supply and guess what happens when that most basic of economic principles occurs ....

Just my 2c worth.

PS , The listed property trusts are the cheapest place to buy property at present. KIP nav about $1.70 at last reval ... current SP ... $1.21 ... ridiculous.

Disc: Bgt 25,000 KIP today at 120

Hi TGGG,

How much did you put down on your 8 purchases?
Are the rents covering your loans?

Over the whole portfolio the equity is around 36% ... 64% debt at a weighted cost of 8.25%. I can't cope with interest only loans so I have the mortgages on a mix of 20y and 25yr repayment schemes. I sub the whole portfolio about $1200 per month after rates and insurance which is about the amount of capital I repay off my loans each month ... so you could argue the whole portfolio just about ticks over ( excluding any maintenance needed ). Not a great cash return on the significant amount of equity ... but at least it is ticking over and hasn't all been in Pumpkin Patch or Fisher & Paykel Healthcare/Appliances over the last two years !!! Three of NZ's leading companies whose shareprices have roughly halved in the last wee while.

PS.

We received an offer on our own home on Sunday , have agreed a sale price of $825,000 ... we owe $400k on it to the ANZ and will repay that. Have decided to move to Auckland and rent a villa in Stanley Bay / Devonport / Cheltenham area. You can get a beautiful villa that would sell for around $1.2-$1.5m for around $800-$1000 per week which seems a bargain to us ... I was paying more than that for a studio flat in Notting Hill in London 8 years ago !! Say we pay $900/week that would be $46,800 per year .. take off say $1000 for insurance and $2000 for rates that we save by renting and we are down to a net cost of about $44,000 per annum. At 9.60% that $44k would pay a $458,000 mortgage so to buy and live in the same house would require about $800k-$1m of equity .... that sort of money deposited at Westpac at 8.8% would earn some serious moolaa ...

You could argue therefore that renting in Devonport is "dirt-cheap" ... so we will put our equity into more rentals ( probably Nelson and another Dunedin property ) and shares on the stock exchange like PFI,KIP and ING which are all selling far far below NAV.

Anyway , offer on house subject to finance,building and LIM so a bit of work to do yet , fingers crosses till Friday 4th.

Good to hear from someone chasing the rental yields in provincial nz TG3. Good luck.

I heard a rumour that interest rates may be lowered sooner than later, hence the weaker dollar and sharemarket surge. Has anyone else heard anything?

Sale of house went thru , $ 825k in the bin ... so move over all u jaffas, look out for the Great Gold Guru movin into Devonport early May time. We will be renting for a few years I think and will look to buy around early 2010 , flick out of some of our dairy farm investments around that time, ( after the equity in them has doubled or even tripled from current levels hopefully ) and buy something near Cheltenham Beach mortgage free ... will keep adding to residential portfolio in meantime when I see some distressed sellers around ... Auckland apartments ( yield 12% minimum ) , Nelson , Dunedin , Wellington and also 3 bed 1940's/50's homes in Te Atatu, Mangere Bridge and Sandringham.

KIP up 5% from recent purchase ... easy money eh ???

Having been an agent for 9yrs now I have never come across anything like the current slow property market. The gap between the market and the venders exspectations seems to be getting bigger each week. I have just done 3 different open homes today with over $1000 of adverts to get buyers in and i have to say no real buyers turned up. Ive just told a close friend just meet the market and sell now because in 6 months time you will deffinatly be able to buy the same thing back way cheaper.
Although not reported buy the media yet our market, Wellington has come back 5% since last year and there is heaps more down side to come.

Dimebag, have you still got your large ATR holding?

Seriously
I have to say this is one of the best, factual, unemotive threads I have ever read on Sharetrader. Congrates to all contributors (esp Dimebag for starting it) with well thought out posts.
PS.
TGGG , You are not Nele under a different handle ????

TGGG, with 500+ jobs gone in Dunedin this week it will obviously have an effect on the market here. This is just going to add significant more pressure to the market.

