‘Bout that gurgling sound…

53 comments on “‘Bout that gurgling sound… ”

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1. Jasper 1

   24 April 2009 at 2:44 pm

   This is a fallacy that continually gets perpetrated Red.

   You’ve fallen into the trap that a house should only be worth what the people can afford, based simply on what people can borrow at 3.5x their wage i.e. a 145-168K mortgage. Not true.

   Australian homes are worth 5x the average wage, and have been since the 70s. Though how much of this is boosted with the first home grant, I don’t know.

   NZ’s house prices have generally been around 5/6x the average wage since the early 80s. E.g. my parents built their house in 1979, total cost (land and materials and labour) was $22,000, single workers wage was $4000 p.a. That’s almost 6x their wage. When they sold it in 1998 for $158,000, average wage was what, $23K? Cost was still 6.8x the average.

   While NZ house prices are currently averaging $340K, it’s still only 7x the average wage.
   We don’t have that far to fall, and coupled with the double banger of net gain in migration, falling kiwi dollar, returning expats, you’ll probably find that we won’t fall that far.

   I’m not trying to talk it up. We bought our first home last year as we realised the banks would stop 100% lending and we didn’t want to get locked out again. Household income = $110K, mortgage, 230K. Recent valuation gave us $5K more, though probably caused by the amount of work we’ve done.
   • RedLogix 1.1

     24 April 2009 at 9:22 pm

     Nothing wrong with your numbers, but you have used ‘average wage’ while I was using the rather different ‘average household income’ number. For a ”data intensive’ analysis of the Australian and USA housing bubbles (and our numbers are not a lot dissimilar) I suggest Steven Keen’s analysis here.

     Affordability is slippery measure of house values. Imagine the silly scenario of say banks offering 2% interest rates and 100% LVR’s…. the average ‘affordable’ house price would quickly soar into the millions. Of course now the actual debt would enormous. However low interest rates are, however long the life of a loan… the principal and accrued interest has to be repaid eventually.

     Nor do I think ex-pats will be returning in large numbers in a way that will have much difference. If they have no job in the UK, selling a home into that very depressed market is not very attractive proposition. If they have no new job to come to in NZ why move? The only likely reason would be to move back in with family, or into a second home/bach/off-market rental. The housing market is a lot more elastic than most people realise.
     • aj 1.1.1

       24 April 2009 at 11:09 pm

       Debt is permanent. Value is temporary.
2. jarbury 2

   24 April 2009 at 2:45 pm

   The solution….

   Ummmmm… boost average household income?
   • Observer 2.1

     24 April 2009 at 3:55 pm

     YES
     • jarbury 2.1.1

       24 April 2009 at 3:58 pm

       The next question is the killer though: How?
       • Chess Player 2.1.1.1

         24 April 2009 at 4:20 pm

         Why is it a killer question?

         Think about what you personally could do to boost your own household income, and then do it.

         NZ’s average household income is therefore increased….
         • jarbury 2.1.1.1.1

           24 April 2009 at 4:33 pm

           Get a better and higher paying job I guess. Oh crap that’s right we’re in a recession and there are virtually no jobs out there in the private sector of my field (planning) because the property bubble has popped. How about public sector, oh no that’s right all councils have gone into lock-down because of the Super-City proposal.

           Guess I’ll be lucky to keep my current job over the next 6 months.
3. Peter Johns - bigoted troll in jerkoff mode 3

   24 April 2009 at 2:47 pm

   Socialism ain’t the answer either.

   End DPB, dole and get the country more family focused to take in their relatives and for fathers to be accountable for their off-spring.
   • Draco T Bastard 3.1

     24 April 2009 at 3:58 pm

     hahahahahaha

     Oh, sweet zombie Jesus, you’re funny.

     Do that and watch as the living standards of the country drop like a stone to rock bottom. One person can barely survive on the median income of ~$27k and you’re saying that those people should support their entire family as well?
   • ripp0 3.2

     24 April 2009 at 5:17 pm

     spoilsport!

