APRIL 2022. House prices falling, - numbers now show.

[McDuck]

Looks like the actual numbers now support the claim that houses prices are starting to fall in many areas.

And that the trend is spreading throughout the country.

Even areas that were ok last month, are now in decline.

The general global consensus is that prices could do with a 10% haircut,

but as that will be insignificant compared to the recent unprecedented price increases,
..

some have even predicted as much as a 30% drop.

Which in my experience seems a bridge too far.

But, as any long term player will tell you.

it's all just numbers on paper.

It shouldn't change your moods or behavior.

[samsinclair]

Yeah, in the long run price is upward sticky

[donna]

^^ 30% become problematic for first home buyers who have a 90% mortgage and their lender decides they want the mortgagee to have more skin in the game.

900K purchase
810 K mortgage

$670K property value after 30% drop.

Anything over 10% drop and the mortgagee can expect a call to top up.

At 80% LVR you wouldn’t want a 30% drop - fingers crossed this doesn’t happen.

Investors have been protected by the 35% deposit - it’s the FHB’s that may get caught out.

cheers
Donna

[McDuck]

..

Investors have been protected by the 35% deposit - it’s the FHB’s that may get caught out.

cheers
Donna

First home buyers.

Ma and Pa investors.

These are problematic, labels - shoved upon dissimilar groups of people.
As they capture a wide range of individuals, very few of which fit the mental image that is conjured up by the imagination.

First home buyers?

The ones wanting to buy their first home in the near future - to raise a family in?
The ones just about to use their recently saved massive deposit, as they attend auctions?
The ones who have just bought last month, and now are home owners proper, abet with a good mortgage ahead to pay off.
The ones who have bought in the past two years, making some headway, and having ridden the massive 25% + capital gains.

First home buyers?

This kind of fuzzy label making leads to fuzzy thinking, inaccurate conclusions and less than brilliant actions.

Anything you can do to lower the actual price of the house is going to help first time buyers proper.

Mr. Orr was warned well in advance, to get off those shiny bottomed pants of his and start the tapering last September.
He did not.
All the panic buyers in the half a year since then can thank him for their temporary financial discomfort -
and their huge capital gains.

You can't have your cake and eat it too.

(I suspect, it will all work out nicely for them - in the long run).

[Chris W]

When people are experiencing a rapidly rising house price environment, there is a fear of missing out and warnings at the time are ignored, or dismissed.

When the house prices are falling, the same warning is then seen in a very different light (with the benefit of hindsight).



From 25 February 2021 - 14 months ago

https://www.stuff.co.nz/national/politics/300238808/reserve-bank-governor-adrian-orr-warns-against-the-fomo-in-housing-market

The warnings from Reserve Bank Governor Adrian Orr to house buyers were stark, and simple: “taihoa”, “hold strong”,and whatever you do, don’t succumb to the FOMO.

Speaking on The AM Show about the overheating property market, Orr said investors in particular were getting “pretty carried away”.

“We’re saying look, taihoa (wait) here folks, there is no free lunch, there is no one-way bet in any investment. And when prices are so far stretched beyond the earnings of the household, that is a sign you’ve gone too far.”

“Any type of market that creates a frenzy or the FOMO - the fear of missing out – does create irrational behaviour, so don't get caught up in it. Understand yourself, understand your earnings power, that’s unrelated to who's standing in the auction beside you, and hold strong.”

[McDuck]

The warnings from Reserve Bank Governor Adrian Orr to house buyers were stark, .. whatever you do, don’t succumb to the FOMO.

”

Ha!
He's having you on.
He's the one who created the temptation in the first place.

If he closed his mouth and his money printing presses, the prices would stop escalating ,and all the housing transactions would still occur , but at a lower more stable and sustainable price.

[Monsterbishi]

It'll be interesting to see how the market reacts now that so many people have bought houses at the inflated rates over the last few years, ie will it lead to people simply not selling.

[McDuck]

It'll be interesting to see how the market reacts now that so many people have bought houses at the inflated rates over the last few years, ie will it lead to people simply not selling.

hmmmm,
I like your forward thinking.

I guess some people will be older, and downsize by need.

They will be winners in a descending market. because the place they buy will also be cheaper.
They will of course leave an empty nest for another family.

The flippers will be out of the market, but hey, they were just dead weight anyway, abusing the true intention of housing, not as a store and way to increase wealth, but as a place to house families securely for decades.

Sure , the churn might slow down, but how much of that churn was needed by housing?
Will it be a real problem if only the flipping and exploitation churn fizzes away?

Would it be a problem if all the froth on your freshly poured beer fizzed away , leaving only the actual beer?


Good agents will still shift the remaining house churn.

As for money churn, it won't kill the banks to make loans to actual productive companies f0r a change.

