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The general public have no idea what's really going on, as most people are wrapped up in their own busy lives. Hold onto your Horses!!
While I agree that the brain-dead great unwashed have succumbed to TV idiocy - the new opiate of the masses, and so "have no idea what's really going on," what makes you say: "hold onto your horses!!"
If you have cash deposits in a big 4 bank - then this is worrying - especially for businesses who have large amounts of cash for working capital purposes and treasury purposes at banks, as well as individuals with their hard earned savings. These banks use their own internal models to determine their risk based capital requirements. If the banks have insufficient capital or have under estimated the risk of their assets, then depositors could be at risk and may need to take haircuts. Wonder if the other banks have issues with their own internal models.
'Very disappointed' RBNZ increases Westpac NZ's capital requirements after 'material failure' to meet regulatory capital requirements
a series of errors in Westpac's capital modelling dating back as far as eight years meant the bank breached its conditions of bank registration. Westpac, along with New Zealand's other Australian owned banks, is allowed to develop its own models to quantify required capital for credit risk and then get these approved by the Reserve Bank. All other NZ banks have the Reserve Bank prescribe their credit risk measurements. However, the Reserve Bank says Westpac used a number of models that had not been approved by the Reserve Bank, and "materially failed" to meet requirements around model governance, processes and documentation.
“This is very disappointing. Operating as an internal models bank is a privilege that requires high standards and comes with considerable responsibilities. Westpac has not met our expectations in this regard,” Reserve Bank Deputy Governor and Head of Financial Stability Geoff Bascand says. The Reserve Bank required Westpac to commission an independent report into its compliance with internal models regulatory requirements. The report found Westpac currently operates 17 out of 35 unapproved capital models, has used 21 out of 32 additional unapproved capital models since it was accredited as an internal models bank in 2008, and failed to put in place the systems and controls an internal models bank is required to have under its conditions of registration.
Good thing that the RBNZ is checking the large banks - better late than never.
ASB restates capital ratio
ASB Bank, the local arm of Commonwealth Bank of Australia, has restated its reported capital ratios after a miscalculation meant it fell short of compliance for the better part of a year. In September, the Auckland-based lender discovered it overstated its capital ratios for the September 2016, December 2016, March 2017 and June 2017 periods, which it has since addressed in its latest disclosure statement. ASB said it applied an incorrect definition of surplus common equity tier one capital in the calculations, which breached a condition of registration.
On finding the mistake, the bank hired a professional services firm to review its compliance and other instances of historic non-compliance including two incorrect provisions and expected loss adjustments in its capital adequacy calculation, areas where internal risk management calculations were carried through to market risk capital calculations, and other minor technical mistakes.
"These calculation errors have now been corrected for the three months ended 30 September 2017," ASB said in its latest disclosure statement. "These errors did not cause the bank to breach any of its required minimum capital ratios, or breach the minimum buffer ratio requirements of condition of registration 1C", which outlines the steps the bank has to take if its capital buffer gets too low. Banks' compliance has come under greater scrutiny this month after Westpac Banking Corp's New Zealand unit was censured by the Reserve Bank for a long-running breach of its obligations by using unapproved internal models, and forced to lift its minimum capital requirements.
ASB's total capital ratio of 13.8 per cent as at September 30 was well above the 8 per cent minimum, while its buffer ratio was 5.7 per cent compared to a 2.5 per cent minimum. In its March quarterly disclosure statement, ASB noted it miscalculated its risk-weighted exposures for some non-retail facilities since March 2008, which overstated its capital ratios, while in the June statement the bank said it hired a firm to independently validate its capital ratio calculations, which found two minor issues that didn't affect the previously reported ratios.
A comparison of NZ household debt to GDP with four other countries -
NZ household debt to GDP
Given Australia's large banks own the large 4 banks in NZ, it is worth considering the household debt to GDP in Australia for potential spillover effects
Comparing household debt to GDP levels with other countries before their residential property prices fell dramatically. With NZ household debt to GDP currently at 95%, this is below Ireland's highest level of over 100%, yet it is above those of the US, Spain and Japan before their significant residential property property price fall. House price risks in Auckland are at an elevated level and potentially vulnerable.
