Déjà Vu All Over Again….
I love this saying, it’s attributed to Yogi Berra the American baseball catcher and coach.
This quote originated when he witnessed Mickey Mantle and Roger Maris repeatedly hitting back-to back home runs in the Yankees' seasons from the early 1960s.
Other than making me smile it’s a term that we should
consider when looking at the various markets like housing, shares &
precious metals. The fervour that we are now seeing spread in the housing
market across the country is 2004-2006 all over again. In this scenario
Auckland has had sustained growth for 4 years and is at 2007-2008 in its
property cycle, now being one of the most unaffordable cities in the world I
can’t see it climbing much more even with immigration pressure. The supply side
is moving up and eventually people hit a pain point where they just don’t want
to borrow and pay more. This tends to tip in at about 9-10 times average
incomes to the average house price, which is where Auckland is at. This was
where it was in London in 2005 when I was working in the industry then, that
market fell off 20% over the GFC at its peak reduction point.
We are now seeing rampant price increases spreading across
Northland, Waikato, Bay of Plenty and Wellington running at +20%-+25% with the
provincial cities like Dunedin, Hastings/Napier and New Plymouth are starting
to see firming prices and increased activity. As I said in my previous article
it’s a ripple effect from Auckland to the closest areas surrounding it and then
to the rest of the main centres as investors look for yield and those who are
priced out of the market buy in cheaper areas. Wellington looks like a bargain
to Aucklanders even now!
Ultimately I believe we will see prices rise like 10-12
years ago across the country but it will look a little different. It will be
nowhere near as elevated as 2004-2007, that was loose lending principals,
advantageous tax treatment on rentals and lets be frank greed took over with a
consumer spending party as the icing on the cake, so who couldn’t make money
out of holding property? Boy did it change quickly and with some hefty losses
for apartment holders, developers and speculators. However it’s different this
time as it’s unlikely to be a worldwide credit crunch, my thoughts are that it’s
going to be RBNZ regulated to start with reduced immigration which causes asset
prices to reduce and the typical softening of the market through the cycle (As
I am updating this article the RBNZ have dropped the hammer on property
investors with a 60% LVR)
- RBNZ has put the hard word on the banks to self-regulate as well as some enforced regulations.
- Extra capital costs for rental investment properties 1 October 2016 – Westpac have just removed their low “specials” for investment properties
- Non-resident buyer – forget about itOff shore Kiwi or Aussies – a range of restrictions,BNZ 60% LVR max and your income post local tax discounted by 40%, good luck borrowing unless you earn over $300k and have a big deposit
- Construction lending – ANZ have recently stopped ALL residential lending to retail clients who want to build a spec home or even one to rent out once completed. Turnkey (buy from a developer) apartments and homes included
- Investment properties 60% LVR with the main banks – This will slow price growth, Auckland went from 25% to 10%-12% once the 70% LVR restriction came in last year.
The debt to income ratios mentioned by the RBNZ and media “freaked”
the banks out as it would shut down Auckland and most likely cause house
depreciation that would seriously impact the banks’ balance sheets. This then
causes losses as the last on the housing ladder have split from their partner, they
lose their job or business fails and a forced sale occurs. Bank loses money,
what do they do? Credit policy tightens and exacerbates the asset price
The RBNZ over estimates the banks abilities to withstand
large asset price reductions in my opinion. Numbers be damned, human nature
takes over and conservatism reigns supreme, the USA had a huge issue with banks
just not wanting to lend to business or consumers even 5 years after the GFC
which really suppressed growth and confidence
One thing I have learnt is that market prices do go down –
even housing and it’s never when any one expects it. People say house prices
didn’t reduce that much in NZ during the GFC, maybe 10% but we had interest
rates go from 10% to 4%, we only have one more time to pull that lever to 0%
and that seems unlikely as we are deemed a risky country by offshore lenders so
why would they lend to us money at 0.50%? I would be nervous if I had Auckland
property and was highly leveraged, Wellington and the regions probably have
some time on their side but in my opinion RBNZ is going to get heavy handed
with regulation to cool the market if the 60% LVR changes don’t work.
I don’t want to sound like Chicken Little but be aware of the asset/property cycle
Some other Yogisms
- "You can observe a lot by watching.”
- "Always go to other people's funerals; otherwise they won't go toyours."
- "I really didn't say everything I said."
- "A nickel ain't worth a dime anymore"
- When you come to a fork in the road, take it."