How to deflate a property bubble

Giant bubble floating on a busy street

No government has lost an election because house prices increased. This goes to the heart of why we have seen decades of government in-action. Property is an easy bet – it always wins. The only reason we now hear murmurings out of Wellington, is political awareness of the economic damage caused by higher interest rates.  Think exchange rate. Think lower consumer spending and confidence. Think over leveraged farms and property. All vote losing. On the one hand we all enjoy watching our house prices increase. On the other hand, nutty house prices now, equals tough medicine later.

Having purchased a lot in the past 2 years, I’m now firmly ensconced on the sidelines. It feels too late in the cycle to be double downing right now. I can still find the odd good deal. But I suspect it won't be long until I see some more bargains. There are enough investors over estimating the market and themselves. Give it 24 months.

The problem in Auckland is fundamentally about a lack of supply and an increase in speculation, especially from investors. Crazy prices are not necessarily driven by a shortage, but are driven by people willing to speculate on a shortage. 

Speculators buy without looking at fundamentals.

Are you a speculator? The biggest speculators I see in the market are young Chinese buyers. They have big deposits from parents back in Asia and are often buying 2-3 properties. The problem is large amounts of easy money. There is often no focus on yield and in my opinion, they trust real estate agents too much. Chinese are hugely motivated by land zoning whether that be for schools or urban planning. There is no decent research on just how much of our market is being influenced by offshore money. From what I see, it is a large influence and could get potentially larger. This is the unknown. Offshore money could keep property prices going up in New Zealand for years. We have such a small economy on the global stage that it doesn't take much offshore interest to smash our market.

The easiest way to deal with speculation in the near term would be to require banks to hold more capital. If someone buys a property with the view to resell it, this should attract more capital. Mortgages to non-residents should attract more capital. Negatively geared investment property should attract more capital. Changes to capital would reduce price competition for higher LVR loans without necessarily tightening credit policy. This might drive high mortgage rates into the speculative parts of the market without having to increase wholesale interest rates. To really hit speculation, the focus needs to be on increasing land supply quickly.

I personally like the new Auckland Plan. If I have an issue with it, it is the council’s inability to execute, … anything.  I would describe the council as a lapdog that rolls over at the first sign of conflict. How on earth it thinks it could execute its own plan is beyond me. The other quick fix would be to smash the urban limit and free up heaps of land. This would not necessarily increase urban sprawl. It would definitely impact those hoarding land and drop land prices even inside the current urban limit. If the Council and Government ever managed to do anything more than talk, then most speculators would find themselves feeling extremely uncomfortable.  However, most are betting our bureaucrats can’t get there shit together and that seems a safe bet!