Why is that measure particularly important (as compared to other measures for instance)?
Davo36
It is one of many financial soundness indicators for a country. The data for household debt comprise debt incurred by resident households of the economy only. This financial soundness indicator measures the overall level of household indebtedness (commonly related to consumer loans and mortgages) as a share of nominal GDP of a country. To compare the household debt to GDP of a country makes it standardised and comparable against other nations.
There is a limit on the total amount of debt that households can take on relative to the productive output of the country (gross domestic product). The higher the ratio, the increased risk of households being overly indebted and unsustainable.
Given that most household debt is owed to banks, this is also an indicator of the level of risk to stability of the banking system (especially if a large proportion of the bank's assets are mortgages secured by residential property and residential property prices are high as this is the collateral banks have to sell in the event that the borrower is unable to repay).
Which has the most effect on house prices:
- household debt to GDP
or
- supply and demand of houses?
Did their residential property prices fall dramatically because of household debt to GDP levels or because of supply and demand reasons?
Household debt to GDP is an indicator of how indebted households are. I regard it as an indicator of financial flexibility of households.
If households have low levels of debt overall, then they are in a better position to withstand unexpected shocks such as mortgage interest rate increases, a slowdown in the economy leading to job losses, banks tightening lending criteria, an unexpected financial shock from overseas, etc.
If households have high levels of debt overall, then they have less financial flexibility to absorb an unexpected shock, and may come under financial pressure. If households come under financial pressure they may need to sell assets to reduce their debt levels.
The market price of residential real estate is ultimately determined by the supply and demand of houses, however the supply and demand of houses on the market is very dynamic and fast changing. Here are a couple of comments that I read on interest.co.nz - where they compare the current listings for sale (as an indicator of market supply in the property ownership market) with the number of transactions for the most recent month (as an indicator of market demand in the property ownership market). This gives a potential indicator of the demand / supply dynamic.
"So on a rolling 4 month average, Auckland currently has 5.9 months of residential property stock available for sale. This is the most since 2008, during a financial crisis, when interest rates were slashed "
"13583 houses for sale in Auckland, 1632 sold in October, so about 5 months average time to sell." - fit an exponential decay function to the sales rate and total stock. With current numbers of 1632 and 13583 half sell in just over 5 months. Mathematically analogous to radioactive decay half lives or capacitor discharge through a resistor.
Here is another comment that I read on interest.co.nz which offers some food for thought
Here's an interesting and very concerning excerpt from the RBNZ financial stability report - "It is estimated that only 8 percent of households currently own investment properties but these households account for around 40 percent of housing debt" If a large proportion of these 8 percent of households get into some sort of financial difficulty or reassessment (such as inability to roll over interest only loans and have to go P&I, interest rate rise, banks requesting additional collateral calls, non bank lenders cutting lending, healthy homes bill requiring major capital expenditure improvements, non deductibility of losses on investment properties against other taxable income, non deductibility of capital losses on investment property but with taxes on capital gains under the bright line test, capital gain oriented investors now have expectation of no capital gain in next few years, investment properties becoming negative cashflow, etc) then they could be under pressure to sell their investment properties. Given that they owe a large proportion of household debt, this could be a large number of properties coming onto the market at the same time which could depress property market prices.
If a large proportion of these 8 percent of households get into some sort of financial difficulty or reassessment (such as inability to roll over interest only loans and have to go P&I, interest rate rise, banks requesting additional collateral calls,
After the 1987 crash, banks foreclosed on lots of mortgages and property prices plummeted.
The banks are smarter these days. in 2007-2009 when things were tough, they just gave people mortgage holidays, rolled over mortgages, transferred from P&I to interest only and so on.
And I think they did that precisely so property prices wouldn't fall. Because they didn't want to lower prices with their own actions leading to them losing more money in a downwards spiral.
And back in 1987, the government just watched (or made things worse, according to Bob Jones). There was no reserve bank act at that time. So things got bad, then they recovered.
Nowadays, the RBNZ and government will step in and 'save the day' i.e. kick the can down the road. The indebted will be rewarded and the savers will be punished. Again.
