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