Quote:

---

Originally Posted by Sideshow Bob

TGGG, with 500+ jobs gone in Dunedin this week it will obviously have an effect on the market here. This is just going to add significant more pressure to the market.

---

SSB, on the realestate.co.nz site, have a look at the first few pages of the Dunedin listings. About half of them are for Mosgiel, have popped up within the last week. Its going to be a killer for Mosgiel (the closure of F&P).

nothing to contribute, just a thank you to Dimebag for a very interesting and thought-provoking thread. cheers

Mr Bollard has left interest rates on hold, although a hint of dove-ishness suggests they may reduce them before the end of the year.

While this gives him plenty of room to move when the economy slows, I think he will need to reduce them sooner than later. My reasoning is that economic stats are retrospective and the current slow housing market, reduced private retail spending levels, and high cost of borrowing for productive purposes, already have the economy heading south. Even the banks are indicating (see ANZ's comments today) that their costs of borrowing mean that interest rates will remain high or increase.

So hopefully we will see a reduction of 0.25 points next month....!

Arbitrage no He wants to get cunning and decrease the overseas borrowing and raise it 0.5&#37; also will stop the spiral starting again

Barfoot & Thompson report that they sold 3 out of 51 houses that go to auction - WOW!

I suppose those, you go unconditional at auction, and people would be scared of not selling their existing home.

Heard today that Fletchers have stopped work on at least 20 houses in the old Mt Wellington quarry development. Info came via a subbie on development. Someone may be able to confirm or otherwise.

A full page ad in the North Shore Times today taken out by a RE company.

"Prices will keep going up"
"Interest rates will fall soon"
"New Zealand's population is increasing"

It does sound like the ol refrain "This time it's different"

If they seriously believed in their own cr*p they would be buying the properties for themselves.

Pressure is going on Bollard to reduce interest rates.

http://www.stuff.co.nz/4514881a13.html

Sorry to harp on, but if it left too long then it will be a longer road to recovery. I suggest 0.25% reduction later this month. You heard it first here.

Was watching the box the other night and there was a bit on bank owned houses in the states and the cops security guards that where going around cleaning out the squatters,some squatters were cleaning them up getting the power put back on and renting them out.

Lots of houses were trashed and when they contacted the banks they didn't want to know and didn't get back to them.

So the bank owns a house that is dropping in price,no one wants to buy it and it's now trashed,someone is taking a big hit and loosing lots of money.

Cheers
Miner

Abitrage that would be absolutely stupid everybody would go mad and expect the reserve bank to bail them out every time they need to reinforce the message not to be an idiot by increasing them preferably two 0.5&#37; rises 3 months apart starting now.

Quote:

---

Originally Posted by miner

Was watching the box the other night and there was a bit on bank owned houses in the states and the cops security guards that where going around cleaning out the squatters,some squatters were cleaning them up getting the power put back on and renting them out.

Lots of houses were trashed and when they contacted the banks they didn't want to know and didn't get back to them.

So the bank owns a house that is dropping in price,no one wants to buy it and it's now trashed,someone is taking a big hit and loosing lots of money.

Cheers
Miner

---

Banks don't have to worry as they have swapped their AAA MBS for treasuries at the FEDs TAF window - just keep rolling over every 28 days. No worries until.....

FED has used 2/3rds of its balance sheet only 1/3rd to go.

Ta Trendy,interesting,but the way I look at it sooner or later someone has to pay the piper and when that time comes ouch.

Cheers
Miner

Looks like property is still a one-way bet (to the upside)

http://www.stuff.co.nz/4514865a13.html

Not sure if the guy down the road from me would agree with you Tok3n as his house that went on the market two years ago for just under a mill that dropped to 750k six months ago is still not sold,or the one the other day that after a year at 300k just dropped to 250k or the one at 530k now 500k after a year of sitting there or the four the other month that dropped between 20k-50k,I could go on but you get the idea ?,NO rush to buy at the moment as there's a ways to go yet.

