Market News 12 November 2018
I felt sorry for the young Auckland couple who had the experience of owning their first home dragged through the media, and then inevitably social media. A couple of politicians had a go as well.
The young graduates won a ballot for one of the first homes to come available under the KiwiBuild scheme which hopes to provide 100,000 new homes for middle income earners over the next 10 years.
Although the couple met the criteria, including the earnings cap of $180k per couple, because one of the applicants was a graduate doctor, and supposedly on the road to great wealth, some believed he shouldn’t qualify for inclusion in the scheme.
What was most disappointing the media jumped on the story without seeming to understand even the basics of the KiwiBuild programme.
The main objective of the KiwiBuild initiative is provide more houses in defined areas in the mid-pricing range of $550k - $650k, houses that otherwise would not be built in large enough numbers.
It is about increasing supply not discounting or subsidising prices and is not about providing homes for low income earners or the unemployed.
With KiwiBuild the government can provide the developer with certainty through guaranteed pre-sales which should enable more projects to proceed; otherwise, in terms of pricing, it is just a normal commercial arrangement between buyer and developer, but without real estate agency fees which provides a small saving.
In terms of paying for KiwiBuild homes buyers have to arrange their own finance and meet normal bank lending criteria by having the required deposit and proving they can service the debt, the same as a non-KiwiBuild borrower.
The government is not involved in financing arrangements for the homes although at least one bank has pounced on a marketing opportunity by offering special terms on KiwiBuild homes but this is purely a bank initiative.
So I say good luck to the young graduates. Their critics are either not aware or don’t care that the young doctor has probably worked his butt off for the past 5 or 6 years to qualify, built up a big student loan in the process and will likely spend the next 5 years working as a junior doctor in a hospital somewhere putting in 80 hours per week and getting paid for 40.
There is a lot of noise about finding homes for the less fortunate, many of whom are looking to game the system, in my opinion, so why shouldn’t we find a home for a young doctor who is going to make a positive contribution to his community and NZ.
What some New Zealanders, a minority thankfully, need to realise is that it is OK to help yourself by working or studying hard, having the right focus and being successful.
There will be a lot of deserving cases for a KiwiBuild home and hopefully as more homes are completed their opportunity will come.
Someone has even predicted that eventually there will be more KiwiBuild homes than demand from qualifying applicants, which should relieve pressure in the overall housing market and make home ownership more achievable for lower income earners.
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The government is proposing an overhaul of tenancy laws in NZ including removing no-cause terminations, limiting rental increases, allowing tenants to make property modifications and have pets and stop rent bidding.
They have already voted to ban letting fees from 12 December this year.
Around half of New Zealanders live in rented accommodation, much of which is provided by private landlords and although KiwiBuild might improve home ownership rates slightly over time private investors will continue to be an essential component of the NZ property market.
While there are obviously cases of very poor landlord behaviour I think property investors are often unfairly criticised and should not be confused with property speculators who operate a hit and run type strategy and add little value, in my opinion.
Many property investors have accumulated genuine wealth but for most it has been a long game during which they have had to endure many obstacles including major house price and interest rate fluctuations, economic disruptions, natural disasters, insurance issues, poor tenant behaviour, tenancy tribunal disputes, and more.
At the same time as the government is looking to impose new tenancy rules banks have also tightened the screw on investors and overall lending to investors is down 3.5% on a year ago.
Knowing that we already have a chronic shortage of rental properties and assuming that NZ’s population continues to grow at current rate, half of whom will rent, we are going to need a lot of new rental accommodation in coming years.
The government’s KiwiBuild scheme should increase overall supply slightly over time but it is designed for owner/occupiers not tenants.
The government has also undertaken to build a further 6500 state homes, but I doubt they will want anything other than a regulatory role in the private rental market so if we continue to rely on private investors to bring new supply to the market we need to think carefully before we flatten them with unrealistic and overly-burdensome regulations.
Regulations need to be based on common sense and workable for all parties.
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Over the past couple of years there has been a lot written about the inevitability of the next financial crisis and share market meltdown but equally as frequent have been dire predictions for the Australian property market.
National dwelling prices in Australia have increased 44% over the past 10 years with hotspots Sydney and Melbourne both recording increases of over 100%.
It mirrors our own market in many respects although Australia now seems to have supply and demand more in balance than NZ. Both markets have cooled a little recently particularly in Australia with prices declining 7.4% year on year in Sydney and 4.7% in Melbourne.
By global comparison NZ and Australia both have very low levels of government debt (22% and 41% net, respectively) but both countries have very high levels of household debt and it seems to be no coincidence that countries with high levels of household debt, measured against GDP and net household disposable income, also have hot property markets.
Switzerland has the highest ratio of household debt in the world at 128% of GDP, followed closely by Australia on 123% and then; Denmark - 115%, Netherlands – 105%, Norway - 102%, Canada – 100%, Korea – 95% and New Zealand – 92%.
When measured as a percentage of net disposable household income Denmark tops the list at around 290% followed by the Netherlands -255%, Norway - 230%, Switzerland – 213%, Australia 200%, Sweden, Korea and Canada all around 190% and New Zealand 166%.
