More trouble in store for home owners
By JENNI MCMANUS - Sunday Star Times | Monday, 6 August 2007
For would-be first home buyers and those with super-sized mortgages, last week's economic news was all bad.
Fallout from the Reserve Bank's latest interest rate hike is unlikely to hit the housing market until Christmas.
But when it comes, expect "a big change in the way people feel about the housing market and the economy in general", says Westpac economist Dominick Stephens.
Stephens and his colleague, economist Donna Purdue, say house prices won't fall immediately. But they predict prices will begin falling in the fourth quarter of 2007 and by the end of next year - about the time of the general election - house price growth will have hit zero. It might even collapse into negative territory.
"It will feel dramatic," says Stephens. "You don't go from 12% growth in house prices to zero within six months to a year without noticing something. It will take a long time for selling prices to drop but our anecdotal information is that lending inquiries are already starting to slow."
At this point, say several bank economists, the demand for consumer credit is likely finally to slow. House price slumps make homeowners feel less wealthy, meaning they are less inclined to spend. But there's little sign of it yet. Figures released last week show household debt to the end of June to banks and other lenders is up 13.6% on June 2006, a total of $159.3 billion. Of this, $147 billion is housing debt, up 14.4% on June last year. Business debt is 16.3% higher to $67.9 billion.
Stephens and Purdue expect most Kiwi homeowners will not contemplate selling their homes but they will cut back on consumer spending and ride out the interest rate rises. Most have secure employment, are enjoying decent wage rises and the economy is cushioned by strong dairy prices. The earliest signs of borrowing stress are unlikely before the New Year when those struggling with higher mortgage repayments will begin to bail out of the market.
Stephens says at this stage he expects the housing fallout to be relatively mild but, equally, won't rule out a big drop.
Falling commodity prices could trigger a sharp decline in house price inflation, as happened in the September quarter of 1998 when annual house price inflation hit a low of minus 4.1%. In other words, the national median house price for the quarter was 4.1% lower than the corresponding period in 1997, exacerbated by rising unemployment.
Infometrics economist Gareth Kiernan says his firm is expecting "a fairly substantial drop-off" in housing sales within the next 12 to 18 months as higher interest rates bite hard.
He advises borrowers to dig in for the long haul, as does the BNZ's chief economist Tony Alexander. Reserve Bank governor Alan Bollard is unlikely to ease interest rates unless economic conditions deteriorate significantly or there are definitive signs inflation is in check. With domestic inflation running at about 4%, Alexander says the scope for easing rates "remains a long, long way off".
Kiernan says he'd be worried about the general direction of the economy except for the estimated $1.7 billion injection for dairy farmers in the coming season from a higher-than- usual milk-solids payout. Without this, he says our future would be considerably more negative.
Similarly, ASB chief economist Nick Tuffley says there are early signs our four recent interest-rate hikes are biting. Sales turnover has been heading downwards for several months, Auckland CBD apartment prices will be "pretty subdued for some time", and his firm's latest housing confidence survey, released last week, indicates the first chinks are beginning to appear in what he describes as a "still-buoyant market".
The survey also showed a significant turnaround in price expectations and whether the present environment was a good time to buy. In both areas, the survey responses were strongly negative.
ASB predicts the slowdown will be protracted but relatively mild, insulated in part by the tight employment market.
Migration is another factor negatively affecting the housing market. It peaked at 14,757 in November 2006 and slowed to 10,066 two months ago. Westpac's Purdue says the key influence has been Kiwis quitting the country rather than foreigners seeking to enter.
The other piece of bad news last week was the international Fitch Ratings report. This ranked New Zealand as the world's riskiest housing market with our prices among the world's most over-valued.
After adjusting for inflation, prices have risen more than 50% in five years, Fitch says, remarking also on our overall economic vulnerability which again tops the list. In particular, it noted our high household debt levels - almost 160% of disposable income, compared with 100% seven years ago.
Overall, our housing market is overvalued and households are financially stretched, meaning we are more vulnerable to shocks from rising interest rates, and falling incomes and asset prices. According to the survey, Denmark, the UK and Norway are right up there with New Zealand. At the other end of the scale, Germany, Japan and Italy have the least vulnerable housing markets.