This whole immigration sustained employment and consumption model is IMOP an evil thig enabled by the MBIE.
Some good journalist would do the country a favor by bringing them to light. oppps wandered off again.
yes, will people sell , if they can get a bargain on the next deal/
Very good question..

[Monsterbishi]

The market drop-off will potentially have some interesting side effects this time round, specifically when it comes to the developers who have been buying up all and sundry, bowling the existing house then starting the builds once they've signed up a person or two. Those are going to stagnate causing more than a few of them to tip over financially.

One of the dodgy schemes I came across was a developer who was approaching people wanting to buy their property for a token sum well under the value of the land but with the promise that they would get a portion of the profits of each unit that he built and sold on the land, so in that instance the building company would fold, the original landowners would lose pretty much everything and the builder walks away scot free to register another limited liability company.

[Chris W]

When people are experiencing a rapidly rising house price environment, there is a fear of missing out and warnings at the time are ignored, or dismissed.

When the house prices are falling, the same warning is then seen in a very different light (with the benefit of hindsight).



From 25 February 2021 - 14 months ago

https://www.stuff.co.nz/national/politics/300238808/reserve-bank-governor-adrian-orr-warns-against-the-fomo-in-housing-market

The warnings from Reserve Bank Governor Adrian Orr to house buyers were stark, and simple: “taihoa”, “hold strong”,and whatever you do, don’t succumb to the FOMO.

Speaking on The AM Show about the overheating property market, Orr said investors in particular were getting “pretty carried away”.

“We’re saying look, taihoa (wait) here folks, there is no free lunch, there is no one-way bet in any investment. And when prices are so far stretched beyond the earnings of the household, that is a sign you’ve gone too far.”

“Any type of market that creates a frenzy or the FOMO - the fear of missing out – does create irrational behaviour, so don't get caught up in it. Understand yourself, understand your earnings power, that’s unrelated to who's standing in the auction beside you, and hold strong.”

How were owner occupier buyers in Auckland thinking in early 2022?

Let's take a look at the situation for an owner occupier buyer in Auckland in late Jan / early February 2022:

1) Property prices in New Zealand have been rising from 1965 to 2022 - that's 57 years of historical data of house prices rising. Based on that, the owner occupier buyer believes that property prices will continue to rise, or not fall by much over the long period. In the last 57 years, nominal house prices have increased by 9.7% p.a, based on the nominal house price index since 1965.
RBNZ paper 50 year house price study from 1965 to 2015 - https://www.rbnz.govt.nz/.../new-zealand-house-prices--a...
https://www.interest.co.nz/.../real.../qv-house-price-index

2) The owner occupier buyer sees the trend in house prices in NZ for the last 47 years, where prices have increased an average 8.23% p.a over the last 47 years, and an average of 10.0% p.a in the last 10 years. They note that house prices fall in very few instances. In most instances house prices have risen. The worst decline in the 27 year period is a decline of -9.4% in March 2009, so they conclude that house prices don't fall by much.
https://www.interest.co.nz/.../real.../qv-house-price-index

3) based on historical house prices of over 40 years or so, high profile property market participants believe house prices double every 10-12 years.
https://www.newshub.co.nz/.../house-prices-to-double-in...

4) They read that property market commentators are saying that there is a shortage of housing in Auckland and read the following analysis in February 2021 that suggests Auckland has a housing shortfall by about 75,000 dwellings.
https://www.greaterauckland.org.nz/.../how-big-is-our.../
Since only 13,470 code of compliance certificates issued for the year to December 2021, there is still a shortage of housing in Auckland.
https://www.interest.co.nz/.../new-home-completions...

5) they read that more inward immigration means more demand for houses and price rises. Borders are closed due to COVID but when they open up, there will be more inbound immigrants.
https://www.interest.co.nz/.../anz-economists-say-short...

6) they read that there are 165,000 resident visas being issued to migrants in NZ, meaning that there will be more people who will buy houses
- https://www.interest.co.nz/.../much-anticipated-decision...
https://www.interest.co.nz/.../eightfold-increase-number...

7) house price construction costs are rising. There is a shortage of materials and construction materials are rising. There is also a shortage of house construction workers.
https://www.interest.co.nz/.../new-homes-are-getting...

given the 16-35% price rise in house prices for the last 12 months, the owner occupier buyer's recent personal experience of house prices, creates a fear of missing out. Given the recent price increases and the overwhelming data mentioned above and expected continued shortage of housing, they choose to ignore or overlook warnings of house price risks by economists. After all, economists have been incorrect in the previous forecasts of house price falls in March 2020.
a) Auckland house prices rise 16-35% - https://www.interest.co.nz/.../corelogic-says-rising...
b) House price risk warning by RBNZ Govenor in February 2021 -
https://www.stuff.co.nz/.../reserve-bank-governor-adrian...