In the household debt figures above, mortgage debt accounts for 75% - 97% of the total, so it no surprise which 5 countries have experienced the biggest increases in real house prices (inflation adjusted) over the past 10 years;
· Canada, New Zealand, Switzerland, Sweden and Australia - all 40% plus and Norway a little over 20%.
Debt sustainability relies on income growth exceeding debt servicing costs over time, and house prices strongly influence consumer spending behaviour.
Countries with high levels of household debt are very exposed to rising interest rates and/or tightening credit standards which invariably lead to a reduction in household spending, falling business revenues, job losses and further economic contraction.
Switzerland is a unique case in that not only does it have the highest ratio of household debt in the world, but it also has by far the highest household savings rate in the OECD and is second only to China on a global basis.
Swiss household debt is partly explained in that private individuals own 50% of the country’s rental apartment market and the Swiss tax system and mortgage market encourage borrowing, with all mortgage interest tax deductible, and friendly repayments terms allowing balloon payment options at retirement.
On the saving side, in addition to Swiss frugality, the Swiss pension and tax systems create strong incentives to limit consumption and save more, and that is exactly what the Swiss do. It is Switzerland’s exceptionally high household savings rate that underpins the country’s large current-account surpluses.
Australia, Canada and the US also have strong tax incentives that encourage retirement savings, and all have positive household savings rates, so perhaps it is something for our Tax Working Group to consider as NZ hasn’t recorded a positive household savings rate since 2013.
High household debt, inflated house prices and a negative household savings rate are not a healthy combination in an economic slowdown or recession, should one arrive.
Footnote: During the US housing bubble, which preceded the GFC, household debt in the US increased from about 70% of GDP in 2001 to 99% in the first quarter of 2008. Although larger now in absolute terms household debt in the US has fallen back to around 78% relative to their economy.
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Australia has avoided recession for 27 years and dodged the 2009 global slowdown because China engaged in massive fiscal stimulus and infrastructure spending which drove demand for Australian commodities.
China now buys 35% of all Australian exports and is also NZ’s largest trading partner, just ahead of Australia.
Both countries will be hoping that the current US – China trade tensions don’t become a take sides affair, with the US a key ally of both NZ and Australia, and they will also be hoping that China can manage its over-indebted economy as global growth continues to slow.
China is the world’s second largest economy, the biggest trading nation and has the third largest bond market. Over the past decade China’s credit boom has been a major factor in global growth.
In 2008 total Chinese debt was about 140% of its GDP, today that figure is 260%.
China’s debt to GDP ratio is similar to that of the US, UK and Italy but China is a middle-income country with low GDP per capita and low income levels make it more difficult to overcome high debt levels.
China’s debt problems are in the corporate sector at 163% of GDP. Reported Government debt (46%) and household debt (51%) are both quite low although up to US$6 trillion of local government debt has recently surfaced, supposedly hidden in off-balance sheet financing vehicles.
The other major issue for China is its largely unregulated US$20 trillion shadow banking industry which sells opaque asset management products to the public and institutions and has the potential to throw-up huge investor losses in a downturn.
One thing for certain the Chinese government will continue to intervene in markets, where and as required.
Most recently Beijing has rushed in to support private businesses that had pledged shares as collateral for loans and faced the prospect of forced selling of the shares as their prices declined.
Big increases in debt without comparable economic gains rarely ends well and in a recent IMF publication they noted that in 43 credit booms, in which the credit to GDP ratio increased by more than 30 percentage points in five years, all but five ended in significant growth slowdowns or financial crisis.
China’s debt to GDP ratio has risen 54 percentage points in the past five years, and started from an elevated position.
The problem with limiting leverage once debt levels are high is that reduced credit growth slows economic growth which can lead to hard landings.
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The recent stock market correction provided an opportunity for buyers, especially growth stocks which got beaten up the most, but as one American analyst recently wrote it’s hard to pick the bottom, and therefore the best time to pounce.
In his newsletter last week he apologised to his readers for giving them the green light too early saying he suffers from a condition known as ‘premature allocation’.
Kiwi Property Group – the interest rate for KPG’s 7 year fixed rate bond was set at 4.06%.
We have a very small allocation left if you would like to participate in this bond offer.
Chorus Senior Bonds – Chorus has not yet announced the details of a proposed offer of 10 year senior bonds with a fixed-rate for the first 5 years and then reset for the remaining 5 years. Details now expected by the 14 November. We estimate the interest rate to be above 4.20% for the first 5 years.
The fastest way to hear about new investment offers is to join our ‘Investment Opportunities’ (New Issues) email group, which can be done via our website or by emailing a request to us to be added to this list.
Edward will be in Albany, Auckland on 21 November.
Chris will be in Blenheim November 20 (pm) & 21 (am).
David will be in Palmerston North and Wanganui on November 20, and New Plymouth November 26.
Our future travel dates can also be found on this page of our website: https://www.chrislee.co.nz/request-an-appointment
Any person is welcome to contact our office to arrange a free meeting.
Chris Lee & Partners
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