NZ house prices hit new record as LVR caps bite

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By Leith van Onselen

The Real Estate Institute of New Zealand (REINZ) has released its October house price results, which registered an increase in median values nationally, with price increases also recorded across the major markets.

In the month of October, the national stratified median price rose by 1.6% to just over $423,000. Prices rose by 0.9% in Auckland over the month, whereas prices in Christchurch and Wellington increased by 0.9% and 3.0% respectively (see next chart).

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The price changes are shown more clearly in the below chart, which shows the values in index form since 2005:

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On an annual basis, house prices rose by 9.9% nationally in the year to October 2013 to be 13.6% above their November 2007 peak. Prices in New Zealand’s largest city, Auckland, rose by 12.6% in the year to October 2013 to be 26.4% above their July 2007 peak. This was followed by New Zealand’s second biggest city, Christchurch, where prices rose by 10.8% over the year to be 14.1% above their 2007 peak. Finally, prices in the capital, Wellington, rose by only 0.3% in the year to October, and were only 0.9% above the September 2007 peak.

While it may not seem apparent by the above house price results, new speed limits on high loan-to-value ratio (LVR) mortgage lending, implemented by the Reserve Bank of New Zealand (RBNZ) on 1 October 2013, appear to be starting to bite, which should act to curb house price growth through the remainder of the year and into 2014.

According to Interest.co.nz, sales were up by only 2.1% in the year to October 2013, suggesting that RBNZ’s new lending limits may be having an impact. The rate of sales increase year-on-year in the heated Auckland market was also up by just 1.6%, while on a seasonally-adjusted basis, Auckland’s sales actually fell over the past month.

Any slowdown in the housing market arising from the RBNZ high LVR lending speed limits could be expected to hit sales volumes first before prices.

In a similar vein, the latest home loan approvals data from the RBNZ registered negative year-on-year growth, which suggests price growth should slow considerably in the months ahead (see below charts).

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Leith van Onselen

Comments

  1. Have NZ linked this (lvr cap) with foreign capital controls? If not they may just be making their property cheaper for the loose liquidity sloshing about the planet?

    • yeah they are smart, no control whatsoever, they just got rid of the remaining FHBs as adjustment variable ( probably hoping than the more knowledgeable investors and upgraders would not go overboard).I m not sure it s what you all want implemented on this side.

      • Crocodile tears for FHBs. Nice. Runaway prices don’t do anything for them either.

        If prices are stabilsied they can can now save appropriate deposits and buy a house.

        With any luck prices will begin a slow melt, squeezing the speculators out over time.

  2. If there is a saving grace to all of this, it’s a bit like keeping short-sellers in the stock market – the FHBers will be needed to be there to buy, when the market corrects, from those that cannot afford to keep their overleveraged properties, and have to sell. The current rationale is ” If we buy all the FHBer stuff, one day they will have to come to us to get it back!”. If Graeme Wheeler has any sense, he will start the ramp-up in rates, now, and add it to what he is trying to achieve with the LVR changes, and failing at so obviously. “Give the LVR changes time” people say. My response is that we have run out of the time to give them. They are too little, too late, and will continue to be shown to be so, until the only mechanism to control excess is put in place – higher, much higher, interest rates. “But that will hurt the real economy!” comes the call “What real economy?” is my answer. That died decades ago…..and we killed it….and the resulting higher NZ$ will cushion the ‘real’ economy; the imported economy that New Zealand now is….

    • Good luck with that strategy Janet.

      How can any small country like NZ possibly go against the global monetary wishes of the likes of the BoJ and the FED, not to forget he ECB?

      It seems to me the only way NZ could effect any really significant increase in Interest rates would be to intentionally create silly levels of exchange rate volatility in the hope that hedging premiums got jacked up.

      I’m not sure who’d really benefit from this strategy but it is unlikely to be Mr and Mrs Average NZ, my money would be with several specialist Fx Hedge funds making a killing.

      • You are probably quite right, CB. And in that case I rely upon my primary view that nothing short of a property market implosion will correct the imbalances in our country. And given that we are a de-facto Australian state, that doesn’t bode well for Australia….