In fact, thinking about this, does the RBNZ have a set of policies about what they will do in an asset bubble bursting? Like do they publish that?
After the 1987 crash, banks foreclosed on lots of mortgages and property prices plummeted.
I'm not sure but my hunch is that the finance companies who were short of capital were foreclosing on mortgages, and reducing their loan book.
I think that the banks that had capital issues were foreclosing on mortgages - primarily as a result of reducing their risk weighted assets for the required capital calculation. I saw this in 2008 / 2009 internationally as banks struggled to meet minimum capital requirements so they reduced their risk weighted assets.
The banks are smarter these days. in 2007-2009 when things were tough, they just gave people mortgage holidays, rolled over mortgages, transferred from P&I to interest only and so on.
And I think they did that precisely so property prices wouldn't fall. Because they didn't want to lower prices with their own actions leading to them losing more money in a downwards spiral.
Nowadays, the RBNZ and government will step in and 'save the day' i.e. kick the can down the road. The indebted will be rewarded and the savers will be punished. Again.
I'm not sure that its entirely wise to rely on the kindness of your creditors to maintain your financial security. When the banks are desperate themselves, they will look after their own interests. Better to be safe than sorry.
You do raise an important point - it does come down to the banks and whether they choose to call in loans and put pressure on highly indebted borrowers. If they had chosen to call in more loans more aggressively in 2008 / 2009 then property prices would most likely have fallen a lot more than 10% or so.
It's anyone's guess whether the banks choose to play hardball or not. However if the banks do choose to play hardball, then property prices could potentially fall dramatically depending if the banks allow an orderly sale or require an urgent sale ...
So it's supply and demand which determines house prices.
Household debt to GDP is interesting but isn't an indicator to future movements in house prices.
Understanding future price expectations of market participants - how do you develop your future price expectations?
For long term buy and hold investors, with respect to future long term property price expectations in Auckland, there are three main camps:
1) those who primarily focus on long term historical property price increases to develop their future property price expectations
2) those who primarily focus on historical valuation metrics such as house price to income ratios, house price to rent ratios (inverse of gross rental yields) to develop their future property price expectations
3) those who primarily focus on recent property price changes to develop their future property price expectations
1) those who primarily focus on long term historical property price increases to develop their future property price expectations
For those whose main influence of future property price expectations is historical price increases, they look back at the annual average price increase over the past 55 years since 1962 According to a QV house price index, the compounded annual growth rate of increase over this period has been 8.5% per annum.
Many people cite their own personal anecdotal stories of property price increases where property prices have increased significantly as further evidence that property prices increase over time. The time frames that they refer to in their experiences for the property price increases vary from 8 years to 40-50 years.
Common reasons cited to support their expectation of future property price increases are continued population growth, continuing high immigration numbers, current excess demand for housing over supply, limited new supply of housing to meet the supply shortfall, and rising construction costs. With recent property price increases, this serves to confirm their price expectations. Prior to the incoming Labour led coalition government and potential restrictions on foreign ownership, demand by foreigners (particularly China) was also a cited as a reason for property prices continuing to increase.
One common belief by this group is that property prices double every 7 to 10 years (that would mean compounded annual growth rates of 7.2% to 10.4% per annum). This has been the result of an extrapolation of the property price changes of the historical past and often repeated by many property tutors to their students who commonly accept this mantra. Due to property prices continuing upwards, those in this group ignore or dismiss the warnings in the Group 2 as they are seen to be wrong or incorrect and that the upward moving property prices are evidence that they are wrong in their warnings.
