Add a third huge bubble city to your Aussie bank risk list

By Leith van Onselen

CoreLogic has released its latest New Zealand Property Market & Economic Update, which paints a disturbing picture of Auckland’s housing market.

First, population growth into Auckland has been extreme – driven by immigration – with the city’s population growing by 44,500 over the past year, accounting for nearly half of New Zealand’s total population growth of 97,000:

Auckland population growth

At the same time as Auckland’s population is surging, dwelling consents remain weak:

Auckland Dwelling Consents

Which has led to a worsening shortage of homes across New Zealand, concentrated in Auckland:

NZ Housing Shortage

According to CoreLogic:

Statistics NZ’s trend series for building consents showed a dramatic turnaround when January’s figures were released. December’s figures have been adjusted down and almost all areas are now trending downwards, with Auckland’s drop of particular interest.

This continues to raise serious concerns about whether the rate of building in Auckland is progressing as quickly as it needs to…

In order to build enough houses in Auckland to meet current and future demand, the level of current activity needs to increase then hold for several years.

Next, we can see that Auckland’s median dwelling value was an extraordinary $1,043,680 as at end-February 2017:

Auckland median house price

And there are now precisely 100 suburbs across Auckland where the average value of the housing stock is over $1 million:

Auckland bubble map

Yet, despite the exorbitant cost, investor participation in the Auckland housing market is at a record high 44%, whereas first home buyers have crashed to 19%:

Auckland investor demand

And this record investor participation comes despite Auckland rental yields crashing to just over 2% – meaning new investors are incurring big rental losses in the hope of cashing in on future capital gains:

Auckland rental yield

In short, Auckland’s housing market is an immigration and investor-led bubble like few others.

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Comments

  1. scottb1978MEMBER

    I’m curious what the risk is of a bail in by the banks and what the mitigation strategies are for it. I’m planning on getting some money out and I’m wondering if you can’t put your money into the banks safely then where can you put it.

    • My opinion on this is that it can’t be paper assets – shares or the 100s of derivative variants. It has to be physical to be in your control and not reliant upon the custodian of anyone else. What is physical and not overvalued? Land = no. Maybe a pet rock like gold or gold on steroids (silver).

  2. Anyone know what Oz bank’s exposure is to Kiwi property and what happens if it goes south? I know most kiwi banks are oz banks. Are they insulated?

    • They are insulated in theory, but not in practice.

      If NZ sub of an Australian bank finds itself in a situation where depositors are about to lose out, RBNZ will tell the Australian parent that they better prop baby-bank up or they will never get a banking license in NZ again. Simples.

  3. I can see a combination of the Perth and Auckland housing market dragging on the banks, causing higher interest rates, particular for investor loans. Throw in an apartment in Melbourne facing a gale force head wind and things will get interesting.

  4. SoMPLSBoyMEMBER

    One of my ‘keepers’ from just two years ago:
    “Big bank super-leverage revealed!”

    No longer an exclusively ‘financial’ instrument / arrangement, astounding levels of leverage between both the manufacturers and the consumers simulates opioid addiction where ever increasing doses are required.

    I’d argue that the ‘rush’ of receiving a huge loan to participate in this property madness is analogous to the calming, coping, pleasurable result of tying off and injecting smack. Widely available, cheap and promises to deliver the user to a much better place and the inherent risks involved, can be ‘managed’ if one is ‘smart’.

    https://www.macrobusiness.com.au/2015/02/big-bank-super-leverage-revealed/

    • TailorTrashMEMBER

      Thanks for reposting that ……….amazing that that was almost exactly 2 years ago ………how much bigger is that bubble and leverage now ?

      • SoMPLSBoyMEMBER

        Hey TT
        I think the plunger of the syringe has been pulled back past the numbers meant to keep track of dosage. It’s exactly what I’d expect as the ever increasing ‘hits’ (required) will always lead one to an overdose. Careless behaviour can often lead to tragedy. Note: am very worried about what’s happening and the eventual ramifications; We have become a board game–except real money is being used.

      • TailorTrashMEMBER

        Smplsb……..agree this is now entering the realms of the fantastic ……….one has to wonder can the Aunz governments hold this bubble up when USA ,Spain and Ireland failed even though I’m sure those governments never wanted a bust either ……………can we last another 2 years ?

      • SoMPLSBoyMEMBER

        …can the Aunz governments hold this bubble up when USA ,Spain and Ireland failed even though I’m sure those governments never wanted a bust either.”
        From the perspective of a rational, fair and equitable ‘market’, where the broad swathe of society can find a decent abode which corresponds to their position in the economic strata, this really is a disaster. However, from the position of powerful, entrenched and wildly lucrative ‘players’ ( supported by willing gov’t entities who also tap the river of gold), ‘this’ is only a problem when it begins to slow.

        Sure, there will casualties in the plunder ( see Vandals. Visigoths etc) but rarely will the elite on top suffer at all. It’s a modern day version of ‘colonialism’ and evident in all UK countries; instead of rolling those that have been conquered, it’s much easier to roll one’s own subjects. It’s incestuous, parasitic, and destined for failure and it will bring this country to the brink of civil war, but along the way, new empires can be created and existing ones can be expanded with extraordinary results if only measured by ‘wealth’ expansion. Note: we like to think we are an integral part of the ‘developed’ world (OECD etc) but if the current vector is not changed, we could easlily ( and rapidly) become another hopelessly corrupt Asian nation.

  5. Just who is allowing such rampant immigration and why? Why has this only been turbo-charged in say the last 10 years? What is the purpose and who agreed to it?

  6. My childhood home in Auckland now looks like it would sell for $2 million.

    About 4 years ago it would probably have gone for $800k.

    Auckland is now firmly in bizzarro world.

  7. TailorTrashMEMBER

    The bank risk is some thing that I’m not really clear on ……perhaps a banker here might like to help my understanding

    1) the Aust government “guarantees” $250 ,000 per depositor per ADI and claims that you will get your money in 7 days in the event that the gaurantee has to be invoked ……..not sure what arrangement are in place for “baby banks ” in NZ .

    2) So long as long as a punter has less $250 K in any one ADI the government ( taxpayers ) will stump up. If more than that I guess a Cyprus style bail in might be on the books .

    If bank goes belly up …….who wears the risk ……..the shareholders ,the holders of hybrids ,bond holders and who else ? ……..overseas suppliers of funds ?

    I guess what I’m asking …if those gold plated houses in Sydmelb and Auckland should one day return to near their real value who ( apart from the holders of the underwater mortgages ) has most to be fearful .

    • Some US pension holders have a defined benefit which guarantees them a certain income in retirement. Some Australians have these also. Many of these pension funds don’t have enough money to continue paying the guaranteed amounts, so they will go broke and stop paying the pensions.

      I don’t believe the Australian government can afford to back up their offer of guaranteeing the first 250k. Unless they can print money like the larger deficit countries.

      • TailorTrashMEMBER

        so the banks behaviour will not only send themselves broke ……but also the government ……scarey stuff ……..