Property price decline

Written By: - Date published: 8:30 am, July 13th, 2018 - 61 comments
Categories: australian politics, cost of living, Economy, economy, housing - Tags:

What would happen if the house prices of Auckland, Queenstown, and other centres of very high debt went into substantial and long term decline?

We are seeing big hints of an answer.

The residential property game in New Zealand remains centred on Auckland: as Auckland values skyrocketed, they took that equity and reinvested in the regions. That may tempt less charitable types shouting “schadenfreude to the JAFFAS”. Just leave that for the truly shonky landlords.

So what if there’s no future equity gains to keep those further fresh loans for further properties available? And what happens when the idea that rents will just keep going up disappears as well?

What matters in the broad sense is that the Reserve Bank has tested whether our banks would get into real trouble if this scenario really played out.

The Reserve Bank did go through some really serious scenarios. In the first, a downturn in the Chinese economy spreads through trade channels to other emerging markets, with flow-on effects to other parts of the global economy including Europe and Japan. A collapse in demand for commodity exports and negative investor sentiment towards the Australian and New Zealand economies triggers domestic recessions and a six month closure of offshore funding markets for banks.

Then, New Zealand’s unemployment rate rises quickly to peak at 11%, house prices fall 35%, and the Fonterra dairy payout remains below $5/kgMS for three years.

The scenario assumes that macroeconomic conditions begin to improve by the fourth year, though property prices do not recover. Banks receive a two notch credit rating downgrade, and face elevated costs in both wholesale and retail deposit markets.

The second scenario put a big operational risk or banking industry-wide misconduct event on top of all that hot mess from the first scenario.

Then the Reserve Bank tested how the banks would survive it all.

Apparently they would, but it’s New Zealand society that needs the stress test.

Neighboring signs are not good. The ANZ parent company in Australia has said that the pace of decline in house prices is quite a bit larger than expected, and likely to last longer than forecast. You might want to read that sentence twice.

In New Zealand, the centres of Wellington, Christchurch, Auckland and Queenstown are in decline.

This decline has been noticeable since the last quarter of 2017.

Now, I’m no Cassandra presaging the end of New Zealand real estate capitalism as we know it. Will the New Zealand housing downturn in key centres turn into an inferno that destroys the New Zealand economy? Or can it just gently smoulder at the edges and burn off just the most risky borrowers?

In a policy sense New Zealand desperately needs the second outcome. A big house price calamity that caused mortgage defaults and made consumers shut their wallets would send waves of unemployment through New Zealand. A slow fade, such as several further years of house prices falling slightly, could be pretty useful. The mirage of the perpetual property acquisition by the few would fade. Household debt levels would on average start to level. And in time it might narrow the gap between income earned and house prices to go for, into a bit less cruelly unattainable.

With so little increase in overall New Zealand productivity for so long, the only reliable way most people have got ahead in this country is getting loans on housing and watching the values go up. That whole model is now at risk.

Most will remember times in New Zealand history in which property values have slumped. 2007-8, 1997, 1987, 1974-77, and 1967-69 spring to mind, and the Reserve Bank is across those as well.

In New Zealand’s highly indebted private loan state, property recessions mean that a whole bunch more people find themselves “under water” – where the mortgage is higher than the value of the property. That means the banks start checking those files out and having a chat about whether you can still afford it or whether it’s better that you hand your keys back. That ends in stress, divorce, a smashed credit rating, damaged families, and damaged lives. This particular property decline is slow, and it looks like it’s here for a few years.

We’re not in any crisis yet. Not near either. What matters in the specific sense, is this sustained decline in property value takes with it the hope of mobility and the wealth of most New Zealanders.

61 comments on “Property price decline ”

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  1. Xanthe 1
    13 July 2018 at 8:53 am

    The banks are the problem . solution , they take a haitcut! I suggest 10% debt to be written off by banks per annum until house prices fall to acceptable levels

    • Antoine 1.1
      13 July 2018 at 12:03 pm

      Meanwhile, in the real world

    • Lara 1.2
      13 July 2018 at 2:23 pm

      Thinking that idea trough:

      If banks write off debt, that means the people who took out the loans do not need to repay those loans. As they’re written off.

