Highs and lows of a market that never failed to surprise
From the leaky homes crisis and GFC to the surge in property values and rise of mum and dad investors, ASHLEY CHURCH looks back at 20 event-packed years.
Twenty years ago I was living in Palmerston North, working in an industry unrelated to property, living in a house I had bought for $159,000 the year before, and using a mobile phone for which the only real purpose was making phone calls. In every respect, my life today is completely different, and just as we were all different people 20 years ago, the property market was also different — and its highs and lows are the result of the things which happened along the way. Some of those could have been predicted. Others couldn’t.
But how do you rank those highs and lows? For me, the property market is a metaphor for how we’ve done for ourselves, at least in a financial sense – so I’ve chosen the events of the past 20 years, based on how much they have impacted on the back pocket or purse of the largest number of Kiwis.
THE LOWS Government intervention in the property market
If we know anything about the New Zealand property market over the past four decades, it’s that it generally defies attempts at Government interference and does what it’s going to do, regardless. Despite this, both Labour and National have continued to interfere in the market over the past 20 years, introducing measures such as the Brightline Test on October 1, 2015, the foreign buyer ban on October 22, 2018, and the ringfencing of tax losses from April 1 this year. While the motivations behind these measures varied, none have achieved the purposes for which they were intended and, ultimately, they have just ended up costing Kiwis money for no real benefit.
The fall of Blue Chip Investments
In February 2008, Blue Chip Investments, a structured property investment company, collapsed under the strain of debt due to a scheme that relied on the price of property going up every year with no contingency for when the market flattened or dropped. Around 2000 shareholders on both sides of the Tasman — some of whom lost their homes as a result of investing in the scheme — were left out of pocket to the tune of around $250m. Blue Chip’s high-profile director, Mark Bryers, was subsequently bankrupted and the company’s name has become a metaphor for dodgy property dealings.
The collapse of 67 finance companies
Yes, you read that number correctly. Between May 2006 and the end of 2012 there were 67 finance company collapses in New Zealand. Not all of these companies operated in the mortgage market, but those which did tended to focus on the higher risk business which the major banks stayed away from. The most high-profile collapses among these were those of South Canterbury Finance, Hanover Finance and Bridgecorp Holdings, At the height of their expansion, these and other finance companies held assets of about $25 billion. Subsequent reports blamed lack of oversight and proper financial management for the collapses and the whole fiasco led to sweeping legislative and regulatory changes.
The global financial crisis
By the time US investment bank Lehman Brothers collapsed in September 2008 — kicking off the Global Financial Crisis — New Zealand was already in recession, so the effects of the GFC were less dramatic here than they were in other parts of the world. That said, house prices still dropped by 8.6 per cent from their peak over the following couple of years, before picking up again in 2011 as the nation headed into yet another property price boom cycle.
The leaky homes crisis
While the leaky homes scandal is mostly associated with the early years of the new millennium, it actually had its genesis in the years following the introduction of the 1991 Building Act. This short-sighted piece of legislation relaxed controls on residential building, allowing the framing of homes to be constructed from untreated timber (which often rotted) and the use of fibre cement sheets for cladding, which were not watertight. This led to a very large number of the homes built between 1994 and 2004 having weather-tightness problems or being unhealthy to live in due to moulds and spores developing within the damp timber framing. In 2009, the repairs and replacement costs associated with the crisis were estimated to be about $11.3 billion. Around 34 pr cent of this was borne by Government and councils, with homeowners bearing the brunt of the remainder of the cost.
Loan to Value Ratio restrictions
On October 1, 2013, the Reserve Bank of New Zealand introduced restrictions on mortgage ‘loan-to-value ratios’ (LVR), which prohibits banks from lending to home buyers with less than a 20 per cent deposit (with a small number of exceptions) and investors with less than a 30 per cent deposit. The Reserve Bank claimed the measures were necessary to slow the rate of house price inflation — an objective which they spectacularly failed to achieve. House prices continued climbing for another three years in Auckland — only flattening at the point of the cycle at which they would be expected to do so — and are still climbing in other parts of the country, giving the lie to the myth that the LVR restrictions slowed the market. Despite this, the Reserve Bank has persevered with this experiment and, in doing so, has closed tens of thousands of first home buyers out of the property market. In my opinion, the negative impact of the LVRs, particularly on first home buyers, makes it one of the most profoundly stupid economic and housing policy blunders of the past 40 years. The Reserve Bank have deprived many young people of an opportunity to develop household wealth — and the impact will continue to be felt for decades.