Does this mean we are setting ourselves up for a US-style crisis, where homeowners in many regions are facing the double-whammy of rising interest rates and falling capital values?
Or the Australian situation, where the smart money is on a rise to 6.5% from the current 6.25% when the Reserve Bank of Australia meets this week to consider interest rates?
While homeowners in Sydney's western "battler" suburbs have suffered a 7.8% house price crash since the Federal election of 2004, Australian household credit jumped 1.8% in May - its biggest gain since 1989 - business lending is booming and people have borrowed big to invest in retirement savings to take advantage of new tax breaks for superannuation.
Add in a new boom in medium density housing, strong immigration numbers and mining-fuelled capital gains on Western Australian property of between 23% and 40% in the year to March and it's not difficult to see why most Australian economists predict another interest rate rise - the fourth since the beginning of last year.
Kiwi economists say our crunch, when it comes, is likely to mirror the Australian situation, where some regions continue to boom while others face carnage.
Most sobering, however, are the US statistics.
Economists interviewed by the Star-Times were quick to point out that our situation is not strictly comparable as 90% of NZ home lending is done through the four major banks rather than through the so-called high-risk sub-prime mortgage markets still wreaking havoc in the American economy.
In the US, slack lending procedures and so-called "liar loans" have crippled the sub-prime market - the lenders of last resort to homeowners rejected as credit risks by mainstream mortgage brokers - and the defaults have spread to other, more creditworthy borrowers.
Putting sub-prime lending aside, there are clear parallels with NZ. Like ours, but for different reasons, the overall US economy remains relatively strong with 3.4% growth in the second quarter this year though analysts say it is showing signs of deterioration.
Most significantly, gloom in the US housing market has hit consumer spending - something that is likely to become an issue in NZ in early 2008.
Figures released late last week show US retail spending in June is at its slowest in nine months (0.1%) on the back of high petrol prices and fallout from the housing slump. Disposable incomes over the same period rose 0.4%, meaning households had the money but were choosing not to spend.
The sour housing market has also hit US builders, who have cut spending on residential construction for the sixteenth month in succession. When the Federal Reserve meets this week it is expected to hold its key interest rate steady at 5.25%.
Coupled with this, the median US house price is flat - $US230,000 ($NZ300,000), up 0.3% from a year ago - but average prices have dropped 12% over the same period. To most US homeowners, this was unthinkable until late 2005 when prices began to drop. Until then, they had not fallen nationally in 35 years of tracking by government and private services.
It gets worse.
Tighter access to credit is prolonging a deeper slump in US home sales and several states are experiencing a housing glut. So great is the backlog that at June's rate of home sales, it would take 8.8 months to unload all the properties on the market - a 15-year high. New home sales fell 6.6% in June, for the fifth time in six months.
Most worrying, however, is the threat of contagion as the meltdown in the mortgage market begins to impact on other areas of the economy, most notably the sharemarket. US analysts say the trigger will be drops in consumer spending and a tighter employment market.
Already the sharemarket has been hit hard and the fallout quickly spread to Australia, NZ and Asia. The last week of July was Wall St's worst for five years. The key Dow Jones index dropped 312 points in a single day and the Nasdaq and S&P 500 indices were similarly hammered.
Late last month Angelo Mozilo, CEO of the country's top mortgage lender, Countrywide Financial Corporation, warned the market there'd be no recovery in the US housing market until 2009 at the earliest.
So why is NZ in this pickle?
The BNZ's Tony Alexander attributes our high interest rates largely to Alan Bollard's reluctance to use the "fear factor".
Had the governor raised interest rates more aggressively in 2004 and 2005, and warned New Zealanders more strongly he was prepared to create a strong downturn if necessary to get inflation under control, perhaps pushing house prices down 5% or 10%, homeowners and consumers might have thought more carefully about their spending and borrowing habits, Alexander says, though the exchange rate would still be high because of the boom in export commodity prices.
Had the BNZ been running the central bank, "we would have run the risk of tightening too much rather than run the risk of not tightening enough," he says.
"The Reserve Bank's inability to scare people in the past three-and-a- half years has been its main failing. It needs to inject uncertainty into the minds of borrowers about what their costs are going to be in the future and, because of that uncertainty, people will restrict how much debt they take on board."
