A House Price Crash Caused By the New NZ Government Policies?

The announced policies from the new Labour/NZ First/Greens Coalition have caused a lot of discussion around how the housing market here will be affected. A NZ house price crash has even been discussed overseas.

Martin Armstrong has done some really interesting work on large cycles and how we humans often repeat the same mistakes. He has some very strong words on the outcome of the election here in New Zealand. Believing the result will be a house price crash.

Is this the most likely outcome? Who knows for sure as New Zealand is just a cork bobbing on the global currents. Our guess is that offshore events are more likely to be the cause of any major troubles here, rather than any new government policy.

But it’s worth reading what he has to say reprinted below. Then make sure you read to the end, as we’ll give our take on what the impact of the government housing policies may be. Including:

1. What Can We Learn From Other Countries Who Have Restricted Foreign Buyers?
2. Is This a Cyclical Peak in NZ House Prices?
3. No House Price Crash = Ignore Gold?
4. NZ Housing to Gold Ratio Update for 2017

 

New Zealand To Foreigners – Get Out!

By Martin Armtrong – first published at ArmstrongEconomics.com

The New Zealand Prime Minister that took the country back into Marxism, has fired its first shot across the bow. 

Thirty-seven-year-old Jacinda Ardern, a member of the New Zealand Labour Party, became the world’s youngest female leader. Hillary must be crying in her martini.

The Labour party have formally signed a coalition agreement, introducing all new policies focusing on climate change, regional development, and poverty which translates into hunting the hated rich.

Nevertheless, PM Ardern has just fired the first shot across the bow and this is a serious warning that foreign investment better cross New Zealand off the list of places that will be up-and-coming.

She has banned foreigners from buying property in New Zealand.

As The BBC reports, the rise in New Zealand house prices over recent years has been fuelled by strong immigration, low interest rates and limited housing supplies.

House price growth in the country, home to about 4.6 million people, has moderated over the past year, but remains among the highest in the world.

A recent survey by property consultants Knight Frank found annual house price growth in New Zealand was 10.4%, pushing it from 3rd to 10th place in the ranking of 55 housing markets.

Prices in the capital, Wellington, rose 18.1% in the year to June 2017. Residential prices in Auckland, the country’s largest city, rose 9.8% over the same period.

The median price for residential property in Auckland is $845,000 ($582,662; £443,554), according to data from the Real Estate Institute of New Zealand.

The first proposal was to ban any migration to New Zealand as well. That they had to back off of given the refugee impression and that would have agreed with Trump – OMG!

“We have agreed on banning the purchase of existing homes by foreign buyers,” Ms Ardern said on Tuesday, while also announcing plans to slash immigration and focus on job creation.

She thinks banned foreign property ownership will cool off the property market. The problem will be, a property crash. When home values decline, people feel they lost money and they spend less.

With rising property values, people feel they are better-off and spend more assuming they have equity even if they do not borrow against it.

She may be the youngest female leader in the world, but she also is clueless about economics.

Related content: Is the RBNZ Aiming to Cause a Property Crash?

 

Will The New Government Policies Cause A House Price Crash?

So how likely is the outcome Armstrong predicts? Will these policies cause a housing crash?

He says the new government has “banned foreigners from buying property in New Zealand“. This is not totally correct as the ban is set to be on buying existing properties only.

So it would seem that new builds will still be allowed to be purchased by foreigners – this is the same as the Australian policy. This will no doubt still have an impact. It could have an even greater impact if they intend to allow foreigners to only purchase land and build themselves. While it is not 100% clear yet, that would seem less likely. A more likely scenario is to copy the Australian policy.

 

What Can We Learn From Other Countries Who Have Restricted Foreign Buyers?

Let’s compare Australia and Canada who have also had massive house price increases.

On top of the rules of restricting non residents to only buying new dwellings, Australia also has higher stamp duty for non residents in the likes of New South Wales. Plus Foreign Investment Review Board fees that non residents must pay. They also have a recent “ghost” tax on homes that are unoccupied for 6 months or more. It’s fair to note that even with all these restrictions and extra costs in Australia (some of which are quite long standing), house prices have still pushed on to record highs there.

