I’ve read a number of blogs trying to explain why the New Zealand 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 find themselves owing more on a property than it is worth, and often struggling to make the mortgage repayments. They decide to walk away from their property; this pushes prices down further, and as the lower values of these abandoned homes drag down the market the cycle continues .
In New Zealand 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 New Zealand mortgage defaults are a function of servicing and not asset prices.
In 2008 and 2009, Kiwis’ 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 New Zealand estimate also ignores the impact of the 2009 tax cuts that added approximately another 4% disposable income to New Zealand’s mortgaged households.
If we look at servicing:
- In New Zealand 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 New Zealand was proportionately larger and from a much higher starting position. As such it has had a much stronger positive impact on servicing. This is still filtering through as homeowners come off high fixed rates.
- Local unemployment was 5.00% last year (an 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, New Zealand 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 New Zealand (and Australia):
- We have had higher population growth (up 1.20% year-on-year compared to 0.67% in the UK.)
- Percentage-wise, we have the second-largest expat 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.
Taking all these factors into account, I believe the New Zealand market is stronger than the UK or the US and that’s why it won’t plummet like those markets have. New Zealand housing is still in demand and should remain that way while these differences remain.