The graph will be like a ramped share you know heads up steeper and faster as word of easy money spreads until there is a near vertical climb,then the music stops,people think hang on it's not worth this(smart money and rampers long gone by now) then it falters,starts to drop,up a tad as a few buy the cheap dip ?,then slowly down again,then it does what we used to call "fall off a cliff",bounce a bit then slowly (years) head back up.

Obviously we are talking about to different thing as most ramped shares die a nasty death were as property will recover in time,but when this all plays out the chart will look the same,property turned a year ago and has ways to go to the bottom of the cliff yet,the smart money is waiting patiently with NO emotion at the bottom for the scraps.

What people are doing now is chasing a dropping market,as in the guy that dropped from 300k to 250k has left it too late,he held out for the hyped mental price for too long then thought o sh*t better drop,but he left it too late and the market has dropped his 50k already.
So he has to chase again to sell but if he leaves it too long he will be behind the market again,and before he knows it a helpful person at the bottom off the cliff will offer him stuff all to pick him up which he may have no choice but to accept by then.

We are at the top of the cliff now.


Cheers
miner

Quote:

---

Originally Posted by miner

NO rush to buy at the moment as there's a ways to go yet.


We are at the top of the cliff now.


Cheers
miner

---

I agree with you.

Prefer to have money in the bank yielding high rates and playing the oilers/miners as a sideline hobby.

Quote:

---

Originally Posted by POSSUM THE CAT

Abitrage that would be absolutely stupid everybody would go mad and expect the reserve bank to bail them out every time they need to reinforce the message not to be an idiot by increasing them preferably two 0.5% rises 3 months apart starting now.

---

From an article today at:
http://www.stuff.co.nz/4516250a13.html

"Westpac chief economist Brendan O'Donovan called today's job figures "an absolute shocker".
He said the figures were "extraordinarily weak".
"It dramatically pulls forward the prospects of an interest rate cut, the market pricing will go towards pricing in a cut for July," Mr O'Donovan said."

Arbitrage Yes he just wants to get the same stupid borrowing cycle again and either increase the banks profit or bail it out of its funding problems. It Is just a repeat of the stupid cycle started by National in the 1990s screw wages down tempt them to borrow instead of demanding decent wages. Untill we get to low skilled earnings up to a stage where they can do some spending businesses are going to do it hard but untill the low end can spend we are going to get nowhere business is a Pyramid and the low skilled the base of most spending not the high income earners like a lot of highly educated people are trying to tell us. Add for a checkout chick in Australia 3 years ago $18.29 per hour this equates to $40000.00 per year and these same people are thinking the Junior doctors are holding everyone to ransome by wanting a $2 per hour increase to Roughly $24 per hour Lowering interest rates is no going to help we have to get rid of the high debt cycle and some are going to get badly burnt doing it but housing has to drop 30 to 40&#37;. Businesses will go to the wall to because they have made stupid decisions on the strenght of low interest rates. American housing is droping fast because it became unaffordable on wages being paid and so it will here Banks are due for some big write offs
Went to a westpac bank mortgagee sale QV$430000.00 Highest bid $332000.00 and the land agent the owners had no equity in house.

Quote:

---

Originally Posted by POSSUM THE CAT

. Businesses will go to the wall to because they have made stupid decisions on the strenght of low interest rates..

---

Small businesses are the major employer in this country. Many borrow money against equity in residential property. These are not necessarily stupid decisions. We live in a capitalist country and capital helps drive the economy. Decision making is based partly on the rules that governments set. So when interest rates go up then these decisions must change. You can see the results of this in business confidence surveys being bandied around at the moment.

We have to remember that our economy is a small cork floating in a big world economic ocean. It reacts quicker than many other larger economies (look at the housing sales for example). As a small business owner in Auckland, I can (and have said in the recent past) see that the economy is turning down faster than predicted based on retrospective statistics collected in Wellington. The reserve bank analysts should come and listen to the city fringe small business zone here and they would see instantly how the economy is performing. As interest rates directly affect this group, it is time to reduce them by 0.25 - 0.5 points.