     I was about to suggest an increase in household income might come from leasing back a part of the property.. to say an independent-minded son or daughter stressed out or straitened in these tough times, but you just wiped away the independence part through a lack of compassion I suspect for beneficiaries…
   • Spectator 3.3

     24 April 2009 at 7:05 pm

     The most practical thing the government could do to defray the cost of the DPB is to get serious about making sure liable parents pay what they owe. Only when it is no longer economic for deadbeats and deserters to dump their children and run will this situation be rectified.
4. BLiP 4

   24 April 2009 at 2:49 pm

   Clear the South Island and lease it to the Israelis?
5. Rob 5

   24 April 2009 at 2:56 pm

   There are 1.4 million dwellings in NZ, and why the 3.5x icome multiplier?
6. Rich 6

   24 April 2009 at 2:56 pm

   A “walkaway” scheme where the government swaps a mortgage in negative equity for an indefinite repairing lease with security of tenure. In return you’re freed of the overhanging debt – the bank gets this back as perpetual government stock.

   Any equity in the property gets assigned to a community housing coop that will get the use of the house when the original occupant moves out, thus building a stock of public housing.
   • Bill 6.1

     24 April 2009 at 5:37 pm

     Housing Collectives in this thread and worker’s collectives in relation to Air NZ!

     You do know that although such solutions are blindingly obvious, positing them is a bit like trying to point out that the world is a globe in the face of flat earth orthodoxy?

     Was Copernicus still alive?…I’ll stop there. He was well dead before the world came around (sic) to seeing things in a more sensible light.

     Anyway. Just because Copernicus couldn’t bypass his days orthodoxies and render them impotent in his lifetime doesn’t mean to say we can’t. However, we can definitely rely on the current system’s gatekeepers to cleave to the status quo.

     Solution?
7. Pat 7

   24 April 2009 at 2:57 pm

   Respectfully, Red, I disagree that house prices will collapse like you suggest. At the end of the day, house prices are governed by supply and demand.

   Take Auckland, for example. The finance company collapses, followed by the credit crunch reducing Banks appetite for lending has seen developers become an (almost) extinct species. Most would say good riddance, but developers did perform one important function – they supplied new housing stock to the market.

   No new housing stock + kiwis returning home from overseas after losing their jobs + plus new immigrants coming to Auckland = eventual housing shortage = house prices and rents going up, even if the recession lasts longer than expected.

   This is not my own theory – this is what BNZ economist Tony Alexander foresees.
   • aj 7.1

     24 April 2009 at 3:09 pm

     I would never trust what Alexander says. He was one of the many bank shills urging people to fix rate for long periods when they were up at 8 and 9 %
     Housing prices may be ‘governed’ by supply and demand but historical price collapses have ignored both.

     And the wild stab at the way out of this mess, if I may – is inflation. And thats what certain central bankers and governments are trying their damn hardest to generate at the moment. The jury is still out.
     • Lew 7.1.1

       24 April 2009 at 3:14 pm

       aj,

       I would never trust what Alexander says. He was one of the many bank shills

       This is going a bit far. Bank economists are pretty scrupulously independent, and are not required to hold their employer’s policy line and (in fact, they take great pleasure in saying whatever they please, causing merry hell for the banks’ comms people, PR companies, sales leaders and the CEO, who are all tied to that line). Bank economists are despised and hated by the other parts of the bank for this very reason.

       So whatever Tony Alexander’s faults (and he has ’em), shilling for his employer isn’t one.

       L
       • aj 7.1.1.1

         24 April 2009 at 3:28 pm

         ok – but when rates were at that higher level and he was encouraging people to fix, he was wrong and he has some responsibility for the number of people now caught with high fixed term loans. He never spelt the risk out – not once – if there was a fall in interest rates. Whatever his allegiances I don’t rate his forecasting much at all.
         • Pat 7.1.1.1.1

           24 April 2009 at 3:34 pm

           aj – the current break cost scandal has shown up the problems in the system, which could be easily fixed:

           1. Banks should have the same break cost calculation. They vary wildly, ASB the best, ANZ/Westpac the worst.

           2. Break costs calculations should be far easier to understand, and spelt out in plain language in the loan agreements.

           3. Why can’t banks include an online break cost calculator on their online banking platform, so you can check it daily?
         • Jasper 7.1.1.1.2

           24 April 2009 at 3:54 pm

           Er, AJ.