      • I like Janet’s theory somewhat. Keep potential FHB’s out of the market now, and after the crash there will be plenty of them to pick up distressed properties (hopefully ex specufestors) at now-fair prices. Hopefully they will thank Graeme Wheeler in the end.

        I say NZ could get itself a genuine economic recovery by actually building houses on fair-priced land, and attracting the Kiwi diaspora back home, including some of the most entrepreneurial types. Nz policy makers and advisors should read Prof. Nicholas Crafts, “Escaping Liquidity Traps: Lessons from Britain in the 1930’s”.

      • Yea, I have a good friend working at a well known Hedge fund in Stonybrook that assures me Australia’s recent Fx volatility has rewarded him with more money than a prudent man could possibly spend in a life time.

        Unfortunately central banks are not known for their nimble footwork so when they barge into a room their missteps have already been pre-calculated often by those that financially engineered the situation. When it comes to playing the FX manipulation game they are so out gunned, that they’ll be lucky to escape with just a moderate whopping, a severe 455 kicking is the more likely outcome.

      • All we have to do is to start returning towrds a partially sane world. pfh has outlined a starting plan for that to happen. It needs some twigging but surely somewhere between Aus and NZ there are still a couple of people with enough sense of realism that can do that.
        As to world CB’s etc we have to recognise that the whole of economic teaching and practice has become corrupted by debt merchants. We need to return to a starting point which is some 60 years ago before this stupid lunatic idea became vogue that we could all become prosperous through debt expanding forever and an exponential rate.
        Sure we’ll tramp on some international toes but for the good of our nation that’s what we need to do.
        Is this all possible from the point of view of getting the over-consuming self-entitled spoiled brats, that now constitute the majority of the population, to vote for such a thing. No that is not possible. So the insanity will go on getting worse and worse until a future melt-down at some future time. Then they’ll vote for some extremist dictaotr of some kind.
        Howeverr unless we, ourselves, oppose what is now happening then we are active participants in fueling the disaster that will eventually come.

      • Phil…Sorry but you build all those new houses then stock them with Italian Granite kitchens, leather lounges from malaysia, Flat Screens from Korea, Bathroom fittings from China, Dining tables and chairs from Indonesia, a BBQ from China, an SUV in the garage from Japan, and a car from Europe. Just exactly how does all that get paid for from building more houses?

      • “Just exactly how does all that get paid for from building more houses?”

        Don’t worry, flawse. We will soon start exporting droids to repair our fucked up TOT balance sheets. Did not you read Episode 31?

      • dumpling! Sorry mate I must have missed an episode. I guess I must just be too simple a bloke. I’m getting too damned old to understand the sophistication!

      • No worries, flawse. Here we go. Perhaps, I should change my pen name to George Orwell Jr.

        Episode 31 REPLAY

        Disclaimer: All characters and events in this Episode -–even those based on real people–-are entirely fictional. All celebrity voices are impersonated…..poorly. The following Episode contains coarse language and due to its content it should not be viewed by anyone.

        Not so long ago in a galaxy not so far away……

        APRA: I heard that you reinstated 100% LVR loans. Is that true?

        Darth Banking Complex: Yeah, you heard that right. In fact, we now offer a whole new range of sexy products of up to 300% LVR to suit the varying needs of our customers.

        APRA: 300% LVR loans!? Are you crazy? Didn’t you learn any lessons from the GFC?

        Darth Banking Complex: Huh? What lessons are you talking about? The only lesson to learn then is how to privatize profits and socialize losses. We learned that well. In any case, we designed these new loans to make sure that the borrowers will never pay back their loan principals. Demography suggests that there will be fewer people in future. So it is vital for us to secure the next generation of customers before they are born. You don’t expect me to give away my bread and butter, do you?

        APRA: Is this why the median house price blew out to x10 the median income?

        Darth Banking Complex: Just as intended. That’s the whole point.

        APRA: At such high debt levels, many borrowers may be unable to meet their regular interest repayments.

