Hard News by Russell Brown

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Hard News: The Boom Crash

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  • Lucy Telfar Barnard, in reply to Sofie Bribiesca,

    Don’t have earthquakes yet.

    That's what Christchurch thought. And even if you don't... volcanoes!

    Wellington • Since Nov 2006 • 585 posts Report Reply

  • Sofie Bribiesca, in reply to Lucy Telfar Barnard,

    That’s what Christchurch thought

    Actually Auckland has had a few in it's time also but Christchurch may have wanted to take note in 1869, 1870, or even 1881 when the Cathedral got damaged. Canterbury has had it's share of earthquakes before 2010

    here and there. • Since Nov 2007 • 6796 posts Report Reply

  • BenWilson,

    Decent volcanoes are a lot rarer than earthquakes. But they're probably a lot more destructive. If you got one the size of even the smaller cones in the Auckland region popping up in the CBD, there isn't going to be any rebuild.

    We get about one per thousand years, so there's the odds - 1:1000 every year. Eventually, it's going to happen.

    ETA: Happen somewhere in Auckland, that is. Odds of it happening in the CBD are a lot less.

    Auckland • Since Nov 2006 • 10657 posts Report Reply

  • Sofie Bribiesca, in reply to BenWilson,

    Happen somewhere in Auckland, that is.

    Heh, moving to the Far North has so many benefits :)

    here and there. • Since Nov 2007 • 6796 posts Report Reply

  • Hugh Wilson,

    Like some others I watch Auckland’s property market developments from afar, but not that afar, Melbourne. There are a couple of things which perplex me about Auckland prices, including where on earth folks get the $ from. Russell’s opening observation about what is in store for future generations is spot on – picture yourself as 25, fresh out of uni with a $30K student loan debt and ready for a bit of personal indulgence on your $60k p.a salary after years of hardship. Forget the big OE or the nice sports car, for you need to cobble together circa $70k for a deposit quick pronto. Say you can save $10k a year, perhaps a touch more, you might get to that $70k in say 5 years. But by that time prices have jumped up another 12% or so. Continuing for a moment, you’ve reached $70k, hooked up with someone who was semi- responsible as well and has $50k, so you have $120k – if the house you like (by now 2019) is $800k, you’ll more than likely be looking at a mortgage of over $600K for your first property, which means huge monthly repayments of $4k+ dollars minimum in your early 30’s, about the time you might have been contemplating having a child and going to a one income house. A parental contribution will help, but unless its really large it may not make a material difference to the maths. Difficult marco economic balancing act too – the economy slows, and unemployment jumps but lower rates could be more fuel on the housing fire / the economy grows and interest rates need to go up to cap domestic pressures, with collateral impacts...

    Anyway, what to do? Haven’t seen any references in the comments to the unitary plan, the cross town rail project or proposed motorway tax. Unfortunately density does need to increase because theres not enough $ to provide the pan-regional infrastructure which will enable the sort of lives that Auckland’s citizens want to lead. It seems that lots of people have tried to have/start this discussion, but it has only made it so far ….

    Melbourne • Since Feb 2013 • 168 posts Report Reply

  • Aotearoan,

    Go North, people. Good people and communities, beaches, kai moana.
    I have watched our QV's decline by 20% over the last 3 years (but not the rates, alas).
    You can still buy a piece of land and a house for under 200K in some places, or a church for $105K in others.
    You will find interesting articulate individuals and groups, biculturalism in action.

    Northland • Since Jan 2011 • 14 posts Report Reply

  • Chris Waugh, in reply to Aotearoan,

    Go North, people

    No, no, no, you want to encourage people to go south, otherwise Northland will fill up with economic refugees from Auckland and all that goodness you talk about will be gone. Then where are you going to go?

    Wellington • Since Jan 2007 • 2401 posts Report Reply

  • bob daktari, in reply to Hugh Wilson,

    including where on earth folks get the $ from

    families I would wager are a big part of enabling those with hefty loans and entry level wages to either borrow, or I know a few whose families are collectively building housing portfolios which means the younger members aren't individually required to mortgage their lives for a roof

    Density is a solution of sorts, though prone to very proactive nimbys pushing the concept away from areas that need it most. I fear for the types of buildings developers will throw into the mix - given the shitty apartment buildings that litter the inner city (cheap and designed to maximise initial profit and stuff the long term consequences)

    As a huge aside: On the German way

    http://www.forbes.com/sites/eamonnfingleton/2014/02/02/in-worlds-best-run-economy-home-prices-just-keep-falling-because-thats-what-home-prices-are-supposed-to-do/

    Wouldn't it be great if once NZ followed successful countries instead of emulate the US, Canada, UK, Aus in our market solutions (to pretty much everything)

    auckland • Since Dec 2006 • 540 posts Report Reply

  • Sacha, in reply to Hugh Wilson,

    the sort of lives that Auckland’s citizens want to lead

    In well-located apartments and other denser dwelling types, you mean? Plenty of sprawling suburban houses already.