This group may also believe that there is limited downside to property prices. This group cite that during the 2008 global financial crisis, property prices in Auckland fell by 8 -10% and that this would be expected to be a worse case scenario. According to the QV national house price index, the nominal property price has fallen very rarely over the past 55 years and when they have fallen, price falls have been small, typically only less than 10%. Property prices have fallen in 1991, 1998, 2000, during the global financial crisis in 2008 and now in 2017, so the rare occurrences of nominal property price falls reinforces their belief that property prices only increase in the long term, with very limited downside property price risk. (Note that nominal property prices may not have fallen in the 1970's but real inflation adjusted property prices did)
2) those who primarily focus on historical valuation metrics such as house price to income ratios, house price to rent ratios to develop their property price expectations
Common reasons cited to highlight the vulnerability of property prices are:
a) the historical house price to income ratio which is currently near historically high record levels and well above the historical level of 3 which is considered to be the long term average and affordable for the local residents. b) the historical house price to income ratio in Auckland is currently among the highest when compared to other large cities in the world. c) the house price to rent ratios are high in absolute terms, and near record highs (this also means that the gross rental yield are at low levels in absolute terms and near record lows). In some suburbs in Auckland, the gross rental yield (which has yet to have operating costs of the property such as rates and insurance deducted) is below that of bank deposit rates and 10 year NZ government bond yields. d) record high household debt to GDP ratios, which has surpassed the levels seen just prior to the 2008 global financial crisis. e) even though nominal property prices in Auckland have very rarely fallen, this group believes that "Black Swan" events can occur. (Note the term Black Swan was popularised by Nasem Taleb's book of the same name) This group cites the experience seen in property markets internationally during the 2008 global financial crisis where nominal property prices fell significantly - such experiences include the United States, Ireland, & Spain. This group also cites the experience seen in Japan in the early 1990's.
3) those who primarily focus on recent property price changes to develop their property price expectations
Those in this group do not have a long term property price expectation framework. As such they develop their short term property price expectations based on recent property price changes. Articles in the media regarding the property market, recent property prices, and projections by property market commentators influence their property price expectations.
From Australia, yet it could be similar here in NZ
Most property investors believe past performance is a guide to future
Over half of Australian property investors are breaking the golden rule of investing – they use past performance as a guide for future success. A majority 56 per cent of property investors said “Australian house prices have always gone up in the past” when asked for the main reason for their confidence, according to a 1500-person survey carried out by ME Bank in November. Meanwhile 11 per cent said “so many other people are buying investment properties it must be safe”, while just 34 per cent were mainly confident thanks to “advice or analysis”. And, for as long as most can remember, Australian house prices have indeed gone one way – up. While “officially” calling the end of the Australian house-price boom in early November, UBS analysts noted 6556 per cent growth in the asset class over 55 years.
But ME Bank head of home loans Patrick Nolan warns investors should practice caution and objectivity, “particularly with property prices so high”. “Analysis and advice is the best basis for making any investment decision, particularly if you’re tempted to rely on past performance, or indeed if you are basing your decision on what other investors are doing.” More broadly, the temptation to think the good times will simply keep rolling is a “well observed investment phenomena”, according to CMC chief market strategist Michael McCarthy. “Studies have shown that human beings are not rational agents maximising their utility, and that their financial decision-making involves components that a cold analysis would not allow,” Mr McCarthy told Domain. “We have this experiential learning bias, so when we see another investor have a good experience with an investment, or if we have one ourselves it tends to reinforce our bias towards that investment.” The fact that one in 10 property investors said they were confident because “so many other people are buying investment properties it must be safe”, is not a surprise either as safety for investors is seen to be had in numbers. “Risks arise when you move away from your peer group,” Mr McCarthy said. “The reality is that if you’re all wrong together then the punishment is a lot less than if you were wrong by yourself.” The ME Bank survey presents are particularly interesting given how varied the Australian property landscape is for investors, according to the researchers. “Australia’s property market is diverse and not all properties are performing equally at any one time,” Mr Nolan said. “While Perth is currently recovering from a downturn, Melbourne and Sydney are growing albeit not as fast, while growth in Hobart has improved. “Apartment development in Brisbane, Sydney and Melbourne are also at record high levels, with some commentators speculating supply may outstrip demand in the short-term.” The result follows the surprising news that 24 per cent of property investors are now “happy” to see property prices fall in order to assist the widespread capital city affordability issue, with more Australians now expecting to benefit from weaker prices growth.
From Australia, yet it could be similar here in NZ
Most property investors believe past performance is a guide to future
Demand is one of the factors which determine house prices.
Currently, Auckland's population is 1.5 million.
If it's population were to halve then I'd expect Auckland's house prices to reduce.