           I’ve got all of Alexanders Weekly Overviews from about two years ago. Last year when rates were on the up, from July through to December, Alexander constantly encouraged to only fix for 1 year at the most. Same thing in 1998 when they were at 9.5% for 5 years, 11.95% floating he said to fix for 1 year at most.
           Hardly encouraging people to fix long term. Those who fixed 2+ years last year are looking for a scapegoat rather than admitting they valued having security in outgoings.

           The most he flubbed on was forecasting the OCR to fall to 6% mid 2009. At least he picked a fall, but up until October, no one really knew the extent of the overseas financial situation.
           In November he picked a 4.5% OCR mid 09, which was revised downwards to 2.5% in January, and then 2% where it’s been since early February.

           Economists are only as good as the data they have on hand.
       • Observer 7.1.1.2

         24 April 2009 at 3:59 pm

         Not one of them predicted the recession. So while they might be scrupulously independent they are also totally undependable!

         As a past Prime Miniter of Canada once said, “if you laid every economist in the country end-to-end, you still wouldn’t reach a promise!” (P. Trudeau R.I.P.)
         • aj 7.1.1.2.1

           24 April 2009 at 11:16 pm

           Jasper, thanks, even so I don’t let him off the hook. I don’t recall him once explaining how break fees could trap borrowers if/when rates fell. If it wasn’t such an oxymoron I’d say bankers had a moral duty to present all side of this equation, much as Pat has outlined.
8. Daveski 8

   24 April 2009 at 2:59 pm

   Apart from the use of many arguable variables, even if you accept the values you have proposed, it only is an issue IF people have to sell. One of the reasons that the market hasn’t crashed is that people largely haven’t been forced to sell. Clearly, those that do are faced with a buyer’s market.

   The other point worth noting is the housing bubble in NZ also got momentum from migrants hence the NZ relativities aren’t the only forces set in stone.
   • Lew 8.1

     24 April 2009 at 3:15 pm

     Daveski,

     even if you accept the values you have proposed, it only is an issue IF people have to sell.

     I think the point here is that if the economy tanks like people claim it will, folks will have to sell, because they won’t be employed enough to service their mortgages.

     L
     • Daveski 8.1.1

       24 April 2009 at 3:35 pm

       Even in the Great Depression, unemployment was “only” around 20-25% – still catastrophic but it doesn’t mean all the houses with negative equity (most likely mine too :)) will HAVE to be sold.

       As I’ve noted numerous times before, NZ does not have the same problems in the US particularly eg sub-prime mortgages. Moreover, whereas in the US banks have fallen over, NZ banks are still profitable and therefore able to ride out the worst of the excesses.

       It may well get worse but I would be very surprised to see RedUnLogical’s vision materialise in the extreme while still acknowledging mortagee sales are undoubtedly on the rise at present.
       • Pat 8.1.1.1

         24 April 2009 at 3:48 pm

         There are a lot less mortgagee sales than there could be. The Banks are being remarkably restrained at the moment, and I have seen examples of people being 6 months or more in arrears without the Bank taking action.

         The Banks are hell bent on hanging on to their Credit Ratings, so they do not want to take a hardline and capitalise a whole heap of losses onto their balance sheets by enforcing a big number of mortgagee sales. So if someone loses their job they can get a lot of breathing space from the Bank by way of repayment holidays etc.

         Many of the mortgagee sales are investment properties where the investor has walked away or, in the case of many Asian investors, gone home.
       • andy 8.1.1.2

         24 April 2009 at 9:14 pm

         Even in the Great Depression, unemployment was “only’ around 20-25% – still catastrophic but it doesn’t mean all the houses with negative equity (most likely mine too :)) will HAVE to be sold.

         20-25% unemployment = major deflation. Negative equity is not a problem for banks or you as long as you can service a loan. Imagine the downward pressure on wages and prices (of local goods and services) with that rate of unemployment. Your boss would have to offer a 20% wage reduction or let you go to stay competitive, and so would you as an employee.

         At the same time our dollar would become very unattractive and the cost of imported goods would rise taking another slice of your ever decreasing income away from your ability to service your current NZ$ debt. To many mortgagee sales would expose banks balance sheets causing the cost of borrowing money up, driving up interest rates etc.

         the list goes on, in the end deflation is a killer.