    Ak • Since May 2008 • 19740 posts Report Reply

  • BenWilson, in reply to Hugh Wilson,

    Your story is not just about young adults now. It's the story of my life. The difference is just that it's much worse now, even more starkly clear what's going on.

    There are a couple of things which perplex me about Auckland prices, including where on earth folks get the $ from

    Loans or gifts, for the most part. I'm yet to meet the person who has saved up $100k on a wage/salary, before buying a house.

    A common one used to be parents giving loan security to the bank, against their own houses, something that was typically quite temporary, since price inflation gave the kids enough equity to pay their parents back quite quickly, refinancing once their equity reached the requisite level. Don't know if that still happens, or if it's more common for them just to borrow it against their mortgage and give it to their kids. That's what happened with me. My folks lent me the money, I paid a goodly chunk of it back (but not all). I remember asking the bank whether that was a problem, since one is required to tell them whether any cash you put up is in fact borrowed (you can't, for instance, just use your credit card to come up with a deposit, without disclosing that), but they pretty much said that when it's parents lending the money, they turn a blind eye.

    Of course this solution only works for families in which parents actually can put up a stake of some kind, so it doesn't help poor families at all. And nothing stops the fact that if you borrow half a million dollars, whether with family borrowings "hiding" the borrowed deposit, or not, you still have to pay the interest on half a million dollars, and the house isn't yours until you pay them half a million dollars on top of all that interest.

    But once you're on the ladder at all, the inflation does sort of work in your interests. If property inflation doubles values every ten years, then even you had no equity and paid nothing back on the principal ever, by the end of 30 years you have 7/8ths equity. A $100,000 borrowing is now against an $800,000 house. Which is why actual owners really dig this inflation. It gives the impression of quite enormous earnings just for paying interest that may have been equivalent to rentals anyway. Few people seem to really understand just how it is that such enormous returns come their way, that they are magnifying the returns of the property market through their huge leverage, often 10:1, and as high as 20:1 just before the GFC. This is far, far higher than you could margin borrow for anything in the stockmarket, so property growth is magnified to actual property investors. If property rises by 10%, and you're leveraged 10:1, you actually double your money annually (less interest costs). Which sounds awesome until you realize that it's money at risk too. If property drops by 10% you halve your money, and if it's borrowed money that means you're completely bankrupt and owe the bank heaps. Which is why it's too big to fail. They don't want to bankrupt you, they want you to pay your debts and they just keep extending credit to the maximum extent they're allowed to.

    Loans for extremely long periods are normal now, too. 30 years loans, for instance. If you were in your 30s before you even got the deposit together, you'll be freehold by about the time you retire, presuming of course (and this is nearly universally false) that you never once refinance, reborrow, renovate, or move.

    Auckland • Since Nov 2006 • 10657 posts Report Reply

  • Hugh Wilson, in reply to Sacha,

    I meant 'lives' in more of a community or lifestyle sense, which are not entirely dependent on cars ... its difficult to articulate in a few brief words, but perhaps you recall that metro article/feature from a few years ago where the author basically described one vision for Auckland which entailed bustling suburban hubs (in this case St Heliers - long anything but bustling) and options for using public transport to get between them (in this case high frequency ferries to the CBD). Put another way, a future where citizens aren't forever tied to their cars on account of where they live and/or a lack of viable PT options ...

    For whats its worth, I avoid driving in Melbourne as much as possible, and you are highly unlikely to find me on the roads after 11am on a Saturday- why? because gridlock pretty much envelopes the city every weekend, especially in places like Fitzroy, and you're unlikely to find a car park at your destination anyway ...

    Melbourne • Since Feb 2013 • 168 posts Report Reply

  • Hugh Wilson, in reply to BenWilson,

    Lots of good points, and yes you are right the 'family contribution' isn't available for everyone ... its also worth noting that there is an element of false economy to AKL prices, in that existing owners are only in a position to benefit from recent capital gains if they relocate elsewhere or downsize - selling up to buy in the same 'hot' market is unlikely to improve one's net position drastically (and thus the term 'rat race' ... )

    Melbourne • Since Feb 2013 • 168 posts Report Reply

  • Aotearoan, in reply to Chris Waugh,

    No, no, no, you want to encourage people to go south, otherwise Northland will fill up with economic refugees from Auckland and all that goodness you talk about will be gone. Then where are you going to go?

    Loathe as I am to overpopulate our beautiful beaches, there are pragmatic reasons to encourage some permant population growth.
    Our ambulance and fire brigade are staffed by volunteers. Many young people have left for Australia, taking their trade expertise with them.