      Which may improve the % of equity they have in the property. And so leave them in a stronger position to borrow again.

      It could most certainly prompt more loans. To buy more property.

      Increasing the amount of $ available to buy property could push up prices.

      Having the opposite effect than the one you intended.

      • One Two 1.2.1
        13 July 2018 at 9:56 pm

        Banks have debt repackaged and sold on, ad nauseum…they won’t be writing debt off…not consumer retail debt at least…

        Which is why ‘jubilee’ is off the table…permanently…

        One goes…many go with it…

      • UncookedSelachimorpha 1.2.2
        15 July 2018 at 12:13 pm

        Tax bank profits, use funds to build state housing? That should help?

        I like the idea of the banks actually contributing something, rather than just exploiting everyone.

        • xanthe 1.2.2.1
          16 July 2018 at 11:34 am

          Yes Taxing bank profits and putting those taxes into affordable housing is another solution.

      • xanthe 1.2.3
        16 July 2018 at 11:32 am

        Laura…Thats NOT thinking it through. The first outcome wouldbe that banks would become very risk averse to lending on unsustainiably priced property.

        As for the increase in owners equity that would be matched by a lower property value so net result would be that owners equity would be nearer to what it would have been without bank induced overpriceing

  2. Blazer 2
    13 July 2018 at 9:13 am

    People that bought a home to actually live in will be alright so long as they have a job.

    Developers could take a bath,but usually they use OPM.

    Highly leveraged speculators may find themselves in trouble.Not too many tears for them either.

    And of course the banks…will be fine..the heads we win .tails you lose mentality always prevails.

    Can’t endanger the financial system by allowing banks to fail.

    The Australians have deposit insurance, but here in NZ its a totally different market(yeah right)and depositors here have the OBR haircut to look forward to.

    It will all be the coalition Govts fault.

    • AsleepWhileWalking 2.1
      13 July 2018 at 6:51 pm

      ;No….people who purchased a home will be alright so long as the government continues to plow taxpayer money into accommodation costs.

      If the extensive subsidies end, so to does the wealth transfer as the housing prices would fall precipitously

  3. Kevin 3
    13 July 2018 at 9:20 am

    If you have a job and can comfortably pay your mortgage, why would the bank want to have any sort of ‘chat’ with you in the first place, even if the value of the property is less than the outstanding mortgage?

    • David Mac 3.1
      13 July 2018 at 9:34 am

      I guess the first question in that chat would be establishing the existence and amount of cover of the life insurance policies for those servicing the upside down loan. Income insurance? I guess banks could start requesting customers take it on….and guess what, good news, the bank sells it! Ha! Bastards.

      I’d be taking a more active interest when someone owes me $10 on an item worth $8.

  4. David Mac 4
    13 July 2018 at 9:23 am

    Our emotions play such an important role in outcomes. Mathematicians can run various scenario outcomes but predicting bankable outcomes is so difficult.

    We are moving out of an extended season of “Buy a house mate, you can’t lose” into a season of Mortgagee Auction signs popping up around our neighbourhoods.

    The ‘Buy a house mate’ advice from Grandads and media pundits is sliding into ‘Keep your powder dry’ mode.

    It’s difficult to make big gains on provincial real estate. It chugs along, great rent return vs mortgage repayments but lousy capital growth, the reverse of Auck etc. The exception I noticed eg: value doubling in 10 years is the mortgagee auction prices of 2007/08 and the selling prices today. The very bottom and very top? of the cycle.

  5. Blazer 5
    13 July 2018 at 9:27 am

    I must say whenever these stress tests have been done I’ve yet to see a conclusion along the lines of…the banks will be..fucked!

    • David Mac 5.1
      13 July 2018 at 9:49 am

      Yep, the banker never goes broke in Monopoly. No jail, no Community Chest, no Chance, just raking it in and outliving everyone but the last player standing. ‘Cue riding off into the sunset together.

