New Zealand housing market (particularly Auckland)

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#2083965 4-Sep-2018 17:53

xlinknz:

A deposit in a passive or active investment fund @ 10% net return per annum is arguably as attractive without all the hassle and constraints of property

If there's an investment fund guaranteed to be generating 10% in the next 12 months, let me know.

Hindsight is a great thing. I'm retired, but I think my wife's Kiwisaver generated >20% over the past 12 month period. It's thoroughly delusional IMO to expect that's going to continue to generate those returns. Stay in any such scheme long enough and better return than bank deposits are almost certain - probably better than almost everything else - except from the past NZ/Aus residential property, bitcoin, and probably methamphetamine manufacturing.

NZ residential property seems to have been returning ~10% PA averaged since the mid '80s - more than double the average rate of inflation. That's tax free for most, so equivalent to ~15% return from a taxable investment - and I don't believe any other market based investment comes close to that record. I don't expect it can continue - reason = simple arithmetics.

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#2083980 4-Sep-2018 18:37

Aredwood:
xlinknz:
A deposit in a passive or active investment fund @ 10% net return per annum is arguably as attractive without all the hassle and constraints of property

Except that for most people, property is a geared investment. Borrow 500K from the bank, with the deposit being equity in your current house. Even if you only get a 3% return, that is still $15K per year. And even better in that you didn't even have to invest any actual cash, Plus you get tax advantages as well.

If you have $500K in your bank account that you want to invest. I doubt that anyone would recommend that you buy a single mortgage free rental property with that money.

Fair point on geared investments.

My point is Kiwis often don't consider other forms of investment which of course they can use equity in an existing property to achieve. Properly is also easier to understand for the average person and 'tactile' than for example Shares.

Fred99:

xlinknz:

A deposit in a passive or active investment fund @ 10% net return per annum is arguably as attractive without all the hassle and constraints of property

If there's an investment fund guaranteed to be generating 10% in the next 12 months, let me know.

Hindsight is a great thing. I'm retired, but I think my wife's Kiwisaver generated >20% over the past 12 month period. It's thoroughly delusional IMO to expect that's going to continue to generate those returns. Stay in any such scheme long enough and better return than bank deposits are almost certain - probably better than almost everything else - except from the past NZ/Aus residential property, bitcoin, and probably methamphetamine manufacturing.

NZ residential property seems to have been returning ~10% PA averaged since the mid '80s - more than double the average rate of inflation. That's tax free for most, so equivalent to ~15% return from a taxable investment - and I don't believe any other market based investment comes close to that record. I don't expect it can continue - reason = simple arithmetics.

No investment fund is guaranteed same with property

Any decent managed investment growth fund Kiwisaver or not will have averaged 10% over years. Ones that focus on Equities/Shares and Property are often higher as appears to has occurred with your wifes last year. My point is one can average 10% over 10 years.

Case in point have a look here at NZ's largest fund provider i.e. ANZ OneAnswer - many funds are over 10% over 10 years

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#2083983 4-Sep-2018 18:49

WyleECoyoteNZ:

What concerns me with the NZ property market in general, is how many are so desperate to get on the property ladder, that they've mortgaged themselves to the limit.

That may be alright while interest rates are relatively low, but what happens when they go up 3-4%?

You are right. The house price these days doesnt matter. I can afford $900 per week, so go to the mortgage calculator and there is your budget. Then look for a house. And I cannot really fault that, as our culture is buy your home. Interest rates rule.

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#2083984 4-Sep-2018 18:53

kryptonjohn:

Fred99:

WyleECoyoteNZ:

What concerns me with the NZ property market in general, is how many are so desperate to get on the property ladder, that they've mortgaged themselves to the limit.

That may be alright while interest rates are relatively low, but what happens when they go up 3-4%?

Now don't you go worrying about that. You've got an entire lending industry (global) and a government regulator (local) looking at this and assuring us that it'll all be just fine. They're doing that with full knowledge (you'd hope) that if it wasn't going to be just fine, then they'd tell us so. Of course telling us that it wouldn't be just fine would precipitate an apocalypse.

As a skeptic, I'm reminded of the (accidental?) brilliance of internet troll Ken M - which applies to bubbles (property may be one - we may find out):

"If we don't study the mistakes of the future, we're bound to repeat them for the first time".

I think it's even worse that we think, because we're actively encouraging people on lower incomes via Kiwibuild etc into borrowing big to get aboard the bus. This has worrying similarities to the sub prime mortgage disaster that created the last GFC.

Do we have sub prime here? The US system is a rort, they encourage marginal lenders, its a weird system. My ex American gf walked away from her and her ex husbands house. I'd drive around (Louisiana), and see cool, large single level houses with 4 foot high grass and broken windows. Yes, Louisiana is a poor state, I got lost in Baltimore, ended up in the bad area, commercial buildings empty everywhere. You would not see that here as they have value, but not there

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#2083987 4-Sep-2018 18:57

alasta:

WyleECoyoteNZ:

What concerns me with the NZ property market in general, is how many are so desperate to get on the property ladder, that they've mortgaged themselves to the limit.