    Houses that could be filled with young families are holiday homes for Aucklanders, generally nice folk who contribute a little to the local economy via cafes and galleries but form only a peripheral part of the community.

    Northland • Since Jan 2011 • 14 posts Report Reply

  • Sacha, in reply to Hugh Wilson,

    the ‘family contribution’ isn’t available for everyone

    a handy class proxy, if anything

    Ak • Since May 2008 • 19740 posts Report Reply

  • Sacha, in reply to Hugh Wilson,

    Seems we're in agreement.

    using public transport to get between them

    which requires denser populations to make viable - hence won't happen while we still prioritise fringe single-level sprawl like Flat Bush. Property developers and construction companies need to get less lazy about how they make their money. And regulators need to stop kow-towing to them.

    Ak • Since May 2008 • 19740 posts Report Reply

  • Marc C, in reply to Hugh Wilson,

    Yes, where do those “dollares” come from? Most is borrowed, and as New Zealanders as a whole have got so used to simply use their credit cards, to get extra loans and mortgages offered by banks, they simply “bank” on a future, which they cannot see, due to financial, economic and social short vision, which is the other “ill” in this nation:

    http://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=11356874

    Hence high interest rates will return with a vengeance at some stage, and it will be causing a very serious contraction. Until then it is all postponed. I came back from an overseas stint in 2005, and there was near full employment, talk was of endless growth, of shortage of skilled labour, and another housing “boom” was in full swing then. We know what happened shortly after that.

    So one year of a milk solids based "boom" and a government talking up an otherwise stalling economy, now largely only “growing” due to rebuild in Christchurch and slowly starting construction in Auckland, has again seduced the majority into more and more borrowing, speculating, and selling homes and buying homes.

    But it is not so clear cut, as it is the investors who are being a growing force behind it all, more wealth ending up in fewer hands and so, and housing affordability being below 50 percent now. Those that have homes borrow to spend more on yachts, cars and so, and trust that ever more migration will create growth, forgetting that such growth has a price too.

    As for the Auckland Unitary Plan, a friend of mine is presently engaged in it, and it is a bit of a disaster, what is happening in some hearings and meetings now. The idea of growing the population to “afford” infrastructure will be nothing but a race in the hamster wheel, as eventually the pressures will only increase and demand yet more investment. But the banks are happy, and the ones that hold wealth, they know they will never lose.

    After all discussions in Parliament, the media and on blogs over all these years, few seem to have learned anything at all, I fear, headless chickens racing against each other, trying to keep up with the Jones’ or to simply survive in one of the most expensive places to live in these days.

    Auckland • Since Oct 2012 • 437 posts Report Reply

  • Marc C, in reply to Sacha,

    While you are right that some intensification is needed, and overdue, I fear that the submissions made on the Auckland Unitary Plan, and I mean those by individuals or residents groups, are in their vast majority against intensification. Most Aucklanders still resist intensification, at least in their own backyard.

    But a city can still function with not so high density, as cities overseas that are much smaller in population than Auckland, and are partly also fairly spread out, can still afford a good public transport system.

    The problem here is, to achieve such a cultural change, to get people out of their damned cars. Many will say they support better public transport, but they do not really want to give up their own cars and pay extra for funding it. It is this widespread mentality of thinking, one can have it both ways, which is the major stumbling block to what Auckland and other large cities in New Zealand face.

    Wait for the screams when parking charges go up further, when tolls on motorways will be introduced (if that happens), it will be massive. But only making driving less attractive and at the same time expanding and improving public transport infrastructure will anything be achieved. I fear Len Brown will not achieve this, and will see the end of his term, to then be voted out.

    Auckland • Since Oct 2012 • 437 posts Report Reply

  • Hebe, in reply to Chris Waugh,

    No, no, no, you want to encourage people to go south, otherwise Northland will fill up with economic refugees from Auckland and all that goodness you talk about will be gone. Then where are you going to go?

    Oh no, you definitely don’t want to come south. No, no, no. It ’s partly why our houses are rocketing in value: youse Aucklanders come down here and say “575k far out” for a decent villa in a leafy street that would have gone for 425 two years ago.

    BTW re volcanoes: beloved found out recently that Lyttelton Harbour is actually a ring of over 20 smaller volcanic cones – not the one caldera we had always been told it was. Makes sense when looking at the aerial shots.

    @Sofie: EQC cover for land, imperfect though it is, is a national treasure and it comes all-in with house insurance. I believe NZ is the only country to insure land. I might be considered jumpy post 14,000 quakes (a good half 1 to 3km from my door) but do consider gritting your teeth and paying for decent cover. It’s so worthwhile.

