A profound inflection point?

[skinny]

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.

[Arbitrage]

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.

[SEC]

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