"it will take 30 years to recover"

[Austrokiwi]

This discussion really impressed me on how much the value and character of the NZ$ has changed since 1974. Initially it was fixed and between 1974 and 1985 it was devalued 4 times and revalued once, finally in 1985 it was floated. In that same time period it went from just over 1.53 to the US$ to around $.56. I will go hunting tonight to see if I can find out how the average salary changed over that same period of time.

[Monid]

I am not sure I totally agree. Yes if you refer to the average home owner. No for IP The reason I say this is I assume the aim of every investor to beat the rate of return they could get by just putting their money in the bank.

It is a matter of perspective and what each investor sees as important. It took a bit of digging but the house Kierans parent's purchased in 1974 cost them 428 Gold ozs' The value of the property in 1991 was 230 oz gold. I think that is what the real growth graph shows.

The figures are approximate and are based on 1974 NZ$gold price as being $28.00 oz and 1991 NZ$650.00 oz

Fantastic, thanks for doing the digging I was too lazy to do.

[exnzpat]

Olly’s book “The Day the Bubble Bursts” has some interesting things to say about Government interference in the housing market prior to the 1980’s. Unfortunately, I don’t have his book with me so I can’t reference the information. But, it had something to do with mortgage approvals, I believe (its been awhile since I read it).

I point this out because house prices (purchase price) would be skewed from the past to the present because of this interference. Therefore, if correct, any average or median data would be irrelevant unless corrected for this interference.

Also, the floating of the dollar vs. the Gold Standard would be another factor that must be corrected for. Just looking at inflation alone would not be enough. There have been some pretty big changes to New Zealand’s economic foundation over the last 40 years.

[Monid]

Good point Exnzpat.
And the conclusion of all this is the old staple of investors anywhere:
"past performance is no guarantee of future performance"

[tricky]

Good point, Monid.
And that neatly destroys the argument about houses are now un-affordable and will have to drop in price.
Just because houses were four times the average wage (or whatever) once upon a time is no reason why houses will return to be four times the average wage.

[Monid]

Shush Tricky that is an emperor's new clothings I'm hoping the market will believe (that prices have to drop) since it will then be self fulfilling and buying for cashflow will make sense again...

You are right though counting on a revision to trend might well be just as foolish as counting on the trend being beaten forever (after this could be the new trend).

Orion's approach looks better and better to me.

Cheers
David

[exnzpat]

Good point, Monid.
And that neatly destroys the argument about houses are now un-affordable and will have to drop in price.
Just because houses were four times the average wage (or whatever) once upon a time is no reason why houses will return to be four times the average wage.

Unlikely.

House prices will fall because the majority of New Zealanders holding mortgages cannot afford those mortgages. New Zealanders are overextended. The recession that is about to sweep the world will mean job loss and loan default. Market value will fall below mortgage notes and those holding negatively geared and interest-only-loans will be the first to fall.

Don’t take my word for it – call your friendly bank manager today and ask him what the bank does when the market value of your home falls below your mortgage note value i.e. the amount you owe. You won’t like the answer.

[Austrokiwi]

Don’t take my word for it – call your friendly bank manager today and ask him what the bank does when the market value of your home falls below your mortgage note value i.e. the amount you owe. You won’t like the answer.

Banks did it in the late 19th century in NZ, it hit both rural and residential property owners. I don't think ringing your friendly bank manager and asking what his bank would do is a good idea, you might make him suspicious!

( maybe ring someone else's friendly bank manager )

[tricky]

House prices will fall because the majority of New Zealanders holding mortgages cannot afford those mortgages. New Zealanders are overextended.

Nonsense.
The majority of home owners have no mortgage or very small mortgages.

[Austrokiwi]

Nonsense.
The majority of home owners have no mortgage or very small mortgages.

..........the statement was a little global........... I think most would agree that there are a significant number of property owners out there who face mortgage stress

[exnzpat]

Banks did it in the late 19th century in NZ, it hit both rural and residential property owners. I don't think ringing your friendly bank manager and asking what his bank would do, you might make him suspicious!

( maybe ring someone else's friendly bank manager )

Good point. I’ll call yours and you call mine – just don’t give them my name – I’ve been on their blacklist since I told them to take their 2 million dollars (interest only) and shove it!
“But, you're good for it” they said.
“Sure, in an up-market” I answered, (this was late 2004).

In truth, they gave me the money without actually asking me if I wanted it. They told me it was mine, never thinking for a moment that I was not interested. Personally, I was horrified at their audacity. Which brings me back to why this market is teetering on the precipice of Mount Doom. How many other New Zealanders were offered these kinds of deals and stupidly took them?

[exnzpat]

Nonsense.
The majority of home owners have no mortgage or very small mortgages.

ARE YOU SERIOUS?

[Austrokiwi]

In truth, they gave me the money without actually asking me if I wanted it. They told me it was mine, never thinking for a moment that I was not interested. Personally, I was horrified at their audacity. Which brings me back to why this market is teetering on the precipice of Mount Doom. How many other New Zealanders were offered these kinds of deals and stupidly took them?

These deals: were these enabled by Basel II ( though I didn't think its been fully implemented yet) ?

[exnzpat]

These deals: were these enabled by Basel II ( though I didn't think its been fully implemented yet) ?

I’m not familiar with that name.

All I remember was that my wife was in tears because we missed one month of paying to principal.

Wealth by reducing debt has always been our goal. We have never understood the concept of increasing debt to increase wealth – it seems contradictory.

To us, the bank is no more than a tool that we use to accomplish short-term goals – the long term is entirely up to us.

[Austrokiwi]

Basel II

http://www.bis.org/publ/bcbsca.htm