In Canada non-Canadian citizens and non-permanent residents of Canada buying a property in the some regions must pay a 15% Non-Resident Speculation Tax.

Some reports indicate these measures have caused house prices to pull back already in Australia and Canada. But like here perhaps they were already slowing before these new measures were implemented?

Completely stopping foreigners from buying existing properties seems like it will have some impact on what appears to be an already slowing housing market.

However, we remain in an environment where the biggest factor has probably been the record low interest rates of recent years. While there are some indicators that we may have reached the bottom in interest rates, there is no guarantee that they are heading immediately higher. So while rates remain so low, the housing market can potentially remain quite buoyant for a while yet. Or at least not see a dramatic fall and house price crash.

 

Cyclical Peak in NZ House Prices

Our guess is that perhaps we have reached a cyclical peak in house prices in New Zealand (especially in Auckland).

But large corrections and house price crashes usually come after rampant speculation and very loose lending standards. (Think the USA housing bubble in 2007 and “liar loans”). Whereas here in New Zealand (flowing over from the tightening in Australia around banks capital adequacy requirements), financing has actually gotten very tight in recent months.

So that doesn’t really gel with a super bubble in house prices.

Perhaps we will just see a flattening of house prices here in New Zealand in the coming years, as many property experts are calling for? Maybe a mega bubble top and major house price crash is still to come down the line further yet?

 

No House Price Crash = Ignore Gold?

So if there was no house price crash on the horizon, does that mean we should just ignore other uncorrelated assets such as gold?

NZ house prices have been trending down since peaking in March this year.

 

Whereas NZD gold prices have been trending up overall in 2017.

 

But while housing in New Zealand may have indeed reached a cyclical peak, gold in NZ Dollars certainly is a long way from one.

 

NZ Housing to Gold Ratio Update for 2017

Now let’s look at the NZ housing to gold ratio.

This takes the median house price for New Zealand and divides it by the price of an ounce of gold. Resulting in the number of ounces of gold it takes to buy the median house. (See here for more on that: NZ Housing to Gold Ratio Update‎).

Here are the end of month numbers for 2017. (Note: We’ve just used the same median price for October as the data won’t be out for a few weeks yet).

Date	Median NZ House Price ($)	Gold Price ($/oz)	Housing to Gold Ratio
Jan-17	485000	$1,655.82	293
Feb-17	496000	$1,747.11	284
Mar-17	542500	$1,790.50	303
Apr-17	540000	$1,851.80	292
May-17	535000	$1,803.20	297
Jun-17	530000	$1,700.38	312
Jul-17	518000	$1,699.00	305
Aug-17	530000	$1,844.59	287
Sep-17	525000	$1,783.45	294
Oct-17	525000	$1,859.00	282

Source: https://www.interest.co.nz/charts/real-estate/median-price-reinz and Stockcharts.com

Below is the NZ Housing to Gold Ratio in chart form for 2017.

It reached a peak of 312 at the end of June. It’s now at the lowest point for the year at 282. But that’s still a long way from the historical low of 55 reached in 1980. (See this article for more on that: Could NZ House Values Drop by 80%). So that suggests there is still a lot of upside ahead for gold compared to house prices. Even if there was no house price crash and NZ house prices merely plateaued out at current prices.

Who knows whether the new government policies will have the dramatic effect and create a house price crash that Martin Armstrong believes they will? They certainly appear to be much more interventionist than the previous government. The one certainty will be that whatever they do (like most government policies) there will be unintended consequences.

Housing in New Zealand may have already reached a cyclical peak this year anyway. The housing to gold ratio is falling, but is still a long way from potential lows. So therefore that would make now a pretty good time to trade some property for gold (or silver).

Go here to get see what products are available: Buy Gold or Silver.

Or see this post to learn about the NZ Housing to Silver Ratio.