Is property still the golden egg?


by Glen Trillo, Head of Wealth Management

New Zealand's house prices have been ranked the most overvalued in the developed world behind only Hong Kong. The Kiwi housing market was also deemed to be the fifth most at-risk among OECD nations, according to an Oxford Economics report. The report considered New Zealand's house prices to be overvalued by a rating of 179 in its valuation index, with only Hong Kong rated higher at 203.

Many have been not just predicting the downfall of the New Zealand Residential Property Market – but expecting it! Forbes, back in 2014 stated 12 clear reasons why the market would crash in New Zealand.

  • Interest rates have been at all-time lows for almost a half-decade;

  • Property prices have doubled since 2004;

  • New Zealand has the world’s third most overvalued property market (now second);

  • New Zealand’s mortgage bubble grew by 165% since 2002;

  • Nearly half of mortgages have floating interest rates;

  • Mortgages account for 60% of banks’ loan portfolios;

  • Finance, not agriculture, is New Zealand’s largest industry;

  • New Zealand’s banks are exposed to Australia’s bubble;

  • Australian and Chinese buyers are inflating the property bubble;

  • New Zealand has a household debt problem;

  • Government overseas debt has nearly tripled since 2008;

  • The New Zealand dollar is overvalued;

…and it would be fair to say ALL of the above are very accurate points. So why hasn’t it? It’s now has been 10 years since the last major price correction.

The Property Clock (below) tells us that once there is an affordability crisis, we then move into a major slowdown. Well… we do have an affordability crisis, but the Banks are propping up the economy with cheap lending money and thus we are in a holding zone.

The Property Clock

So yes – we are in the Yellow Zone 1 of the clock (as of now). BUT, we are not seeing an oversupply of property, falling construction prices with an oversupply of tradespeople – and thus are stuck (time is standing still). NO Property Crash is coming soon.

Why? Interest Rates. If Interest Rates moved upwards – and let’s be fair it is incredible that they have not gone up… then I think we are up the creek without a paddle.

It is almost if the Reserve Bank and the Banks are keeping us in an artificial holding zone of low interest rates – so the Property Crash doesn’t come.

If Mortgage Interest Rates went up:

  •  Inflation would sky rocket

  • Construction Costs would sky rocket

  • A wave of residential property would come to the market by those whom are struggling now with low mortgage rates – that would struggle more paying higher mortgage interest rates.

Then we are in Blue Zone 2. More sellers than buyers, valuations fall, no confidence in property market etc.

Other things in the property market:

Proposed NZ Rental Changes

  • Proposal to increase tenancy termination from 42 days to 90 days in all circumstances incl sale of property

  • Require purchasers to take on the tenant of any rental property during the sale of property (98% of respondents felt that the new purchaser should be able to take vacant possession)

  • Removal of 90 day notice no-cause termination

  • No refusal to allow pets

  • Tenants rights to make modifications

  • Limit to increase rent to once a year – Could mean a larger spike in rent payments at once

  • Removal of letting fees – going ahead

  • Limit the practice of rent bidding

Australian Housing Market – A Cautionary Tale

  • House prices in Australian largest cities are falling

  • Low 40% Auction clearance rates

  • 15 Month price decline in Sydney

  • Martin North of Digital Finance Analytics says best case 10-15% fall and worst case 30-45% (Sydney down 7.5% thus far)

  • Increased Australian bank lending restrictions – Banks are now lending responsibly!

  • Highest house prices Vs. income compared with 10 key countries (NZ is the second)

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