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  1. #21
    Speedy Az winner69's Avatar
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    Quote Originally Posted by patsy View Post

    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

  2. #22
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    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

  3. #23
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    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)

  4. #24
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    Quote Originally Posted by MrDevine View Post
    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...
    Death will be reality, Life is just an illusion.

  5. #25
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    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.

  6. #26
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    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.

  7. #27
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    Quote Originally Posted by Arbitrage View Post
    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

  8. #28
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    Quote Originally Posted by skinny View Post
    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

  9. #29
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    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?
    God - Please give us just one more bubble....

  10. #30
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    Quote Originally Posted by patsy View Post
    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?!
    Death will be reality, Life is just an illusion.

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