        Darth Banking Complex: We then just let the interest accrue on top of the principal. After all, we already do that for our credit card businesses – and it works well. Just to make sure that we are on the same page, I let you know that we already came up with an exotic name for this new type of products; Supersized Negatively Amortizing Interest Only Intergenerationally Full Recourse Low Doc Loans.

        APRA: What will happen to your balance sheets if the borrowers struggle to meet the repayments as the interest bills get bigger?

        Darth Banking Complex: Then we will instruct the RBA to cut rates so as to let the borrowers catch their breath for a while.

        APRA: But rates cannot go below zero and you will need to pass on your costs and your profit margin, won’t you? It won’t be long before they hit the max LVR or fail to meet the minimum due. In fact, what is your minimum due for each loan product and how did you set that?

        Darth Banking Complex: Oh, that is secret. Our prized financial engineer developed a very complex proprietary formula to calculate that so as to maximize the growth rate of our assets. If a customer is too hopeless to meet the minimum due, we will simply kick him out of the property and sell it to somebody with real money. Perhaps to a filthy rich Chinese. There are a billion of them to choose from. That will keep growing our assets.

        APRA: What will happen to those kicked out people?

        Darth Banking Complex: That is not my concern – they are losers after all. In any case, I did not put my gun to their heads to force them to sign a paper or anything like that. BTW, I have been lobbying hard behind the scenes to abolish mathematics from our compulsory education system, and sack all the math teachers and banish them to Solomon Islands once and for all. I finally got the much needed nod from the new PM.

        APRA: Why do you want to do that?

        Darth Banking Complex: Oh come on. The borrowers will then have no idea of how much their monthly payments will be or what their debt servicing capacities are. They will need to rely on whatever numbers we will show to them – in fact, we may as well fudge some numbers to shorten their travel time on the debt treadmill – they will have no idea anyway. Oh yes, before I forget, I must disclose to you that we newly established a Household Budget Micromanagement Division for our mortgage-stressed customers. In time, we will tell each stressed household (1) what to buy, (2) what to do, (3) what to think, and finally (4) what to feel…… Apparently this is how to manufacture droids – I read it in the Master Palpatine’s legendary Dark Side Manual, so it must be true. Once our mining and manufacturing sectors die out, we can start exporting droids to repair our fucked up TOT balance sheets – there is no way we are going to give up on the flashy up-to-date gadgets which we can show off to our global peers for the welfare of these losers. We will be the proud pioneer of this new droid industry of the 21st century. Call me a visionary down under.

      • That is serious GOLD! You covered a lot in a short space of time. I guess that is the future of the Empire.

    • That’s right. The time to introduce macro prudential to counter the lack of short selling mechanisms (i.e., to bring the housing pseudo market closer to symmetry) was about a decade ago. Long gone.

      Fasten your seatbelts, guys.

      • It’s all long gone. However, in any case, MP controls are not ewnopugh. We need realistically positive RAT interst ratres so people save and we can stop selling off our country so that there is something left for our children and grand-children. Of course that involves a lot of dislocation and for us to curb our outrageous lifestyles…so screw them! Let’s party! Interest rates need to be cut further to really get the party going again. The RBA needs to stop being behind this curve. The RBA need to have an emergency meeting before Christmnas and get these rates down so we can all have a really good Christmas.

  3. I’m with Dam on this one, this MP stuff is all way to little and way to late. If you wanted to tinker around with the system by adjusting LVR’s the time for this was over 10 years ago. Sorry if it sounds unsympathetic but you guys cooked up this mess and now you have to eat it.

    Unfortunately it’s one of these perverse problems where the best individual wealth creation/protection strategy is to simply join the fray. So I wouldn’t count on any sort of orderly unwinding, this is the sort of problem that Pollies will go to the mattresses over.

    • +10 Bob. That’s our reality. They also have the backing of the RBA. We’re the ones in the hell outside with the gnashing of teeth.

    • Sadly, I have to agree. Looking at the Sydney market, I expect it to go up by at least 20% next year, and push the average price of houses to 1 mil, before it will inevitably pop.

      To put it into perspective, winning the Lotto used to set you up for life. Now it barely pays for a house in a good suburb.