    Christchurch • Since May 2011 • 2899 posts Report Reply

  • Jim Cathcart, in reply to BenWilson,

    Nice train of thought Ben. However, your narrative is based on an assumption of property price inflation every 10 years. Why has that not happened in the case of Japan considering the country's productivity and "developed nation" status? Is this asset price inflation assumption only assigned to liberal democracies who prescribe to monetary systems dominated by the Anglo-Saxonsphere?

    Interestingly, our central bank governor has stated today that we do not have a property bubble as house price inflation was less than 20% over a recent 12-month time frame. What is he trying to tell us? Surely he has a quantitative framework to make this claim. Why not express it in layman terms and highlight all the necessary assumptions? It's more like a Kabuki play every day.

    http://www.interest.co.nz/property/72882/rbnzs-wheeler-says-annual-auckland-house-price-inflation-85-not-bubble-it-would-have-

    Since Nov 2006 • 228 posts Report Reply

  • Jim Cathcart, in reply to Marc C,

    Where does the money come from? It's important to remember that on basic accounting theory, debt is an asset on the other side of the ledger. To really understand where the money comes from, start looking at the capital ratios of banks relative to mortgage debt (approx 10% in the case of Australia). Money is essentially printed into existence by a borrower's future income and repayments, not by an equivalent deposit within the financial system.

    Since Nov 2006 • 228 posts Report Reply

  • Rob Stowell, in reply to Hebe,

    It may actually make sense for us to cash up and leave Auckland

    Numbers of 'nearing retirement' Aucklanders have been doing this in Kerikeri and other parts of northland. Even in Keri, one of the better-off parts, house prices haven't really bounced back yet.
    And Northland can be a fine place to wake up in the morning :)

    Whakaraupo • Since Nov 2006 • 2110 posts Report Reply

  • Jack Harrison, in reply to Jim Cathcart,

    Housing is now a utility. We need well-housed citizenry. It needs to be removed as an investment tool and it needs to be recognised as a major asset for a modern city.

    Auckland is no longer Dorkland. Auckland is 170 years of beauty and heartbreak. Auckland is the home to the coolest rockstar on the planet at the moment. Auckland is nice. Auckland needs to be the most progressive city in the world. It needs to greet the communities coming their way, so attracted to the underground current of Auckland more than the overground blandness. Housing is really a not for profit endeavour now. Housing is a Maslow need. If you have excess money it must go into business not property, capitalism needs to be pure and not distorted by a scramble for basic living needs.

    wellington • Since Aug 2014 • 296 posts Report Reply

  • Marc C, in reply to Jim Cathcart,

    Of course, that is the idea of creating credit, to generate economic activity that pays for itself as it goes, with interest to repay and serve the created “money”, associated costs and profits. This bears risks that can be managed, but it also applies pressures for the borrowers and investors using credit to perform and deliver.

    What some economists do still not seem to accept or understand is, that resources are limited and finite, and that growth cannot continue as an endless upwards spiral. Changing conditions and environments force changes of economic direction, and we also have some choices, what kind of growth in what kind of form we want. The unresolved problem with New Zealand is, that most want to adhere to lifestyles and so called middle class living standards, that the kind of economic activity we have will not be able to sustain. Actually many can only “afford” their homes and so, by borrowing up to their eyeballs, and then spending their lives working to pay it off, at higher interest as in most developed countries, where less credit fueled housing and consumption may be the norm.

    It is indeed time to change the housing market, to create and provide affordable rental and owned homes, so that more investment goes into other activities, that produce stuff that earns a better, more secure living for the future. The state can play a major role in this, also able to afford lower credit interest rates, and in state housing take advantage of large buying power, to obtain cheaper building materials. Most may in future be renters of privately owned rental properties (nest-eggs for some), but they will likely pay high rents, to pay off the homes that private investors built for them, also using credit that will eventually be repayable at higher interest.

    Under the present government, like many others before, I cannot see this change of direction happening.

    Auckland • Since Oct 2012 • 437 posts Report Reply

  • Hugh Wilson,

    A link to the Metro piece, 'A dream for St Heliers' mentioned above (from a couple of years back):

    http://metromag.co.nz/current-affairs/unitary-plan-battle-city-we-deserve/

    Melbourne • Since Feb 2013 • 168 posts Report Reply

  • Sacha, in reply to Marc C,

    the submissions made on the Auckland Unitary Plan, and I mean those by individuals or residents groups, are in their vast majority against intensification.

    True for the wealthy coastal areas highlighted in the first map in this Transportblog post. Those are the whinging fogies who got so much publicity during the draft urban plan process, demanding that their parts of this great city stay like a quaint 1950s seaside village cos that's what they bought.

    Well, fuck em. I really hope the council cuts off the funding taps for *any* improvements to those suburbs in favour of those like the inner West who actually supported denser living and therefore are doing their bit to welcome the million new residents being born (2/3) or moving here (1/3) in the next couple of decades.

    Ak • Since May 2008 • 19740 posts Report Reply

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