Arbitrage You still want the govt. to bail you out. Get yourself out of the mess you got yourself into the mess.

PTC, don't worry about me mate. I operate totally independently of the govt. What I am worried about is potentially poor decision making by the Reserve Bank taking the country down, when through a bit of closer analysis they could lightly touch the accelerator to prevent the economy over shooting in a downward direction. They have done it before under Don Brash and can do it again.

Arbitrage if it was done before it was stupid (and maybee I was out of the country when it was) and the sooner they drum the message into thick heads that they have to think about evetualities the better by increasing interest rates at least 0.5&#37; preferably 1% to get them thinking instead of whining. Also it would give New Zealanders more incentive to hold more of their wealth in $NZ

Quote:

---

Originally Posted by Arbitrage

They have done it before under Don Brash and can do it again.

---

We gotto stop blaming the govt and RB. Each NZer should start looking at one self and ask why are we borrowing so much and living the life of the Jones. Mate, if one is to load ones self on debt to live a good life, then one should be prepare to pay it back or feel the pain when the tide turns and it has turned.

I dont at one bit feel sorry for those that got greedy in the property boom. During the crash times is a measure of a good investor. Those that survive through it or not will come out a better person and learnt from the mistakes.

I get sick of people living in a well to do area and driving a nice European car at the same time blowing hot air, going on and on about their overseas shopping spree. while I live a modest lifestyle and drive a jap car. We all know those that show off have very little liquid cash in their bank accounts and loaded up on debt. What they have is all show and BS.

Don't disagree about the greedies Doc. I just worry about the businesses that drive this countries economy.

The ASB has just cut interest rates:
http://www.nzherald.co.nz/section/3/...ectid=10509172

Business is the same principle. I have invested in VC and start ups. I find that it is amazing that some founders of ideas/concpets wants to spend all the money in their new venture before seeing a revenue stream. You can spot the spenders miles away and know their concept will fail before they even start.

I had this guy who wanted me to invest in his business concept. I asked a simple question. What are you gonna do with the cash once is in the bank. His reply was, he wanted to get a flash office, lots of staff, nice cars..etc... LOL.. I mean WTF?? There is a fail business concept looking at me straight in the face.

Good business and good management will do well in the good times and the bad times. Take a look at CDI and you will see that the company is cashed up and ready to purchase cheap land during the bad times while most of the property firms are falling like flies and/or needing cash injections.

Not sure whether i agree with the doing ok thru good times and bad. There are always shocks that can tip over a risk. Anyway, the good news is the reduced interest rates. This will help reduce some business risk.

Arbitrage - you sound like a residential property spruker - tried blue chip?

Good one T-23. Sorry mate gold medallions and brylcreem don't sit well with me.

I am just a small businessman trying to keep ahead of the game in these turbulent times. Now off to call my asb bank manager to reset my loan rate.

Quite - they reduced them on Friday I think so good timing!

Well, coming up to six months since this thread begun, I can't say that anything I've read, seen, or heard has done anything other than reinforce my conviction that we are beginning to see the unwind of prehaps the biggest speculative residential housing bubble NZ has ever seen.

The official QV statistics now show house prices have fallen 7% from their peak, which, for any property investor using say 75% leverage, would have wiped our 28% of the relevant investor's equity. Furthermore, anecdotal evidence seems to suggest conditions are much worse than the official statistics would suggest - particularly in areas where speculative activity has been most concentrated (such has holiday homes in Queenstown and beach-homes in places such as the Coromandel), where some prices have reportedly fallen more than 50%.

Even in central suburbs in Auckland, I have heard of asking prices being cut up to 30% from last year's asking prices, and these homes are still struggling to attract buyers. My feeling is that the lack of transactional activity (i.e. sellers holding out for yesterday's prices) has resulted in the official statistics still understating the full extent of the price adjustment that has already occurred, and is ongoing.