         Just sayin…
9. Pat 9

   24 April 2009 at 3:17 pm

   The way out of the mess? Farming, forestry and fishing exports into emerging economies.

   We need Chinese and Indians to get a taste for our Eskimo Pies.
10. Tom Semmens 10

    24 April 2009 at 3:24 pm

    The solution to all this would be to have tax system that punished anyone who didn’t treat a house primarily as a place you live in rather than primarily as a speculative asset, and rewarded anyone who invested in the productive sector of the economy. That way, people would buy somewhere to live for this notional 168k and invest the mythical 200k in stocks, bonds, and other productive investment vehicles.

    The problem with this approach isn’t really what people traditionally say it – you know, “capital gains tax = electoral death” etc etc. The REAL problem with this approach is trying to convince Sharon and Trevor that they won’t be ripped off for their retirement savings by the dishonest, lazy and incompetent kleptocrats who pass as our business “leaders”.

    Let’s be honest. People invest in property in a large part because they have no faith in New Zealand business and New Zealand businessmen and women.
    • aj 10.1

      24 April 2009 at 3:33 pm

      Tom I take no pleasure in saying that I have been conservative during this housing boom and done nothing but pay off one mortgage on my one home.
      And I have invested – through shares – in the productive economy.
      The only reward, and not a small one, is that I have a freehold home. My investment in the productive economy has a book value about 50% less than two years ago.
      Hate to get punished for doing the right thing…..
      • Draco T Bastard 10.1.1

        24 April 2009 at 4:23 pm

        Hate to point it out to you but capitalism doesn’t actually work.

        Take x as a value that’s enough for someone to live comfortably on from the interest alone. Now give everyone x and have them all living on the interest. It doesn’t take a genius to work out that the economy collapses under such a scenario but that’s what all the capitalists and quite a few economists keep telling us is the optimum.

        (Actually, I’m lying, I’m having a lot of fun pointing it out 😛 )
        • Lew 10.1.1.1

          24 April 2009 at 4:30 pm

          DTB, the point of capitalism isn’t the destination (the interest return), it’s the journey (accumulating that much money).

          L
      • Jared 10.1.2

        24 April 2009 at 7:47 pm

        If you purchased shares on the open market you have done nothing to further corporate investment, however if you purchased shares through an IPO or share issue then you have contributed to share capital for businesses to further reinvest. Holding shares to get a capital gain return is a fallacy in a market as small as ours. There simply isnt the volume of trading in the NZX to actually get some growth going. You would have been better off investing your money in government bonds or a property/cash fund.
11. Pat 11

    24 April 2009 at 3:37 pm

    Dollar Cost Averaging, aj. Keep plugging away at the investments and you will have your day in the sun.
    • aj 11.1

      24 April 2009 at 3:41 pm

      lol actually thats what I’ve done in an index tracking fund now for about 8years. I think I still have all my ‘capital’ but the last few years gains have gone…
      Still plugging the same amount away each month…irrespective of the current value.
12. ripp0 12

    24 April 2009 at 5:26 pm

    That gurgling sound…

    I wonder whether this blog has emanated from very recent news of the World Bank suggesting how the US housing stock still has another 12.5 percent prices drop across the nation to go…
13. Bill 13

    24 April 2009 at 5:44 pm

    If only the market economy was water soluble and it rained tomorrow and the next day.

    Blissful gurgling all round instead of this emanation from us and ours going down.
14. RedLogix 14

    24 April 2009 at 6:33 pm

    Gee guys.,… I was just going to suggest that we drink our way out of the recession. (But sadly the Japs have gone and bought Lion Nathan, so that mightn’t work so well now…:-)
    • Bill 14.1

      24 April 2009 at 7:30 pm

      As long as you don’t indulge in corporate lolly water then that option is still open. Who cares if such piss is owned on or off shore? There be really good bier brewed just right here….and there…..and there.

