Where are all the property gurus?

When was the last time you saw some news about house prices in New Zealand? My guess is it hasn’t been too recent. And if you have, it would have been a brief mention.

Up until last year there were articles daily. “Record house prices”. “I made $500,000 flipping property”. “Prices up 2% last month”.

Banks, property developers, property investors, and real estate companies were all actively promoting content on our computer screens. Where have they all gone now? It’s been extremely quiet.

Why do we hear of all the good housing market news, but not the bad?

Property analysts are heavily involved in the real estate industry and benefit from property performing well. It comes as no surprise to me then that they don’t release the statistics that make the housing market look bad. We are relying on real estate data and news that is collected from those involved in the real estate industry. Does no one else see a problem with this?

The analysts either don’t release the data, release only partial data, exaggerate positive data and minimise negative data, or they hold on to it for a long, long time until the data is no longer relevant. This is a huge problem due to the significant conflicts of interest. They frequently angle the data to support their argument, instead of just releasing the data and letting it speak for itself. The media suck this all up without questioning the information they are receiving and publish these half (if we’re lucky) truths. In fact, the media are likely in bed with these companies. One example is the NZ Herald’s relationship with the property company ‘one roof’.

Yet, they release every single piece of data, no matter how small, that makes the housing market look good. It’s no wonder the public are sucked in to paying too much for houses.

As the public, we rely on timely and accurate data and these analysts need to be held to a much higher standard of conduct. Independent analysts that are heard would be a start.

Think about who has produced the data, who is releasing the data, and if they benefit from the data being presented a certain way. The answers to your questioning may surprise you and you will find that pretty much everyone in New Zealand with involvement in housing data has an incentive for property prices to increase.

In the last 10 years or so of booming property prices, banks have taken on lenders that could be considered risky. In other words, one small change in circumstances could make them unlikely to be able to meet their repayment obligations. That was OK with the banks though, because they knew they could bank on the capital gains.

I bought a house at 11 times my pre tax income in 2013. The mortgage alone accounted for over 70% of my after tax income. There were no inquiries as to my other annual expenses. My loan was incredibly irresponsible of the bank and I would hazard a guess that there were thousands of similar loans approved across the country.

There is anecdotal evidence, that around half, if not slightly more, of all rental properties purchased in Auckland post 2014, return a negative net yield. Yield basically means cashflow – what the investor receives in the hand. Net yield is cashflow after costs. After seeing many of my business clients accounts, I would say this is definitely true.

What this means is that most investors who bought a rental property in Auckland after 2014 are in negative cashflow after consideration is made for all the costs of managing a property. Mortgage, rates, insurance, maintenance and repairs, property manager, and so on.

This is a highly dangerous scenario for the banks to be in because both them and the property investor are relying purely on capital gains to make the property a safer proposition. To further add to the mortgage default risk, there will be a new law passed shortly that will disallow rental losses to be offset against one’s income. In other words, losses won’t be able to be claimed back in taxes.

Not only that, but house prices have started to decrease year on year in Auckland, So, not only do investors have negative cashflow, but recent buyers (during the boom) will start to see negative equity as well. People will then owe more on the mortgage than the cost of their house.

In the last 6 years in particular, people have been so willing to pay over inflated prices for houses because they have been relying on capital gains and that has worked out well for them. And landlords are much more willing to take on negative cashflow in order to achieve this.

The problem with capital gains though is it is not guaranteed. Times have changed. Today’s landscape is different and the capital gains party has ended. A house is only worth as much as someone is willing to pay for it, and as prices have reached such high levels of unaffordability, people are finally starting to say “no”. No, I will not pay that much.

The banks are reacting to this. Their criteria for mortgage approvals is much more strict than it was a couple of years ago. It is much harder to get a mortgage now as they don’t want higher risk borrowers on their books. And if they do take on a higher risk borrower, you will be paying a higher interest rate. They are offering attractive short term interest rates, but only to those they consider lower risk.

Make no two ways about it. Banks see a huge problem with the current mortgage situation and are trying to lessen the risk on their books by making lending more difficult, and enticing the most attractive borrowers to their bank. They are extremely worried of house prices falling further and more negative equity situations arising. I imagine that the number of interest only loans will decrease dramatically, if the banks haven’t started already.

The trends typically start in Auckland, and eventually spread to the other regions.It can take years.

In March, Auckland’s year on year house prices have decreased almost 3%. Number of houses sold is down by almost 20%.

Houses are taking 5 days longer to sell than one year ago. There are more properties going unsold at auctions.

All these unfavourable statistics that you may not have been updated on because our media is biased. The property data is biased.

The number that stands out for me is the almost 20% drop in house sales. This provides several bad signals for the future of house prices in my opinion. The drop in sales could be from fewer buyers being interested in buying property at the current prices. It could be from sellers unwilling to lower their expectations and lower their price to meet the market because it results in too heavy a loss for them. Or it could be the banks tighter lending conditions, or some combination of all of the above.

House sales are falling and so are prices. Typically when supply falls, prices increase. Yet, in the current market the opposite is happening. This spells out a huge problem.

Immigration numbers are much lower than reported which could easily result in an oversupply of houses and a drop in prices. Especially if the building consents pick up steam as anticipated.