I continue to confront a lot of resistance when I argue that prices in NZ will ultimately fall ~30%, perhaps more, and that this will be rapid rather than protracted. All manner of arguments are put forward, which are all based on the "fundamentals" (falling interest rates, increasing population, NZers desire to own property, etc etc). I continue to believe these arguments fundamentally underestimate the level of speculative activity that has taken place in NZ's residential property sector, facilitated by what in hindsight will be clearly be seen to be irresponsible levels of debt, and continue to place too little weight on the fact that prices are, by any unbiased fundamental metric (rental yields, affordability metrics etc), still massively overvalued.

History has shown that the popping of a speculative bubble is usually spectacular and painful, and also largely unexpected by most participants. The fact that people are still resisting the idea that we have had a bubble in property shows just how much further we still have to fall. A speuclative bubble develops when people rush in in the expectation of easy profits. The bubble begins to fissle when economic realities result in market participants experiencing disappointing results. When this begins to occur, people stop rushing to buy and some people sell, and then a self-reinforcing process on the downside is triggered. Prices begin to fall, and as more and more speculative buyers have their lofty expectations disappointed (property prices always rise, and will go up 10% a year...), they will exit. This process is well advanced in the US, and is now well underway in the UK, Ireland, Spain, and a number of other Western European countries.

This process has now been triggered, and it will continue until ALL the speculative money that came in looking for a quick buck exits. This will require many years of falling prices, and a dramatic reassessment by the majority of property "investors" about the real risk and returns involved in buying property.

My felling is that we have a long, long way to go. Rental yields are still ridiculously low, at about 5%, when they should be 7-8%, and prices could overshoot on the downside. This is especially the case in NZ, where a lot of our economic prosperity has been dependent on the property boom. We have a very undiversified economy, and the economic fallout from the popping of the property bubble could be severe. A deep recession, rising unemployment, bank loan losses and tighter credit, and a collapse in the NZD and a rise in market-driven interest rates could all see property prices plunge a long way indeed.

I could be being too bearish here, but I continue to see the risks of owning property as staggeringly high, and the prospective returns unbelievably low (5% rental yields) in comparison. Very interested in comments or observations/anecdotes any contributors have to share about their present experiences in the property market.

Regards,
Dimebag

Quote:

---

Originally Posted by Dimebag

Well, coming up to six months since this thread begun, I can't say that anything I've read, seen, or heard has done anything other than reinforce my conviction that we are beginning to see the unwind of prehaps the biggest speculative residential housing bubble NZ has ever seen.

The official QV statistics now show house prices have fallen 7% from their peak, which, for any property investor using say 75% leverage, would have wiped our 28% of the relevant investor's equity. Furthermore, anecdotal evidence seems to suggest conditions are much worse than the official statistics would suggest - particularly in areas where speculative activity has been most concentrated (such has holiday homes in Queenstown and beach-homes in places such as the Coromandel), where some prices have reportedly fallen more than 50%.

Even in central suburbs in Auckland, I have heard of asking prices being cut up to 30% from last year's asking prices, and these homes are still struggling to attract buyers. My feeling is that the lack of transactional activity (i.e. sellers holding out for yesterday's prices) has resulted in the official statistics still understating the full extent of the price adjustment that has already occurred, and is ongoing.

I continue to confront a lot of resistance when I argue that prices in NZ will ultimately fall ~30%, perhaps more, and that this will be rapid rather than protracted. All manner of arguments are put forward, which are all based on the "fundamentals" (falling interest rates, increasing population, NZers desire to own property, etc etc). I continue to believe these arguments fundamentally underestimate the level of speculative activity that has taken place in NZ's residential property sector, facilitated by what in hindsight will be clearly be seen to be irresponsible levels of debt, and continue to place too little weight on the fact that prices are, by any unbiased fundamental metric (rental yields, affordability metrics etc), still massively overvalued.

