Housing: Despite the media's hot air, a cool wind is blowing

by Graham Adams / 12 April, 2017
RelatedArticlesModule - Housing
The regulatory headwinds are growing, but the media hype around the housing market doesn't show it. Photo / Getty Images

Beware the media hype when the real-estate market is stalling.

There’s a whiff of desperation around the Auckland housing market lately. Or more particularly on the New Zealand Herald’s pages, which have regularly featured tales of people heroically scrimping and saving for a deposit so they can enter a lifetime of debt peonage in a real-estate market that is among the most over-stretched in the world.

Or at least that’s what the Herald pretends; often enough the subjects have a wealthy parent in the wings with a hefty financial loan to offer but that fact is usually buried well down the story in order to maintain the impression that self-denial will get you into your first house and then a swathe of rentals.

It’s hardly what you might call a responsible approach. More than a few indicators are flashing warning signs of a market that is stalling, and quite possibly turning. Fewer properties are being sold… unsold inventory is piling up on Trademe… selling times are expanding. And then there’s the anecdotal evidence of houses in desirable areas sitting unsold for months when they would previously have been snapped up within weeks.

The latest QV figures show Auckland prices dipped 0.2 per cent over the past quarter. Barfoot and Thompson, Auckland’s biggest real-estate firm, just had its quietest March for sales since 2011.

You might think in such circumstances a responsible media site might encourage would-be buyers to hold off for a few months to see which way the market is heading. Instead, with its heavy dependence on property advertising, the Herald is pushing the “You Can Do It” line, highlighting people who have managed to get onto the property ladder, as an example to others to try much, much harder.

You will probably have seen the repeated tales of perseverance and self-denial by house-hunters that have featured in its pages. Or you may have seen the spoofs doing the rounds on social media.

The story that captured most attention was that of a Chinese immigrant property spruiker, Gary Lin, who apparently was given $200,000 by his father in 2009 that he allegedly turned into a $10 million portfolio of 14 dwellings. This is not exactly a water-into-wine scenario given the giddy ascent of the Auckland market since then and the banks’ willingness to lend vast sums of money against property as collateral for the next, although reading the Herald’s breathless coverage you might well have thought this was a modern-day miracle.

What’s also a bit repulsive about the story — apart from the bragging — is that individuals buying multiple houses means others are locked out.

There was another story about a Chinese house-cleaner, Anna Feng, who has bought two houses after moving to New Zealand in 2008, buying her first Auckland house in 2010. Apparently part of her financial success was her austerity programme of growing vegetables, wearing second-hand clothes and using LED lightbulbs (which is a change from the usual exhortations to millennials of avoiding smashed avocado and lattes).

The moral of both stories appears to be: “It is a wise move to have first bought at least seven years ago” or, better still, make sure you have a wealthy parent.

The most glaring example of the latter was the tale of a couple who had a $30,000 deposit they intended to turn into a million-dollar portfolio within a year. It turned out the parents had given them more than $200,000 as an “equity gift”. But you had to read well over half of the story to find that out.

We weren’t told in those stories how Lin and Feng or other buyers will fare if interest rates continue to rise. Or, indeed, what will happen if prices fall and banks decide they need more equity to cover their loan-to-value ratios.

In a property mania it’s never mentioned, of course, that if prices fall banks can ask for more security for their loans at short notice and require borrowers to stump up money.

I know people who were wiped out in 2009-10 during the GFC which featured an average fall nationwide of around 10 per cent. Suddenly the bank wanted more collateral from them, but the huge debts on their several properties meant they had no room to move and nobody was interested in buying their clutch of houses, not least because they couldn’t get credit.

Some properties fell much further than 10 per cent. I know people in plum neighbourhoods who were bankrupted in mortgagee sales, with the new buyers getting a handy 25 per cent discount on the house’s apparent value two years earlier.

Nevertheless, it’s part of the city’s folklore now that, even in the worst financial crisis since the Great Depression, Auckland prices only dipped a little before rising again. Very few point out that this was due in large part to the Reserve Bank slashing the OCR from 8.25 per cent to 2.5 per cent during 2008 and early 2009. These were extraordinary measures and the bad news is that with the OCR currently at 1.75 per cent, the central bank doesn’t have much room to reflate the market if it drops.

Another part of the folklore is that owner-occupiers will do anything to keep paying their mortgage, which means prices won’t fall. But what should we make of the huge number of investors in the Auckland market? How dedicated will they be to holding onto their assets if prices turn south?

The Auckland property market is a giant Ponzi scheme that is kept alive by new entrants — domestic and foreign — piling in. As soon as that tapers off, the Ponzi is in deep trouble. The Herald is very interested for that reason in pulling in more punters and maintaining its property advertising revenue just as the government continues to bring in record numbers of migrants to goose GDP figures and prevent the housing market from collapsing.

John Key made that much clear in an interview last September. Financial analyst Bernard Hickey reported Key as saying that the government had to be careful with any taxes or restrictions on foreign capital entering the housing market in case they sparked a catastrophic fall in prices. The government’s responsibility was to protect homeowners’ equity, Key said.

However, regulatory headwinds are growing. Stricter loan-to-value ratios are having a marked  effect but according to John Bolton, of Squirrel Mortgages, the most significant reason for the stalling market is the banks following their Australian parents’ lead and no longer accepting foreign income for servicing a mortgage.

He wrote in January: “The single biggest change implemented by banks was restricting offshore income for mortgage servicing. This rule change has effectively stopped Chinese buyers in their tracks and nothing will change that. Our volume of New Zealand resident Chinese buyers is down around 65 per cent and anecdotal feedback across the market is similar.

“Many Asians are self-employed and so taxable incomes are generally low. That makes servicing debt difficult to prove. In the past, the way around this has been ‘offshore income’. Business owners will be loath to pay more tax simply to buy property, especially if the property market is softening.”

Further stifling incoming funds, China’s government has clamped down hard on how much money can leave its shores. And APRA, the Australian bank regulator, has tightened bank lending criteria across the Tasman and it looks as if it is going to pull the reins even more tightly in the months ahead. One result of the tightening over there is that credit for housing is becoming much, much harder to get here.

Yes, of course, the housing market may take off again, especially if the Chinese relax measures restricting capital outflow. But right now, it would be wise to ignore the media hype and avoid rushing into buying a house in Auckland until the direction of the market becomes clearer.

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