9) The owner occupier proceeds with a house purchase in early 2022 using an 80% mortgage. We will assume that the house is purchased at the median house price in January 2022

i) Property price: $1,200,000
https://www.interest.co.nz/.../real.../median-price-reinz

ii) Mortgage @ 80% LVR - $960,000 (- assumed to be interest only to avoid the effects of loan principal payments distorting the comparison of equity growth from initial equity below)

iii) Equity value saved and used to buy the house - $240,000

What might they expect in 10 years time in 2032?:

a) Using the historical average house price growth for the past 47 years of 8.23% p.a, they might by the year 2032, expect their house price to increase to $2,645,000 in the next 10 years. Assuming an interest only loan, then their equity value in 2032 would be $1,685,000 (or 7.0x their initial equity of $240,000)

b) Using the house prices doubling every 10 years, they might, by the year 2032, expect their house price to increase to $2,400,000 in the next 10 years. Assuming an interest only loan, then their equity value in 2032 would be $1,440,000 (or 6.0x their initial equity of $240,000)

c) Or being more conservative, and using say 5% growth for the next 10 years, the expected house price might be $1,954,000. Assuming an interest only loan, then their equity value in 2032 would be $994,674 (or 4.14x their initial equity of $240,000)

[McDuck]

3) based on historical house prices of over 40 years or so, high profile property market participants believe house prices double every 10-12 years.

That's a nice bit of well researched and thought out work there Chris.

One little alarm bell did go off though.

When you get a thing that doubles over time, you have to stop thinking linearly, and start thinking exponentially.
In the last few iterations, things get really silly, and need to consume the whole universe to continue.
Conclusion, it's a false claim.

Every physics student knows, that exponential growth curves soon get impossible. and any biology student knows that the curve usually encounters a natural restricting factor.

Human expansion is encountering environmental restrictions as we speak. It's all a bit predictable, I'm afraid.

The vivid example of this was the Lilly in a round pond math's example from high school.
A Lilly sits in the middle of a 100 square meter round pond.
The Lilly is 1 meter squared on the first day. , it doubles in size every day.
on what day does the lily cover half the pond.

The answer is the second to last day.
Yes, drop that linear thinking.


The famous grain of rice and chessboard fable is a similar example of the impossibility of the claim.

[Chris W]

That's a nice bit of well researched and thought out work there Chris.

One little alarm bell did go off though.

When you get a thing that doubles over time, you have to stop thinking linearly, and start thinking exponentially.
In the last few iterations, things get really silly, and need to consume the whole universe to continue.
Conclusion, it's a false claim.

Every physics student knows, that exponential growth curves soon get impossible. and any biology student knows that the curve usually encounters a natural restricting factor.

Human expansion is encountering environmental restrictions as we speak. It's all a bit predictable, I'm afraid.

The vivid example of this was the Lilly in a round pond math's example from high school.
A Lilly sits in the middle of a 100 square meter round pond.
The Lilly is 1 meter squared on the first day. , it doubles in size every day.
on what day does the lily cover half the pond.

The answer is the second to last day.
Yes, drop that linear thinking.


The famous grain of rice and chessboard fable is a similar example of the impossibility of the claim.

FYI, property market commentator expects house prices to double every 10 years based on the historical price data of the last 40 years.

(Note: house prices doubling every 10 years is equivalent to house price increases of 7.18% p.a.)

https://youtu.be/K5M8aatssYc?t=111

[McDuck]

... based on the historical price data of the last 40 years....

Ha, yes, often the past is a good indicator of the future.
Then again, sometimes something changes, and suddenly it's not.

What with all this funny money printing, its difficult to know the real increase in house value over the decades.

Here's a question for that investigative mind of yours...

How many ounces of gold would it take to buy a house in 1970, compared to 2020?

That partially removes the funny money from the equation. (I say partially, because "paper gold" is also being manipulated).

[McDuck]

Here's the same story, without the Nixon spin.

[Chris W]

The owner occupier proceeds with a house purchase in early 2022 using an 80% mortgage. We will assume that the house is purchased at the median house price in January 2022

i) Property price: $1,200,000
https://www.interest.co.nz/.../real.../median-price-reinz

ii) Mortgage @ 80% LVR - $960,000 (- assumed to be interest only to avoid the effects of loan principal payments distorting the comparison of equity growth from initial equity below)

iii) Equity value saved and used to buy the house - $240,000

How does that choice to buy in January 2002 look 12 months later in January 2023?

i) Property price: $943,000
https://www.interest.co.nz/.../real.../median-price-reinz

ii) Mortgage @ 80% LVR - $960,000 (- assumed to be interest only to avoid the effects of loan principal payments distorting the comparison of equity growth from initial equity below)

iii) NEGATIVE equity of ($17,000)

The owner has lost more than 100% of their initial deposit of $240,000 used to buy the house.


Remember how the property mentors told their students that this is good debt.