    • AsleepWhileWalking 5.2
      13 July 2018 at 6:54 pm

      Read Nomi Prins.

      The stress tests are being fudged (and Douche Bank still managed to fail…)

  6. DH 6
    13 July 2018 at 9:29 am

    Much of that talk is wildly exaggerrated and misleading. Very few people would go into negative equity if house prices fell 20%. They could fall 30% and still it wouldn’t affect that many.

    Do the maths. If house prices rise 10%, and a person buys a house with a 10% deposit, after 1yr they’d have 20% equity. After 2yrs they’d have 30% equity…etc.

    A sharp fall in house prices would only negatively affect those who bought within the last year or two, and many of those are ‘sell old house/buy new house’ who wouldn’t be affected either.

    • David Mac 6.1
      13 July 2018 at 9:43 am

      In light of your thought DH the requirement for larger deposits for investment properties should serve us well. A Mortgagee Auction sign being hammered into the lawn outside your rental is not a pleasant feeling.

    • RedLogix 6.2
      13 July 2018 at 10:01 am

      It’s true that only very recent buyers are at immediate risk of going under water, but combined with possible interest rate rises the risks rise as Ad details in the OP.

      The one thing he didn’t really mention, is that in a falling market no-one wants to buy. And certainly lenders tend to increase their equity requirements. Instead of the bank looking for 10 or 20% equity, it might be 30.

      Because while the equity gain numbers are very nice thank you in a rising market, they’re brutal in a falling one … especially on first home buyers.

      • Ad 6.2.1
        13 July 2018 at 10:14 am

        After a decade we’ve started forgetting how really cold it feels when it hits.

      • DH 6.2.2
        13 July 2018 at 10:32 am

        There’s a lot of factors not mentioned RL, one of which is the known lag between rents and house prices. Falling markets are always self correcting. The fall halts when the income from rents becomes sufficient to pay the mortage on a rental property. Old investors make way for new investors.

        Another is the obvious fact that banks have to lend money to make money. It’s not in their interests to engage in mass foreclosures even if mortgagees’ equity does get hammered.

        • RedLogix 6.2.2.1
          13 July 2018 at 10:41 am

          Yes there are a mess of factors involved; but the one big joker in the pack will be interest rates. If they climb back up towards 10% or more; it’s all bets off.

          The year after I purchased my first house in 1986 IIRC, my mortgage hit 22%. If I hadn’t gotten a 25% pay rise that year it would have all turned pear-shaped. So yeah .. these things are not impossible.

          • DH 6.2.2.1.1
            13 July 2018 at 10:53 am

            Sure it’s a joker in the pack but then it always has been so why would it make things different now? Is there any reason why interest rates might climb to 10%

              • DH …
                13 July 2018 at 11:12 am

                What’s your point Ad? Your link provides no reasons why interest rates might climb to 10% in the immediate future.

                • Ad …
                  13 July 2018 at 11:22 am

                  The whole point of the post was to show that really weird confluences of stuff happen which can tilt the real estate market faster and deeper than expected.

                  Some of those are tested beforehand by the Reserve Bank.

                  • DH …
                    13 July 2018 at 12:01 pm

                    The RBNZ are always conducting worst case modelling, that doesn’t mean its going to happen though does it.

                    Getting back to the argument, I think people get sucked in a bit by what banks say instead of looking at what they actually do. The banks say whatever suits their interests and the RBNZ are the types to fall for it because it’s their business to ensure our banking system survives.

              • dv …
                13 July 2018 at 11:19 am

                Interestingly DH that graph refers to byAD (66 to 08) show rates with an ‘average’ (by eye) in the 8-10% range over the 40 years!!!

                • Ad …
                  13 July 2018 at 11:23 am

                  True!

                  But it’s the spikes that kill you.

                • DH …
                  13 July 2018 at 11:37 am

                  It’s meaningless in that context though dv, interest rates generally follow inflation and we haven’t had high inflation for quite some time.