      Enjoy!
15. aj 15

    24 April 2009 at 11:37 pm

    http://www.ritholtz.com/blog/2009/04/housing-fair-value/
16. CMR 16

    25 April 2009 at 10:20 am

    I perceive the formula Red has used as suspect. While it is a measure of the issue the overwhelming influence for house pricing is supply/demand. If the population continues to grow so will the demand on an already inadequate housing stock. The imponderable here is that housing is a stationary commodity and if demand grows disproportionately from one region to another, then a surfeit of housing can germinate in that latter region.

    My solution for housing is to loosen the arbitrary dictates of land use, (Local Government Act,RMA, District Plans etc..) The cost of housing is a misnomer to the extent that the value of the land needs to be subtracted from the total value. If more land is available for housing construction then the cost of that land will reduce over time.

    To summarise: Get government and especially local government out of the industry!
    • RedLogix 16.1

      25 April 2009 at 5:25 pm

      If the population continues to grow so will the demand on an already inadequate housing stock.

      Yes it is true that NZ does not have the same gross oversupply as is apparent in the USA. But housing demand is more elastic than most people assume. If housing becomes unaffordable for whatever reason, occupancy rates rise to absorb the difference. Young adults stay at home longer, young couples live in the downstairs flat, grandparents move out to the family bach, a rental is taken off the market, a big garage is lined out and some beds moved in… and so on.

      This sort of thing is the norm for working class folk who have been doing it all along; it just comes as a bit of a shock to find it happening in the leafier suburbs.

      If more land is available for housing construction then the cost of that land will reduce over time.

      A decent reply to this is worth a whole post on it’s own. Suffice to say, it’s a form of ‘free market’ ideology that has no basis in reality.
17. Travellerev 17

    25 April 2009 at 12:00 pm

    In response to CMR the following:

    While at some time at some place the housing market might be such that there are not enough houses to accommodate the population this I emphatically claim is not the issue in New Zealand.

    Today in Auckland 16.392 houses stretching from Manukau (3698) to Wiheke Island (660) were on sale on Trade me alone.
    For rent were 5654 properties in this city.
    That is a lot of property for sale and for rent on a population of approx. 1.3 million.

    Wellington clocked 7033 Houses for sale and 1123 for rent and equally huge amount of property for sale on a population of 473.700 (2008)

    I suggest you have a look on trade me and It will become clear that every major population centre in NZ has a huge surplus of both to buy and to rent properties.

    Even in nearby Raglan more than 10% of the local property stock is either for sale or to rent.

    5 or 6 subdivision area’s have not sold a singel section in the last two years.
    The sewer, water and power infrastructure burden of those development rests upon the residents a lot of whom are retires who wanted to retire cheaply to their extended batch and are now living under the poverty line due to the expensive developments pushed through by greedy real estate agents and the gullible city council.

    In my native Country Holland 17 million people live on an area the size of North land and believe me or not but people sometimes have to wait (I.E> live with their parents) until late into their twenties until they are able to secure even a rental. They get onto waiting lists age 16 years of age and if they get a house around their late 20s they are lucky.
    These rentals are just square boxes on top of each other anywhere from 4 to 40 floors high. No gardens, no play areas for children and yet the prices are either the same or lower that in New Zealand when we arrived here.

    Imagine our surprise when (My Kiwi) husband and I arrived back here four years ago and we found that the house prices here were much higher than Holland and the quality (Wood, weather board versus stone and concrete) was much much less than in Holland.

    Not only that but the price of your average wooden shack in NZ would buy you a medieval semi chateau in France or four 300 year old stone build beach front property on one of the most romantic Croatian Islands (Korzula) in the Mediterranean.

    And a half acre section in Raglan would have bought you a small chateau in Romania, Hungary or even Greece. That was two years ago, we now see them go for the price of a beach front property on afore mentioned Island in the Mediterranean.

    So if demand and supply were not at the bases of the ridiculous increase in house prices in NZ or the US, UK then what was?

