Mortgage broker John Bolton looks at the Auckland housing market and chances of a market correction

By John Bolton*

Typical of our tabloid media we get the usual fear driven headlines designed to sell papers.

Are house prices overinflated?  Yes, they are.

Is the rampant speculation that has dogged Auckland over the past few years bad for our economy?  Yes, it is.

Are we about to experience a housing correction?  In my opinion, not yet.

The naysayers are out in force willing the market to crash.  They are excitedly lined up to say “told you so.”

I’ve voiced my concern in this newsletter for over 2 years about the global economy.  At times I’ve felt like chicken little.

The thing I find so frustrating is our media’s inability to peg our housing issue back to a global problem that is much bigger than house prices.

Far from solving the ‘big issue’ which is unsustainable debt-fuelled growth, we are about to enter another round of monetary easing.  It’s a race to the bottom with countries trying to competitively devalue their currencies.  All chasing the mythical benefit of an export led recovery.  The only problem with such a limp approach to solving the growth dilemma is that for every winner there must be a loser.

In other words, it is not sustainable and cannot work.

Unsustainable growth essentially driven by debasing our monetary system for the past 30 years is the elephant in the room that nobody in the mainstream media is talking about.

Globally our whole monetary system is at risk and nobody has the answer.  You are unconsciously participating in a very big economic experiment.  My other observation is that Governments and Reserve Banks will keep this game going as long as they possibly can – which is a while yet.

Our Reserve Bank is giving itself room to reduce interest rates even further and they signalled that today.  Low interest rates push up all kinds of assets, not just property – and this is a global issue.  The media is not talking about the share market being in bubble territory as it breaks through new highs.

My other frustration is our Government and Reserve Bank’s reluctance to deal with immigration, but mostly with the inflow of foreign capital.  The Reserve Bank hasn’t put two and two together and figured out how banks have managed to increase their retail deposits by 11% year on year.  It has not come from Kiwis saving!  Foreign capital.  Enough said.

Auckland has been heavily influenced by the influx of foreign capital at the same time as record immigration and a unitary plan that invites speculation.  The rest of the country has every right to be pissed off with the mess our politicians have made of Auckland and they will now also feel the brunt of it with LVR restrictions but without the same levels of capital appreciation.

Will there be a market correction?

We’re going over old territory on this.  My view is that any major market correction (i.e. a “crash”) will occur at a global level and will be driven by factors outside of New Zealand.  It is foolhardy to look at New Zealand in isolation of the rest of the world.

When the world goes into its next serious recession (which it will at some point) then we will feel its impact more so than last time.  Australia and China aren’t in as good a shape to carry us through.  We are however in reasonable shape.

When we go into the next global recession the share market will take a hammering and that’s an obvious place to start.  I’m fascinated by “market commentators” who point at property but don’t point at the share market as if it is somehow immune to the bigger issues brewing.

But what about house prices?

House prices will fall when supply outweighs demand, but mostly when people are forced to sell into a soft market.  It always works that way.

The Reserve Bank is attempting to reduce excess demand through LVR restrictions, but ironically it may also inadvertently limit supply as the liquidity is removed from the market and homeowners don’t sell.

House prices fall when demand crashes.  That could happen in speculative parts of the market where there could be a sudden spike in properties for sale.  Sections are always dangerous when the market turns.

Prices fall when there is a big jump in unemployment and people can no longer pay the rent or the mortgage.

Demand can reduce if there are better or safer options for people’s money.  Hmmm, let’s think about that: finance companies, share market, banks. If you are a Boomer and came into $500,000 tomorrow where would you put it?  Personally I’d pay off debt.  I sure wouldn’t put a lump sum into the share market right now.  I might put it into a bank deposit and earn around 2.50%.  Understandably many Kiwis would buy property with a gross rent yield of around 4.00% to 5.00%.

Next, unemployment.  During the GFC we didn’t see a big increase in unemployment.  We live in a fairly simple economy and we produce basic necessities.  We are also not a high growth economy, and businesses here have not tended to over-invest in growth.  Most businesses are run very lean with little ability to cut staffing.  Think about that in the context of your own job.  I recall reading that Kiwis work some of the longest hours in the world.  That’s not to say unemployment wouldn’t increase, but NZ is not the same economy it was 30 years ago.

Speculation is where I see the greatest risk and that’s been a big factor in the Auckland market.  The risk sits mostly around developers and land bankers and in areas where buyers have been speculating over capital growth as a result of the unitary plan and housing shortages.  A lot of this has been fuelled by foreign capital and a game of pass the parcel.  The rule of the game is simple – ignore fundamentals and find someone who is prepared to pay more than you paid.  This game clearly ends badly.  The greatest speculative risks are on the periphery of the city where land prices and build costs are simply too high.

That said, there are plenty of mitigating factors in the short term with ongoing immigration and a shortage of housing supply.  I suspect the LVR restrictions are going to slow down housing market supply (people will be less inclined to sell.)  That lack of liquidity and reasonable underlying economic growth and high immigration will push house prices along for a while yet in Auckland, especially against a backdrop of low interest rates.

Auckland city is going to continue to grow.  Its population will continue to increase and it will be popular for new residents.  There is no easily develop-able land in Auckland city (and a lot of water and un-usable land) so per square meter rates will increase as we push the city upwards.  Long-term nothing changes that.

There is no reason to panic.

My key message (which hasn’t changed) would be to be sensible and not over extend yourself:

  • Make sure you have a sufficient buffer inside your mortgage, wriggle room in terms of your ability to service the loan, and have some other forms of savings.
  • Where appropriate lock in longer-term fixed rates to give you certainty. Also don’t rely on your ability to borrow against the house.
  • Make sure you are properly insured if something goes wrong.
  • If you own a business make sure you are well capitalised and have a strategy should your market slow down, especially if you are in retail.
  • Also be quick to act when things do change. With much tighter loan-to-value ratios don’t assume you can get access to capital from borrowing or even selling property.
  • On that point, be careful about cross-collaterisation. Generally, I wouldn’t have all of my lending with one bank, or I’d at least mitigate the risks.

John Bolton is the “Chief Squirrel” and CEO at Squirrel Financial Services. This articel was first posted on the Squirrel Mortgages blog, and is here with permission.