            • RedLogix 6.2.2.1.1.2
              13 July 2018 at 11:08 am

              Instability, uncertainty, risk, need to recover lost capital from mortgagee sales, etc. The usual reasons. The key point to make, is that if haven’t got much debt, you don’t really care about interest rates, but it’s a different story if you do.

              Government Debt to GDP at around 22% looks manageable, but the household Debt to GDP is over 90%. I’d imagine that’s fairly exposed:

              https://tradingeconomics.com/new-zealand/government-debt-to-gdp

              https://tradingeconomics.com/new-zealand/households-debt-to-gdp

              • DH …
                13 July 2018 at 11:28 am

                Maybe you’re seeing it from the wrong perspective RL?

                If rising interest rates led to more foreclosures then surely it would be in the banks interests not to increase interest rates. Why would they want to create their own losses?

                • RedLogix …
                  13 July 2018 at 12:03 pm

                  The banks in NZ are really only retail outlets; they don’t have much control over the rates that they are charged.

                  • DH …
                    13 July 2018 at 12:08 pm

                    Yeah I get that, but banks here do tend to follow the OCR so the local economy has an influence on even the overseas owners.

    • Draco T Bastard 6.3
      13 July 2018 at 11:50 am

      If house prices rise 10%, and a person buys a house with a 10% deposit, after 1yr they’d have 20% equity. After 2yrs they’d have 30% equity…etc.

      So, they’re paying off 10% of equity every year and will thus have the loan paid off in ten years?

      Yeah, your maths sux.

      • DH 6.3.1
        13 July 2018 at 12:05 pm

        I was rounding Draco, don’t nitpick.

        • Draco T Bastard 6.3.1.1
          13 July 2018 at 12:44 pm

          The problem being that your rounding gives a seriously wrong impression.

          • DH 6.3.1.1.1
            13 July 2018 at 12:51 pm

            Only to you Draco, most people understand that we’re not going to minutely detail every item in the pursuit of making a point.

            I could point out that my numbers were accurate for a person with a 10yr mortgage but then I’d be nitpicking wouldn’t I.

            • mpledger 6.3.1.1.1.1
              13 July 2018 at 5:26 pm

              Based on a $100,000 mortgage, interest charged at 6% per anum and compounded monthly, a monthly payment of 1110.21 that pays off the loan in 10 years. The amount paid off after each year is
              year end _______ % of mortgage paid off
              1__________ 7.5
              2__________ 15.5
              3__________ 24.0
              4 __________ 33.0
              5__________ 42.6
              6__________ 52.7
              7__________ 63.5
              8__________ 75.0
              9__________ 87.1
              10__________ 99.99999682

              So, not very close to 10% initially.

      • mikesh 6.3.2
        13 July 2018 at 1:27 pm

        A rise in equity (capital gain) does not provide cash to make loan repayments.

  7. David Mac 7
    13 July 2018 at 10:04 am

    In the past, it seemed to me, other than new entrants, the first to find themselves in trouble had converted equity in their homes into nice things to have: Boats, holidays, grand weddings etc.

  8. Draco T Bastard 8
    13 July 2018 at 11:45 am

    So what if there’s no future equity gains to keep those further fresh loans for further properties available?

    The economy crashes as Steve Keen has shown.

    In the first, a downturn in the Chinese economy spreads through trade channels to other emerging markets, with flow-on effects to other parts of the global economy including Europe and Japan.

    Yes, the problem with a country being trade-dependent rather than being able to stand on its own with trade being a ‘nice to have’.

    Now, I’m no Cassandra presaging the end of New Zealand real estate capitalism as we know it. Will the New Zealand housing downturn in key centres turn into an inferno that destroys the New Zealand economy?

    What do you think will happen when the entire economy is based upon an asset bubble caused by too much lending creating too much money and then the bubble pops for several reasons?

    With so little increase in overall New Zealand productivity for so long, the only reliable way most people have got ahead in this country is getting loans on housing and watching the values go up. That whole model is now at risk.