By JENNI MCMANUS - Sunday Star Times | Monday, 6 August 2007
For would-be first home buyers and those with super-sized mortgages, last week's economic news was all bad.
Fallout from the Reserve Bank's latest interest rate hike is unlikely to hit the housing market until Christmas.
But when it comes, expect "a big change in the way people feel about the housing market and the economy in general", says Westpac economist Dominick Stephens.
Stephens and his colleague, economist Donna Purdue, say house prices won't fall immediately. But they predict prices will begin falling in the fourth quarter of 2007 and by the end of next year - about the time of the general election - house price growth will have hit zero. It might even collapse into negative territory.
"It will feel dramatic," says Stephens. "You don't go from 12% growth in house prices to zero within six months to a year without noticing something. It will take a long time for selling prices to drop but our anecdotal information is that lending inquiries are already starting to slow."
At this point, say several bank economists, the demand for consumer credit is likely finally to slow. House price slumps make homeowners feel less wealthy, meaning they are less inclined to spend. But there's little sign of it yet. Figures released last week show household debt to the end of June to banks and other lenders is up 13.6% on June 2006, a total of $159.3 billion. Of this, $147 billion is housing debt, up 14.4% on June last year. Business debt is 16.3% higher to $67.9 billion.
Stephens and Purdue expect most Kiwi homeowners will not contemplate selling their homes but they will cut back on consumer spending and ride out the interest rate rises. Most have secure employment, are enjoying decent wage rises and the economy is cushioned by strong dairy prices. The earliest signs of borrowing stress are unlikely before the New Year when those struggling with higher mortgage repayments will begin to bail out of the market.
Stephens says at this stage he expects the housing fallout to be relatively mild but, equally, won't rule out a big drop.
Falling commodity prices could trigger a sharp decline in house price inflation, as happened in the September quarter of 1998 when annual house price inflation hit a low of minus 4.1%. In other words, the national median house price for the quarter was 4.1% lower than the corresponding period in 1997, exacerbated by rising unemployment.
Infometrics economist Gareth Kiernan says his firm is expecting "a fairly substantial drop-off" in housing sales within the next 12 to 18 months as higher interest rates bite hard.
He advises borrowers to dig in for the long haul, as does the BNZ's chief economist Tony Alexander. Reserve Bank governor Alan Bollard is unlikely to ease interest rates unless economic conditions deteriorate significantly or there are definitive signs inflation is in check. With domestic inflation running at about 4%, Alexander says the scope for easing rates "remains a long, long way off".
Kiernan says he'd be worried about the general direction of the economy except for the estimated $1.7 billion injection for dairy farmers in the coming season from a higher-than- usual milk-solids payout. Without this, he says our future would be considerably more negative.
Similarly, ASB chief economist Nick Tuffley says there are early signs our four recent interest-rate hikes are biting. Sales turnover has been heading downwards for several months, Auckland CBD apartment prices will be "pretty subdued for some time", and his firm's latest housing confidence survey, released last week, indicates the first chinks are beginning to appear in what he describes as a "still-buoyant market".
The survey also showed a significant turnaround in price expectations and whether the present environment was a good time to buy. In both areas, the survey responses were strongly negative.
ASB predicts the slowdown will be protracted but relatively mild, insulated in part by the tight employment market.
Migration is another factor negatively affecting the housing market. It peaked at 14,757 in November 2006 and slowed to 10,066 two months ago. Westpac's Purdue says the key influence has been Kiwis quitting the country rather than foreigners seeking to enter.
The other piece of bad news last week was the international Fitch Ratings report. This ranked New Zealand as the world's riskiest housing market with our prices among the world's most over-valued.
After adjusting for inflation, prices have risen more than 50% in five years, Fitch says, remarking also on our overall economic vulnerability which again tops the list. In particular, it noted our high household debt levels - almost 160% of disposable income, compared with 100% seven years ago.
Overall, our housing market is overvalued and households are financially stretched, meaning we are more vulnerable to shocks from rising interest rates, and falling incomes and asset prices. According to the survey, Denmark, the UK and Norway are right up there with New Zealand. At the other end of the scale, Germany, Japan and Italy have the least vulnerable housing markets.