That may be alright while interest rates are relatively low, but what happens when they go up 3-4%?

This worries me too. I used to work as a corporate financial analyst, so I am fortunate enough to have the skills to stress test my own situation against these types of scenarios. However if I plug some numbers into the banks' indicative mortgage calculators it looks like they would be likely to be willing to lend me $100k-$200k more than my own models show I can afford.

Interest rates will stay low for a while yet, but people who have borrowed five times their income are likely to find themselves in trouble eventually.

Agree. There are reports that the mistakes of the GFC are being repeated, but NZ has a very low exposure to banking. If internets rates rose that will hurt mortgage payments, but I 100% wager that wont have a detrimental effect on existing mortgages. Govt will step in an underwrite, mortgages can be extended, the main factor his keeping people in their own homes. Some will sell, forcing prices down, but off you can afford your mortgage you keep paying irregardless of the house valuation

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#2083989 4-Sep-2018 18:59

Senecio:

When I lived in Dublin the Irish government introduced lending criteria to try to control the housing market and not to have a repeat of the sub prime crash of 2007/2009.

The rules were in simple terms

Minimum 20% deposit (10% for first time buyers)
Maximum 3.5 times combined annual pre-tax income
Banks were allowed to approve exceptions but no more than 15% of a banks borrowings could be on exception basis
There was outrage that people were not going to be able to borrow more than 4 times their combined salary!! No amount of education could convince the Irish public that the lending laws were for their own good.

Agree, and that in itself will hold the property market as it will decrease demand, pull prices back to get sales

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#2083992 4-Sep-2018 19:04

Fred99:

xlinknz:

A deposit in a passive or active investment fund @ 10% net return per annum is arguably as attractive without all the hassle and constraints of property

If there's an investment fund guaranteed to be generating 10% in the next 12 months, let me know.

Hindsight is a great thing. I'm retired, but I think my wife's Kiwisaver generated >20% over the past 12 month period. It's thoroughly delusional IMO to expect that's going to continue to generate those returns. Stay in any such scheme long enough and better return than bank deposits are almost certain - probably better than almost everything else - except from the past NZ/Aus residential property, bitcoin, and probably methamphetamine manufacturing.

NZ residential property seems to have been returning ~10% PA averaged since the mid '80s - more than double the average rate of inflation. That's tax free for most, so equivalent to ~15% return from a taxable investment - and I don't believe any other market based investment comes close to that record. I don't expect it can continue - reason = simple arithmetics.

It will. Property doubles every 10 years. Not linear. That will change as inflation has upset that, but immigrants have compensated for that, but it will increase, and but below 10% p.a. And the adage buy what you can afford as inflation will take care of that after 3 years of struggle, also wont apply, but there is still a demand exceeding supply situation.

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#2084060 4-Sep-2018 20:56

tdgeek:

It will. Property doubles every 10 years. Not linear. That will change as inflation has upset that, but immigrants have compensated for that, but it will increase, and but below 10% p.a. And the adage buy what you can afford as inflation will take care of that after 3 years of struggle, also wont apply, but there is still a demand exceeding supply situation.

That sort of reminds me of the government getting into huge debt and then inflating the debt away. But it is a huge assumption that house price rises are going to continue. This money has to be created from somewhere, unless they are printing it out of thin air. Over the last decade it has a been a perfect storm in NZ for house price rises. But NZ is but a cork on the ocean.

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#2084112 4-Sep-2018 23:24

Senecio:
When I lived in Dublin the Irish government introduced lending criteria to try to control the housing market and not to have a repeat of the sub prime crash of 2007/2009.

The rules were in simple terms

Minimum 20% deposit (10% for first time buyers)

Maximum 3.5 times combined annual pre-tax income

Banks were allowed to approve exceptions but no more than 15% of a banks borrowings could be on exception basis

There was outrage that people were not going to be able to borrow more than 4 times their combined salary!! No amount of education could convince the Irish public that the lending laws were for their own good.

That is all very well, if there are plenty of cheap houses. And plenty of cheap rental properties. Otherwise such rules just keep people in the rent trap.

Myself, I bought in 2007. Over 80% of my income went on the mortgage repayments. It was a massive struggle at first, and even now, still not easy. I only managed to get the mortgage due to loose lending rules at the time. Even now, I probably wouldn't qualify for a mortgage.

But thanks to loose lending rules, I have made approx 800K on paper capital gains. Hardly ever needed to pay rent due to buying at a young age. Rising rents mean that my mortgage repayments are now cheaper than rent for an equivalent house.

Tighter lending rules are just more nanny state rules. There are problems now in some smaller towns. Where people can't buy due to their income being too low. Even though the mortgage repayments would be less than what they are currently paying in rent.