    That’s a model that cannot possibly work. But it’s also capitalism in its entirety as people seek to become rich without actually producing any value.

    And it’s a model that’s fuelled by the private banks being able to create money and loan it out at interest.

    Change the banking system so that private banks can’t create money would be one major step towards actually stabilising the economy. The second part to that is having the government be the sole creator of money which it spends into the economy mostly through a UBI.

    We’d still have to ban foreign ownership and have it so that the purchase of NZ goods and services is solely done in NZ$ (I.e, foreign money cannot come into NZ).

    We’re not in any crisis yet.

    We’re in a crisis and have been for some time. It just hasn’t manifested yet as the government has been able to kick the can down the road time and time again but the weakness is still there. It’s a weakness that is systemic.

  9. Stuart Munro 9
    13 July 2018 at 12:06 pm

    If prices went down significantly I wouldn’t put it past the government to soften their stance on foreign investors until they firmed – they’re more consistently loyal to investors than citizens.

  10. SPC 10
    13 July 2018 at 12:43 pm

    Getting ahead by affording to own a home is good and is one reason why Morgan’s party deservedly died.

    Getting rich watching property values going up, not so much. That model was based on inflating land values and cheap finance for speculators – it’s a pyramid scam, requiring immigration. This has high infrastructure costs and results in real decline in funding for health and education (especially with no CGT).

    There is little market risk with a correction in property values of itself (as the government has a supply programme) nor to banks or to owners either, given there is the 20% deposit for recent buyers and those who bought earlier have large equity gains.

    The problem for individuals would be an increase in mortgage rates impacting on ability to pay mortgages or loss of income/employment. But this has always been the case and can occur with illness (income insurance), death if no life insurance and partnership separation.

    I have no problem with an end to an era of owning property as being the path to “mobility” and the “wealth” for New Zealanders. It’s taking home ownership out of the reach of the next generation. Little wonder our productivity performance lags behind the rest of the first world and our homes cost so much to build and are not great quality either.

  11. Bill 11
    13 July 2018 at 12:51 pm

    A property value crash could be a golden opportunity for the government, instead of bailing out banks re 2008, to shove piles of productive cash into the economy to do such things as retrofit and upgrade existing housing stock (as well as other pieces of infrastructure) in preparation for likely climatic effects that are just around the corner.

    So thinking of such things as increasing the thermal mass of houses and buildings to better withstand more extreme and lengthy heatwaves. High productive investment/low unemployment economic settings. Very Keynesian/social democratic, and so against the grain, I know. But hey…

    And it’s a bit of an aside. But the housing announcement made by Twyford that Ad linked to on Open Mike, good as it is as far as it goes, I do wonder what standard these houses are being built to. And I wonder on the basis that NZ houses I’ve experience of simply aren’t built to cater to long periods of extreme heat. (Neither in terms of thermal mass, nor provision of utilities such as electricity)

    edit – as for people paying mortgages on houses that are no longer worth what they paid, they can always simply turn their house into a home 😉

    • McFlock 11.1
      13 July 2018 at 1:30 pm

      One of the best ideas I heard re: alternative responses to the GFC was that governments should just have bought the riskier own-home mortgages from the banks on the cheap and simply managed them on a state housing rent-to-own basis. Nobody gets turfed from a home even if they lose their jobs, the banks take a bit of a haircut (but the main problem was the deregulation and outright fraud that motivated the toxic mortgages, because bankers), and the economic damage is nipped in the bud.

  12. Siobhan 12
    13 July 2018 at 1:03 pm

    Its a little hard to really care even when your on the receiving end of the property/rental market scam ..we live in a world wide system of bubbles and crashes.
    If housing ‘crashed’ the economy would eventually pick itself up again and flick off the ‘losers’ like a bunch of dead fleas and go bounding after the next housing bubble treat.

    The only thing that seems to happen is each and every bursting bubble (housing, commodities etc) seems to help concentrate the wealth into a smaller and smaller pool of people..ie The Obscene Transferal of Obscene Wealth.