History has shown that the popping of a speculative bubble is usually spectacular and painful, and also largely unexpected by most participants. The fact that people are still resisting the idea that we have had a bubble in property shows just how much further we still have to fall. A speuclative bubble develops when people rush in in the expectation of easy profits. The bubble begins to fissle when economic realities result in market participants experiencing disappointing results. When this begins to occur, people stop rushing to buy and some people sell, and then a self-reinforcing process on the downside is triggered. Prices begin to fall, and as more and more speculative buyers have their lofty expectations disappointed (property prices always rise, and will go up 10% a year...), they will exit. This process is well advanced in the US, and is now well underway in the UK, Ireland, Spain, and a number of other Western European countries.

This process has now been triggered, and it will continue until ALL the speculative money that came in looking for a quick buck exits. This will require many years of falling prices, and a dramatic reassessment by the majority of property "investors" about the real risk and returns involved in buying property.

My felling is that we have a long, long way to go. Rental yields are still ridiculously low, at about 5%, when they should be 7-8%, and prices could overshoot on the downside. This is especially the case in NZ, where a lot of our economic prosperity has been dependent on the property boom. We have a very undiversified economy, and the economic fallout from the popping of the property bubble could be severe. A deep recession, rising unemployment, bank loan losses and tighter credit, and a collapse in the NZD and a rise in market-driven interest rates could all see property prices plunge a long way indeed.

I could be being too bearish here, but I continue to see the risks of owning property as staggeringly high, and the prospective returns unbelievably low (5% rental yields) in comparison. Very interested in comments or observations/anecdotes any contributors have to share about their present experiences in the property market.

Regards,
Dimebag

---

I'm in complete agreement.

We have a home we moved out of on the market......we priced it VERY favourably for both the local suburb and the current market......I'm thinking we will need to display further flexibility as I believe further news will continue to be negative.

Fortunately we are in a very favourable situation where our old family home consists of low single digit % of total tangible net worth.

Anecdotally, a few of our old neighbours in a cul de sac with no other listings are somewhat upset at the pricepoint we have chosen...thinking we have undervalued our home and that we are potentially hurting their property values.

Our new home, we got a hell of a deal on it....but I told my wife at the time of the purchase I expect the home to drop a good bit in value below where we purchased in the short-to-medium term.

On a positive note, our last remaining commercial property is seeing an explosion of interest in recent weeks, immediately following the very successful National Bank Commercial Property auction.....the yields realised were incredibly low.

I've been fielding calls for our last property approx. 1 every other day for the past fortnight...with prospective buyer tours every single day.......indicative yield is 7% for extremely high quality retail.

So I'm perceiving a possible "flight to quality" or it could just be a one-off fluke.

The driver of the property boom was easy credit. Lending in the US, Ireland, the UK etc has all but dried up - thus the collapse of their housing bubbles. Could the same be about to happen here?
http://www.nzherald.co.nz/personal-f...ectid=10534400

We lost our footing at the top of the property mountain a few years back,since then we have been slowly slipping down on the loose gravel on the other side desperately trying not to fall off the cliff just meters below our last foot hold.

Our grip is fading on that last weak rock and we are about to fall off the cliff,and once we do it will be nothing but fresh air to stop us,not a lot of resistance,and it's a very big cliff.

Cheers
Miner

Quote:

---

Originally Posted by miner

Not sure if the guy down the road from me would agree with you Tok3n as his house that went on the market two years ago for just under a mill that dropped to 750k six months ago is still not sold,or the one the other day that after a year at 300k just dropped to 250k or the one at 530k now 500k after a year of sitting there or the four the other month that dropped between 20k-50k,I could go on but you get the idea ?,NO rush to buy at the moment as there's a ways to go yet.

The graph will be like a ramped share you know heads up steeper and faster as word of easy money spreads until there is a near vertical climb,then the music stops,people think hang on it's not worth this(smart money and rampers long gone by now) then it falters,starts to drop,up a tad as a few buy the cheap dip ?,then slowly down again,then it does what we used to call "fall off a cliff",bounce a bit then slowly (years) head back up.

Obviously we are talking about to different thing as most ramped shares die a nasty death were as property will recover in time,but when this all plays out the chart will look the same,property turned a year ago and has ways to go to the bottom of the cliff yet,the smart money is waiting patiently with NO emotion at the bottom for the scraps.