On top of that we are currently in a low interest rate, low unemployment environment. As soon as those numbers start increasing again, we will be in for a bit of a shock. This doesn’t even mention a downturn in the world economy. Whatever combination of these influences occurs will determine how big the drop in prices will be or how extended the stall in prices will continue.

In other words, house prices in Auckland are currently going down or staying flat and that is with as favourable economic conditions you will ever get. Low unemployment (by historical standards), interest only loans, low interest rates, etc. When, not if, the economy turns more unfavourable then where is there for house prices to go?

House prices can’t continue to rise at the same pace forever. If they are severely unaffordable, eventually house prices will need to wait for incomes to catch up. Whether that will be a large drop in house prices in a short space of time or a flat decade where house prices remain fairly static in order for incomes to catch up is anyone’s guess.

In New Zealand dollar terms, median house prices in Auckland are now more expensive than Melbourne. How crazy and upside down is that? Melbourne is a city with a much higher median income than Auckland and more attractions, yet Auckland houses cost more. Corrections need to be made and my money is on Auckland slowing or decreasing, as opposed to Melbourne increasing.

How sharp the drop, if any, could depend on many factors. An increase in interest rates. An increase in unemployment. A reduction in immigration rates. An increase in housing supply. A reduction in building costs. A change in government legislation. A reduction in interest only loans. Just to name a few.

In my opinion there is a more than even chance of house prices travelling down, as opposed to up. And this is not discussed in the media. And this will place many families under significant financial stress and hardship due to our obsession with housing.

The 20% drop in house sales and 3% drop in house prices in Auckland for March were not even on the news.

We only hear that interest rates are low and house prices are stalling. It is a buyers market blah blah blah.

Or we hear from friends and family and investors how they made hundreds of thousands in profit. Beware of these stories as they only fuel the fire and are usually only half true. If that.

People with vested interests may be trying to convince you that it is now a buyers market. It is most definitely not a buyers market. House prices are still far too unaffordable by any stretch of the imagination. If interest rates were to increase by just 1% we could see a lot of mortgage defaults, not to mention the start of a housing collapse. There is not a lot of room to breathe for a lot of people who have taken on recent mortgages, and banks up until now, have been very relaxed with their lending.

If New Zealand banks are now putting safety of loans above profits you know they are severely concerned about the current situation. So should you.

We are now seeing an increasing number of first home buyer loans and I am worried for them. They have probably fallen for the biased media how house prices only go up and how we are all of a sudden in buyers market after less than a year of static prices, following on from a huge decade of gains. Give me a break.

House prices can go down. The rhetoric that it can’t happen here is rubbish.

There is a common human tendency to place a significant amount of emphasis on recent events, known as the recency bias. We tend to remember, and put greater importance, on things that are happening now, or have happened recently. An example may be of an stock investor. They may think that the share market only goes up, as that has been their most recent experience. If they looked further back, such as 12 years ago, then they may find that is most definitely not the case. They may have just forgotten. The same thing can be said for housing. There haven’t been significant price drops in so long that people now think it is not even possible. That thinking is extremely dangerous and will get people into major financial troubles.

The media have gone quiet about housing and so have all the stories of ‘successful’ house flippers.

The so called property investors featured in the media who are actually thinly veiled property investment companies have gone awfully quiet.

The news doesn’t want to scare people off due to all the vested interests and all the fingers in the housing pies.

The only reason I would buy a house in today’s market is if I had run the numbers and realised that I may not make any gains on the property, and if I intend to live in that same house for at least 10 - 15 years. Any less than 15 years and I think I would be at risk of losing too much money.

I don’t know if house prices will fall dramatically or remain static for a decade. But I do know that they can’t continue to rise. We simply can’t afford these prices.

Your own house is a very undiversified investment, so don’t put all your eggs in one basket, thinking the impossible. There are other ways to get ahead, that carry much more diversification, and much less risk.

You may say that I just won’t sell in a downturn. That could very well be your intention. But unfortunately we don’t always have a say to when we move. Life happens sometimes. We could be forced to sell due to a new job, a illness in the family, mortgage stress, a job loss, a growing family needing more space, marriage break up, or any number of reasons.

Our country has a negative savings rate. This means that the average New Zealand household are spending more than we earn. Our debt levels are at an all time high. The average New Zealander home owner has very little net worth outside of the house and mortgage. Without that liquid cash as backup to fall back on and high debt obligations, there could be a lot of mortgage defaults should house prices slide or if the economy turn for the worse.

I guess my main message here is buyer beware, do your research, and plan for no capital gains in the next decade. Don’t buy into the hype blindfolded. Don’t assume that house prices can only go up. They can go down and they will. Make sure that you have a diversified portfolio of assets, not just in housing. And if you are buying a house, don’t buy as much as you can afford. Buy less. Having that extra margin of safety could help prevent financial disaster.

The mass media and vested interests have gone quiet on housing and there is a very good reason for that. Banks are being far more cautious with their lending and are in a battle to entice good quality borrowers on to their books - hence the lower mortgage rates we are seeing. They are all worried. It would pay for you to be conservative in this environment too.  

The information contained on this site is the opinion of the individual author(s) based on their personal opinions, observation, research, and years of experience. The information offered by this website is general education only and is not meant to be taken as individualised financial advice, legal advice, tax advice, or any other kind of advice. You can read more of my disclaimer here

What are your thoughts on the current housing market? Do you see the house of cards tumbling any time soon?