Real Estate Savings

As a resident of a country town and frequent citizen of Ponsonby at the bach, I get a pretty good picture of the differences in thinking between town and country people.

One of the differences shows up at dinner tables where the main topic of conversation in the city over the last few years has been house prices, with quite a lot of pleasure and mostly underserved self-congratulation over the steady rise in house values and along with it, net worth, (although not for those who use the house value increase to simply borrow and spend more). Evidence supporting this can be found in Ponsonby’s own glossy magazine, Ponsonby News dominated by real estate adverts for houses and apartments, and making agents into local minor celebrities.

Conversely country dinner sessions usually feature rugby and fishing before settling on Fonterra.

Both sets of dinner tables have seen a change in flavour recently with an element of caution entering city house price discussions and a definite souring of feeling in the country towards Fonterra, which has moved from support for the co-operative to shock at the huge salaries earned by those whose decisions have resulted in the losses and value destruction of Fonterra shares.

These two are inextricably linked, even if city dwellers don’t immediately see it. That is because Auckland spends the country’s wealth and rural NZ earns it, with Fonterra being the biggest individual contributor of overseas earnings.

So, why have city house prices risen so much in the last five years? Population growth, immigration? Ya think? Nah, it has all been due to cheaper and cheaper finance.

Take a couple on say $100k. They manage to save around $100k after a few years saving and this becomes the deposit with a maximum of about $40k annually available to service a loan. When finance costs were 8%, they could borrow $500k, hence setting a maximum price of $600k for their house buy. Now with finance costs at 4% they can borrow a million to enable a buy of $1.1m. Did they get to buy a better house? No. House prices all rose up to meet this new figure and these buyers now face a debt mountain and possibly negative equity as house prices start to fall. No wonder the dinner parties are becoming rarer and more subdued.

Much the same with farmers whose love affair with Fonterra is well and truly over, in spite of Ritchie McCaw appearing in adverts telling farmers how good Fonterra is.

Predictions are very hard, especially about the future, but here goes, so where are house prices heading?

Let’s have a look at Sydney and Melbourne, two nearby cities that share a lot of common themes with Auckland and as usual who are a bit further down the road in economic trends like house prices. Sydney’s population dominates New South Wales, Melbourne’s the same for Victoria and Auckland for NZ. In all cases export earnings come from the regions, mining in Australia’s case and agriculture in NZ. The only major difference is that city dwellers in Australia do have big ownership of the rural mining industry.

Export confidence and returns have dropped for all three cities and with it, confidence and the long run-up in house prices has stopped in all three, with Melbourne first, then Sydney and more recently Auckland.

So, how does that play out? First thing, sales drop in number dramatically. Sellers retreat from the market and think about renovations. Prices stall and real estate agents fill the press with reassuring statements pointing out that prices are only off a bit. This is self-delusion mostly.

Then the banks start noticing borrowers who are struggling with just the interest portion of the loan, let alone reducing the capital borrowed and the banks are forced to act. This puts the distressed owners into a very slow market. Vulture capitalists and bargain hunters emerge along with the first big drops in house prices, which in turn sets all values lower.

This puts more borrowers into a tricky situation with some starting to see negative equity. The downward spiral gets underway.

Too negative, you think? I hope so, but it has happened before and will again. The Dairy sector is poised at the top of a debt cliff right now and its not only the farmers, but also the banks that are hoping for a good Fonterra payout. Maybe city folk should be too.

Editor

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