What people are doing now is chasing a dropping market,as in the guy that dropped from 300k to 250k has left it too late,he held out for the hyped mental price for too long then thought o sh*t better drop,but he left it too late and the market has dropped his 50k already.
So he has to chase again to sell but if he leaves it too long he will be behind the market again,and before he knows it a helpful person at the bottom off the cliff will offer him stuff all to pick him up which he may have no choice but to accept by then.

We are at the top of the cliff now.


Cheers
miner

---

The above house is now 225k and he is still chasing a dropping market,but would say he has left it to late again,give it time and you will probably get it for 150-175k,if not there will be another.

In the boom this house would have been snapped up in 2 seconds as an absolute bargain,a bargain that now has lost the better part of a 33% in a year,this is only one example there are plenty of other ones.

No rush just sit on your hands and watch.

Cheers
Miner

Hi Dimebag, I am involved in residential property sales in Wellington, and I am convinced you are correct that most property has dropped a lot further than the statistics indicate. The QV stats shows wellington as being nearly neutral growth, this is rubbish, there are very few homes in Wellington that would get the same price as early last year and I have seen people already realise losses.

My guess is that higher priced homes are making up more of the volume and skewing the stats. My experience has been that desirable second homes (i.e. $500k - $800,000k - family demographic) are selling faster (relatively!), whereas cheaper first homes and small apartments are not moving. The reason for this seems to be that First home buyers are so worried about declining prices they need a HUGE margin of safety before they will take the leap (wise of course) whereas families with more equity and family type needs who are buying and selling in the same market are less concerned.

I think you could be right about a 30% drop and if I had to guess I think we are half way there already - as always some locations will do better than others and id rather be owning in NZ rather than in the US right now. I doubt we will have too many ghost towns and tent cities. I have been told that in the US there are approx 2,000,000 more homes than are needed to house everyone in the country. At least we don't have a supply issue like that here.

I can't tell you how many people I have met in the last 8 years since I began selling property who had the view that property never falls in value. Peoples memories are so short. Historically property fell in value for 5 years after the first oil shock of 1974 among many other periods and it is pretty damn easy to find this stuff out even if you werent around then!

It will be fascinating to see what happens in the commercial property sector. My feeling is that it will take longer for rot to really sink into commercial but it will happen. The real bargains in commercial property after 87 did not appear until the early 90's. For different reasons than 87 I am sure commercial property is set to take a big bath.

I also predict things will be worse and for longer than people expect . Just like the boom was bigger and longer than everyone thought. These things snowball and feed on themselves. Not to mention that one of the fundamental issue we are facing is credit, the lifeblood of economies - This is some scarily endemic stuff that is not going away in a hurry with or without a trillion dollar cheque.

I have to admit to finding current world events immensely exciting. It's a guilty excitement because I know a lot of people are going to be hurting and I do feel for them. However it's fact that we are watching a historic once in a life-time world event unfold and one that will present huge opportunities for the patient. I find it weird more people do not seem to be enjoying this as much as me! Perhaps it is because I am a young net saver so I have the most to be happy about...

Quote:

---

Originally Posted by Dimebag

The official QV statistics now show house prices have fallen 7% from their peak, which, for any property investor using say 75% leverage, would have wiped our 28% of the relevant investor's equity. Furthermore, anecdotal evidence seems to suggest conditions are much worse than the official statistics would suggest - particularly in areas where speculative activity has been most concentrated (such has holiday homes in Queenstown and beach-homes in places such as the Coromandel), where some prices have reportedly fallen more than 50%.

Even in central suburbs in Auckland, I have heard of asking prices being cut up to 30% from last year's asking prices, and these homes are still struggling to attract buyers. My feeling is that the lack of transactional activity (i.e. sellers holding out for yesterday's prices) has resulted in the official statistics still understating the full extent of the price adjustment that has already occurred, and is ongoing.

---

http://www.telegraph.co.uk/finance/e...on-record.html

More fuel for the fire :)

Largest drop on record in the UK market.