The Christchurch and Kaikoura earthquakes
Earthquakes aren’t new to New Zealand — but their deadly power has certainly been a significant feature of our national psyche. I rank two of them, in particular, as having the most impact on the property market of any event over the past 20 years. The first struck Christchurch
at 12.51pm on February 22, 2011, causing widespread damage and killing 185 people. In its aftermath an estimated 10,000 homes required demolition and over 100,000 were damaged. Estimates of the cost of the rebuild of the city — which is ongoing — sit at around $40 billion with claims that it will take 50 years. The second quake, on November 14, 2016, was centred in Kaikoura but caused extensive damage to property in Wellington and Nelson. The impact of these two quakes is ongoing, not just in respect of the loss of lives and cost of claims but also in the impact that they have had on construction standards, on how insurance premiums will be levied, and on our national perception of our own mortality.
THE HIGHS Private sector housing construction
Despite the failure of Kiwibuild, census and building stats tell us that we’ve more than kept pace with the need to build new dwellings. Between 1986 and 2013 we built 565,000 new dwellings — and we built a further 290,000 between 2013 and 2017. These numbers are in stark contrast to the regular warnings about a shortage of homes. While it’s still too soon to say there isn’t a housing shortage after all, it’s certainly starting to look that way.
The internet and the digital economy
It may seem strange to include the internet and the digital economy in a list of the property market highs, but their inclusion is well deserved. As recently as the late 1990s towns and cities throughout New Zealand were struggling with the threat of depopulation and the loss of traditional industries. But that all changed as internet speeds got faster and the technology it carries became more sophisticated. Ultra-fast broadband, high-definition streaming, and a vast array of software and apps means the tyranny of distance once strangling provincial New Zealand has largely evaporated. This has flowed into strong capital growth in house values throughout many parts.
The dominance of first home buyers
In the ‘lows’ column I’ve given a pretty strong serve to the Reserve Bank for its short-sighted LVR restrictions. Yet we now know that first home buyers were still the single largest group of house buyers everywhere except Auckland and in every year between 2013 and 2018. Whether they’ve achieved this through hard graft, the ‘bank of mum and dad’ or some other strategy, I don’t know. I’m just pleased that they’re still in the market, despite the huge obstacle put in their way.
Mum and dad investors
Those who seek to remove property investors from the market need to be careful what they wish for. These people are the true heroes of the property sector, providing around 440,000 of the roughly 525,000 rental properties in New Zealand and saving the taxpayer billions — every rental provided privately is one less needed to be provided by the taxpayer. It’s a testament to their vision and fortitude that they continue to be active in the market, despite being demonised by advocacy groups and politicians.
Strong immigration growth
New Zealand has transformed from a country which lost more people than it gained in any given year, to an immigration hotspot and a magnet for people with education, money and a desire to make a new life in our south pacific paradise. Our net population grew by almost 175,000 between 2016 and 2018, and while annual numbers have come back from their peak in 2016, they’re still high by historic standards.
Low, low, low mortgage interest rates
Most economists believe the upward trend in house prices since the mid 1980s is largely due to a steady reduction in mortgage interest rates. While I don’t completely buy into this view — primarily because our housing market periodically goes off the boil even when interest rates are low — I have no doubt it’s a contributing factor. In January 2000, the average twoyear fixed mortgage interest rate was 8.4 per cent. In October 2019, that same two-year rate was 4.4 per cent, with some banks even offering rates under 4 per cent. As a result we’ve been in a benign mortgage environment for almost 20 years —and right now the proportion of household income spent on servicing a mortgage is about the same as it was in 1976.
The market
The undoubted star of New Zealand property scene over the past 20 years, has been the market itself. Despite a barrage of extreme (and mostly nonsensical) claims from both sides of the political spectrum — and repeated warnings of an imminent market collapse, which never comes — the market ticks on, increasing in value by between 70 and 100 per cent every decade and increasing the wealth of millions of Kiwis.