Although debt to income and other restrictions do have their place, with lending to landlords. As a landlord with lots of properties going bankrupt, is far worse than just 1 owner occupier going bankrupt. And it avoids some of the problems with landlords not maintaining their properties properly. As I know of at least 1 case personally of a landlord not fixing major problems. Only because they quite literally didn't have any money to pay for repairs.

mattwnz

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#2084120 5-Sep-2018 01:22

Aredwood:

Although debt to income and other restrictions do have their place, with lending to landlords. As a landlord with lots of properties going bankrupt, is far worse than just 1 owner occupier going bankrupt. And it avoids some of the problems with landlords not maintaining their properties properly. As I know of at least 1 case personally of a landlord not fixing major problems. Only because they quite literally didn't have any money to pay for repairs.

It think part of it is, what happens when interest rates rise?. Will people be able to afford to service the mortgage on their million dollar shack, which they got a 800k mortgage on, especially if the economy tanks and people lose their jobs. The LVRs are supposed to help bring prices down a bit, as peoples can only buy what they can afford to service the mortgage on. So if there are no buyers, then house prices will fall to meet the market. But that hasn't really worked in NZ as there is a housing shortage, and immigration and overseas buyers only fueled demand and raised prices. Immigration has had a huge effect of stimulating demand over recent years. But these things go in cycles.

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#2084139 5-Sep-2018 07:16

mattwnz:

tdgeek:

It will. Property doubles every 10 years. Not linear. That will change as inflation has upset that, but immigrants have compensated for that, but it will increase, and but below 10% p.a. And the adage buy what you can afford as inflation will take care of that after 3 years of struggle, also wont apply, but there is still a demand exceeding supply situation.

That sort of reminds me of the government getting into huge debt and then inflating the debt away. But it is a huge assumption that house price rises are going to continue. This money has to be created from somewhere, unless they are printing it out of thin air. Over the last decade it has a been a perfect storm in NZ for house price rises. But NZ is but a cork on the ocean.

Rising house prices has always happened, it will continue to happen. Inflation being low should mean they rise slower at more or less inflation rate, but that hasnt happened. Right now you could say that everyone who wants a house and can afford one, has bought one. Limited by prices vs salary. They should decrease as was the case in ChCh a decade or so ago and before that. With interest rates low and immigration and short supply, I expect at a minimum, small annual increases for the next few years.

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#2084141 5-Sep-2018 07:21

xlinknz:

ANZ OneAnswer - many funds are over 10% over 10 years

But there hasn't been a market correction over 10 years. There's been an almost unprecedented period of continuous growth.

When that inevitably comes, the highest risk / highest yielding funds will be the fastest falling funds.

tdgeek

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#2084142 5-Sep-2018 07:24

mattwnz:

Aredwood:

Although debt to income and other restrictions do have their place, with lending to landlords. As a landlord with lots of properties going bankrupt, is far worse than just 1 owner occupier going bankrupt. And it avoids some of the problems with landlords not maintaining their properties properly. As I know of at least 1 case personally of a landlord not fixing major problems. Only because they quite literally didn't have any money to pay for repairs.

It think part of it is, what happens when interest rates rise?. Will people be able to afford to service the mortgage on their million dollar shack, which they got a 800k mortgage on, especially if the economy tanks and people lose their jobs. The LVRs are supposed to help bring prices down a bit, as peoples can only buy what they can afford to service the mortgage on. So if there are no buyers, then house prices will fall to meet the market. But that hasn't really worked in NZ as there is a housing shortage, and immigration and overseas buyers only fueled demand and raised prices. Immigration has had a huge effect of stimulating demand over recent years. But these things go in cycles.

If they rise a couple of percent or more, that will hurt some. They can take a mortgage holiday for a few months, they can add years to it to reduce the repayments, the Govt will allow that to avoid a crash. Plus, banks here are far less exposed that overseas banks are in a GFC. Looking at rates in 2008 to 2011, they were about 5%, increased to about 6.5%+ then decreased again. On that, its looks pretty stable here

xlinknz

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#2084154 5-Sep-2018 08:07

Fred99:

xlinknz:

ANZ OneAnswer - many funds are over 10% over 10 years

But there hasn't been a market correction over 10 years. There's been an almost unprecedented period of continuous growth.

When that inevitably comes, the highest risk / highest yielding funds will be the fastest falling funds.

I agree but a market correction will affect property too.

Most funds around 2008 dived, many to -20% or worse but rebounded the following year. Many of the funds I have seen have averaged over 10% including the 2008 down turn period.

The irony is that a severe market correction will probably do a better job of correcting the property market than any govt !

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#2084158 5-Sep-2018 08:19

xlinknz:

The irony is that a severe market correction will probably do a better job of correcting the property market than any govt !

Not if interest rates stay low during another GFC

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