    Personally I like to imagine future when owning more than one house or being a Landlord is considered a social faux pas of the highest order.

    • Draco T Bastard 12.1
      13 July 2018 at 1:11 pm

      Personally I like to imagine future when owning more than one house or being a Landlord is considered a social faux pas of the highest order.

      And where unearned income by rich people is seen as the bludging it is.

  13. Herodotus 13
    13 July 2018 at 2:37 pm

    Many here fail to recognise, should the construction industry contract, there are such consequences (and not limited to) as:
    Companies fail – dragging down with them many subbies
    Construction activity dramatically decreases as banks reduce credit – as happened in 2008
    Developers without adequate strength in their balance sheet are unable to continue and developments stagnate e.g. 2008
    Much of the 2007-9 manufacturing crisis and its subsequent rise can be attributed to the construction contraction and later boom/expansion that we are currently experiencing.
    Spec building ceases as there is no ability to build and achieve any gains for builders
    So who builds ???
    Many are not old enough to remember the late 80’s (sharemarket crash), 1998 (Asian Crash) and what it was like back then. We were fortunate that the 08 recession was not as savage as the 80’s on our economy and was “relatively” short in duration in its effects.
    https://tradingeconomics.com/new-zealand/building-permits
    And note the issues that have faced Fletchers
    https://www.nzherald.co.nz/bdo/news/article.cfm?c_id=1504111&objectid=12051857

    • Tricledrown 13.1
      13 July 2018 at 4:26 pm

      This scenario is extremely unlikely especially in Auckland Queenstown
      The back log ie housing shortage will take 10 yrs of maximum capacity to just catch up let alone create an oversupply.
      Unless we have an outflow of migration
      That’s extremely unlikely as well.

      • Graeme 13.1.1
        13 July 2018 at 7:35 pm

        Haha, wondering how long would take some deluded ” the boom’s going to go on for ever” type came along. That sentiment was rather common around Queenstown in 2007 and is a pretty reliable indicator in my book that the good times are getting very close to the end. y neighbour at that time was one of them, nice property, all the toys, now in reduced circumstances down south, and a lot happier too.

        In Queenstown right now we’re building houses to house people to build houses. See the problem. And most of the tradies that live in those houses are mortgaged to the max.

        I know a self employed sparky with a million dollar mortgage, he’s having to do work for people I wouldn’t go near because I know I wouldn’t get paid at the end of the job. I can’t see it ending well for this guy. A medium sized tits up would clean out quite a few around the town, a good one, and there’s a few contenders, would be devastating.

  14. McFlock 14
    13 July 2018 at 4:44 pm

    So that’s the impact of an international banking problem.

    What about the impact of simple property price reduction? Let’s say that (for the purposes of discussion) between kiwibuild and the private sector, over ten years the housing stock increases 10% (might happen) and the population stays the same (it won’t, but KISS).

    House prices would fall, but the construction sector would still be booming. People might go underwater, but the banks will still have money to lend because the odds of the underwater people being able to maintain payments won’t change.

    Some developers would move out of the market because of lower per-unit returns, but the cheaper houses and larger construction industry could make build-your-own more affordable.

    I dunno. Any other ideas?

    • corodale 14.1
      14 July 2018 at 5:38 am

      Seems you are correlating with supply and demand logic. It’s not the 70’s bro. Gold-standard is long-gone, and a decade of quantitative-easing later…

      International banking does set the price.

      • McFlock 14.1.1
        14 July 2018 at 4:42 pm

        Oh, well, it must be true because you said it. God bless you and your hierophantic vocation.

  15. corodale 15
    13 July 2018 at 8:08 pm

    RBNZ looking at possiblities of “…a six month closure of offshore funding markets for banks.” The mind boggles.

  16. cleangreen 16
    14 July 2018 at 2:59 pm

    Oh gosh – ‘property pice declines’ – then all the ‘Jafas’ will jump out of their fifth floor apartments?

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