    Well you could ask John Key because he was in New York and he was there when the Glass Steagall act was repealed and the Federal Reserve of New York under Alan Greenspan decided that a housing bubble was just what the world needed. In fact he was one of only four upon invitation only advisors to the Fed Res at the time while he was the European head for Bonds and Derivatives and the Global head for foreign Exchange for Merrill Lynch. Both departments made huge amounts of money with the same intricate (read fraudulent) products now causing the collapse of our financial system. Read here about the subprime and Derivatives crisis. This is also a nice introduction
    • jerry 17.1

      25 April 2009 at 1:25 pm

      John Key is to blame for the house prices in NZ …..wtf ??
      • RedLogix 17.1.1

        25 April 2009 at 5:15 pm

        Actually Travellerev has a point. The housing bubble did not just happen last week; it has it’s origins in a course of action set by the banking industry in the 80’s and 90’s, t a time when John Key was very much involved at a senior, influential level, with one of the biggest players in the business.

        Did Key cause the housing bubble all by himself? No, of course not. But neither are his hands clean.

        The right has so far sucessfully defended Key by minimising or obscuring the real implications of his somewhat, shall I say, peculiar CV. For now the New Zealand public is content to let the matter slide under the carpet; but that may not last.
        • jerry 17.1.1.1

          25 April 2009 at 8:37 pm

          Of course people like yourself with multiple rentals have got nothing to do with the problem ?
          • RedLogix 17.1.1.1.1

            25 April 2009 at 8:48 pm

            Well no jerry.

            I actually built them from scratch. Mostly with me and my partner’s own hard work. Today we finished tiling a bathroom in the latest one.

            It’s why I usually only get time to blog much in the late weekend evenings.

            The average landlord in New Zealand is has 1.5 units, the vast majority are ordinary mums and dads who have worked very hard for what they have. The small minority of professional investors who have gone on to ten or more units generally only buy properties that for one reason or another are undervalued by the market, and to which they can add some value over time.

            In the last two years of the bubble most properties became grossly overvalued from a cash flow point of view, and most professionals had their cheque books firmly shut. Yet the property market kept on bubbling all the same without us.

            Now of course the market has returned to some semblence of sanity, not so many folks are complaining that some investors are back in the market buying again. (Not me … I think it has a ways to go down yet…)
          • Travellerev 17.1.1.1.2

            26 April 2009 at 6:19 am

            In fact I would go as far as saying that with the exceptions of a few people with too much money who where persuaded by smarmy real estate agents to buy or build expensive houses in places like “Raglan” on the assumption that it would be the new “mount” landlords such as RL are as much victims of the artificial housing bubble as the small time house buyers. It’s not as if they can up the rent to cover their losses easily (That is speaking from a tenants point of view) although I’m sure some will try.

            You might want to read this series about the recent history of what the Wall street scheisters (Where John Key had an office at the very time the housing bubble was started) have been up to in the last twenty years.

            RL I agree with you. When we arrived here four years ago we knew that he house prices could not possibly be related to income, economic growth or scarcity and that the market would collapse spectacularly. We decided to rent until that happened. Well it happened and it’s going to get far worse. We keep on waiting.

            The only thing worse that the total deflation world wide of our economy will be the hyper inflation which is sure to follow.

            With the FRNY creating trillions of dollars out of thin air this is just a matter of time before that happens.
18. Peter 18

    26 April 2009 at 11:55 am

    Your analysis is poor. You ignore supply and demand.

    We’re facing a housing shortage now, which will grow even more acute in the next few years because developers have stopped building.

    And it’s not just the number of houses, it’s the type of housing stock. Most of our houses are designed for the nuclear family unit. The nature of the family unit is changing rapidly, and it will be decades before the housing stock reflects this.

    Add the RMA and other council and government regulations forcing up prices, and you’ll soon see where it is going.

    Nowhere near your laughable figures….
    • travellerev 18.1

      26 April 2009 at 2:04 pm

      Have a look on trade me.
      The supply way outweighs the demand in every major city in New Zealand
      • Peter 18.1.1

        26 April 2009 at 3:11 pm

        Too simplistic.

        Supply of what, exactly? What type of house? Where? At what price?

        It matters not that there are streets of empty houses in, say, Ekatuhuna. The reality is that no one wants to live there.

        Analysis of housing demand in our major housing markets indicates one thing – we’re heading for a supply crunch. The reason for that is mostly to do with land regulation by government.

        Look up “Auckland land shortage critical study” on Google. There is a ton of data out there all pointing in the same direction.

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