Does this mean we are setting ourselves up for a US-style crisis, where homeowners in many regions are facing the double-whammy of rising interest rates and falling capital values?
Or the Australian situation, where the smart money is on a rise to 6.5% from the current 6.25% when the Reserve Bank of Australia meets this week to consider interest rates?
While homeowners in Sydney's western "battler" suburbs have suffered a 7.8% house price crash since the Federal election of 2004, Australian household credit jumped 1.8% in May - its biggest gain since 1989 - business lending is booming and people have borrowed big to invest in retirement savings to take advantage of new tax breaks for superannuation.
Add in a new boom in medium density housing, strong immigration numbers and mining-fuelled capital gains on Western Australian property of between 23% and 40% in the year to March and it's not difficult to see why most Australian economists predict another interest rate rise - the fourth since the beginning of last year.
Kiwi economists say our crunch, when it comes, is likely to mirror the Australian situation, where some regions continue to boom while others face carnage.
Most sobering, however, are the US statistics.
Economists interviewed by the Star-Times were quick to point out that our situation is not strictly comparable as 90% of NZ home lending is done through the four major banks rather than through the so-called high-risk sub-prime mortgage markets still wreaking havoc in the American economy.
In the US, slack lending procedures and so-called "liar loans" have crippled the sub-prime market - the lenders of last resort to homeowners rejected as credit risks by mainstream mortgage brokers - and the defaults have spread to other, more creditworthy borrowers.
Putting sub-prime lending aside, there are clear parallels with NZ. Like ours, but for different reasons, the overall US economy remains relatively strong with 3.4% growth in the second quarter this year though analysts say it is showing signs of deterioration.
Most significantly, gloom in the US housing market has hit consumer spending - something that is likely to become an issue in NZ in early 2008.
Figures released late last week show US retail spending in June is at its slowest in nine months (0.1%) on the back of high petrol prices and fallout from the housing slump. Disposable incomes over the same period rose 0.4%, meaning households had the money but were choosing not to spend.
The sour housing market has also hit US builders, who have cut spending on residential construction for the sixteenth month in succession. When the Federal Reserve meets this week it is expected to hold its key interest rate steady at 5.25%.
Coupled with this, the median US house price is flat - $US230,000 ($NZ300,000), up 0.3% from a year ago - but average prices have dropped 12% over the same period. To most US homeowners, this was unthinkable until late 2005 when prices began to drop. Until then, they had not fallen nationally in 35 years of tracking by government and private services.
It gets worse.
Tighter access to credit is prolonging a deeper slump in US home sales and several states are experiencing a housing glut. So great is the backlog that at June's rate of home sales, it would take 8.8 months to unload all the properties on the market - a 15-year high. New home sales fell 6.6% in June, for the fifth time in six months.
Most worrying, however, is the threat of contagion as the meltdown in the mortgage market begins to impact on other areas of the economy, most notably the sharemarket. US analysts say the trigger will be drops in consumer spending and a tighter employment market.
Already the sharemarket has been hit hard and the fallout quickly spread to Australia, NZ and Asia. The last week of July was Wall St's worst for five years. The key Dow Jones index dropped 312 points in a single day and the Nasdaq and S&P 500 indices were similarly hammered.
Late last month Angelo Mozilo, CEO of the country's top mortgage lender, Countrywide Financial Corporation, warned the market there'd be no recovery in the US housing market until 2009 at the earliest.
So why is NZ in this pickle?
The BNZ's Tony Alexander attributes our high interest rates largely to Alan Bollard's reluctance to use the "fear factor".
Had the governor raised interest rates more aggressively in 2004 and 2005, and warned New Zealanders more strongly he was prepared to create a strong downturn if necessary to get inflation under control, perhaps pushing house prices down 5% or 10%, homeowners and consumers might have thought more carefully about their spending and borrowing habits, Alexander says, though the exchange rate would still be high because of the boom in export commodity prices.
Had the BNZ been running the central bank, "we would have run the risk of tightening too much rather than run the risk of not tightening enough," he says.
"The Reserve Bank's inability to scare people in the past three-and-a- half years has been its main failing. It needs to inject uncertainty into the minds of borrowers about what their costs are going to be in the future and, because of that uncertainty, people will restrict how much debt they take on board."
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