Why has the NZ Property Market not collapsed?

I’ve read a number of blogs trying to explain why the NZ property market hasn’t collapsed like the US or UK markets. For what it’s worth, here is my view which is consistent with what we’ve been saying for a while.

In the US homeowners have a free option to walk away from a property if they get into a negative equity situation. It’s called jingle mail because homeowners literally post the keys back to the lender. This free “put option” was not properly priced into the market. Once this free option started being exercised it caused the whole market price to collapse.

(In plain English … as prices drop, more people move into negative equity and decide to walk away from their property, this pushes prices down further and so on.)

In NZ you cannot walk away from your debt. Even after you sell, the lender can chase you for the remaining debt through to bankruptcy.  And often they do!

As a result in NZ mortgage defaults are a function of servicing and not asset prices.

In 2008-2009 NZ disposable income increased by around 7.50% mostly driven by reduced interest rates.  In the UK it increased by about 3.50% and in the US disposable income flat lined.  The NZ estimate also ignores the impact of the 2009 tax cuts that added approximately another 4% disposable income to NZ mortgaged households.

If we look at servicing:-

1. In NZ the Reserve Bank reduced mortgage rates from 9.50% to 5.75%. In the US mortgage rates fell from 5.60% to 3.80% and in the UK from 6.50% to 4.25%. The reduction in rates in NZ was proportionately larger and from a much higher starting position.  As such it has had a much larger positive impact on servicing.  This is still filtering through as homeowners come off high fixed rates.
2. NZ unemployment was 5.00% last year (increase of 1%) compared to 9.30% in the US (an absolute increase of 3.50%) and 5.50% in the UK (an absolute increase on 2.40%) Going into the recession, NZ was suffering a skill shortage so much of the early impact of a slowing economy was reduced overtime.

In addition I think there are some other differences that stand out for NZ (and Australia)

1. We have had higher population growth (NZ is up 1.20% year-on-year compared to 0.67% in the UK.)
2. Percentage wise we have the second largest ex-pat community in the world behind Ireland. But unlike Ireland many Kiwis intend to eventually return home and so own or buy property in New Zealand. They then service any income shortfall from offshore.