Equally, if Auckland's population were to increase then I'd expect house prices to go up.
So far, over the last 100 odd years, Auckland's population has only gone one way.
Which goes to explain why Auckland's house prices have only gone one way.
Who would actually, seriously suggest Auckland's population will dramatically decline?
I think it's quite sensible to accept the strength of Auckland's historical growth to determine your investing strategy.
Demand is one of the factors which determine house prices. Currently, Auckland's population is 1.5 million. If it's population were to halve then I'd expect Auckland's house prices to reduce.
Equally, if Auckland's population were to increase then I'd expect house prices to go up. So far, over the last 100 odd years, Auckland's population has only gone one way. Which goes to explain why Auckland's house prices have only gone one way. Who would actually, seriously suggest Auckland's population will dramatically decline? I think it's quite sensible to accept the strength of Auckland's historical growth to determine your investing strategy.
It's not as simple as the traditional (economists) demand/supply model.
Sure in a land of cash only buyers demographics, income and aggregate savings will have the strongest correlation to supply/demand and therefore sales price. However this model completely ignores the impact of the Banking system where one can borrow at up to 5:1 leverage. Once you factor in the availability of (now cheap) credit then prices will rise/fall to a greater magnitude than pure supply and demand dictates. This leads to an over/under shooting below equilibrium.
This is from a stock brokers report in Ireland (2006):
- The continuing rise in the over-25 population provides a strong base for housing demand. - Rising immigration is now the key to sustaining house completions at anything close to the current pace. - Immigration seems likely to remain high in the next few years because of the freedom of access granted to citizens of the ten new EU countries and the disparity in incomes between Ireland and many of these countries. -Increasing income and wealth are supportive of investment in the existing housing stock and in second homes. We estimate that about 10,000 second homes are being constructed per annum. - Mortgage repayments still appear affordable this year and next on our assumptions. Thereafter, the market may need to find an equilibrium so that prices rise more in line with incomes if affordability is to be preserved. -Housing demand is projected to run at between 40,000 and 75,000 units per annum for the next 15 years depending on the pace of immigration, building of second homes and trends in household size. On our central population projection, allowing for declining household size, we put the pace of demand at 65,000 per annum to 2015 and 55,000 thereafter. In the immediate few years ahead up to 2010, the sustainable pace of homebuilding could be higher if immigration continues to rise.
"We expect that house prices will rise by more about 11% in 2006, driven by rising immigration, and then slow to perhaps 6% in 2007"
The Aftermath:
Eventually, demand for residential property fell in early 2007, resulting in price decreases of 0.6% in March 2007, and of 0.8% in April 2007. This led to an expectation of a drop in house prices on a quarterly basis for the first time since 1994. Houses in the commuter belt in Greater Dublin fell earlier, due to a combination of increased supply in the Dublin urban area, increasing interest rates, and continuing infrastructural deficiencies in rural communities. Prices in large urban areas were static, though demand dropped noticeably. However, a significant proportion of these new builds are unoccupied. Eventually, demand for residential property fell in early 2007, resulting in price decreases of 0.6% in March 2007, and of 0.8% in April 2007. This led to an expectation of a drop in house prices on a quarterly basis for the first time since 1994. Houses in the commuter belt in Greater Dublin fell earlier, due to a combination of increased supply in the Dublin urban area, increasing interest rates, and continuing infrastructural deficiencies in rural communities. Prices in large urban areas were static, though demand dropped noticeably. However, a significant proportion of these new builds are unoccupied
As predicted in earlier reports dating from 2006 and 2007, a property price crash hit Ireland by the first half of 2009. It coincided with the 2009 recession as both had started to develop in late 2008 following the global economic slowdown and credit control tightening. By June 2009, it was reported that around 40% of the price escalation that had occurred during the property bubble years ("Celtic Tiger Part 2") of 2001–2007 had been lost. As of 2012, house prices are below the 2001 prices and more than the entire gain during the Celtic Tiger years has been erased.Approximately 31% of mortgaged properties, or 47% of the value of outstanding loans, are found to be in negative equity at the end of 2010.
Maybe food for thought considering I think we are witnessing this in real-time in Sydney and Brisbane..
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