Are You in Danger When the Kiwi Property Time Bomb Explodes?

For the first time in a decade, the Auckland property market is bleeding red.

You shouldn’t be surprised…we’ve been predicting this outcome for at least six months now..

But with the new year rolling around, real estate firms like Barfoot & Thompson are running the numbers…and finding that their sales have fallen short year-over-year.

They found that they sold 8% fewer properties in 2018. And of that, the median price was down 0.8%…which is the first time that’s happened since the Great Financial Crisis.

If you compared December 2017 versus December 2018, you’d find that 25% fewer homes sold last month over the year before.

Tick…tick…tick…the countdown timer on this time bomb is nearing zero…

Now, the mainstream won’t use that kind of language. They’ll say ‘soft data’ or ‘buyers/sellers taking a cautious approach’ or ‘buyer’s market’…or even deny the trend altogether.

For example, mortgage-issuer ASB sugarcoats it nicely, ‘The rebalancing in the Auckland housing market is expected to continue into 2019, with higher inventory levels giving prospective buyers the luxury of both time and choice.

That’s a funny way to describe the first signs of a property market crash. In fact, the Kiwi property market is long overdue for a correction. And not this fraction-of-a-percent level correction.

I’m talking a foundation-cracking, wealth-wiping, generational-reset sort of correction.

We’ve seen predictions for this value haircut as nasty as 48%.

Which, to be fair, only represents a few years’ worth of appreciation…

But for many could mean retiring 5–10 years later than they had planned. There’s no sugarcoating that…

 

Who’s to blame?

According to Barfoot & Thompson’s analysts, the slump is due to a variety of factors:

A range of factors contributed to market uncertainty at year end. These included non-New Zealand residents being restricted from buying certain categories of property, the reported major decline of property prices in the major Australian cities, the potential for capital gains to be applied to investment properties in the future and concerns over world economic stability, in part caused by the trade friction between the United States and China.

I’d agree that all of those factors negatively affected the local property market here in New Zealand, but I believe they’ve missed the main culprit: the era of easy money.

Specifically, how the era of easy money has created a façade of prosperity.

Damien Grant, principal at Waterstone Insolvency hit the nail on the head with his recent article published by the National Business Review.

He explains why NZ construction firms are failing during today’s construction boom. His full explanation is worth reading, but for those who don’t have an NBR subscription, I’ll summarise his thoughts here in my own words.

Take two firms — one that’s efficient and one that isn’t. When interest rates are high and it’s hard to borrow money, the inefficient firm will struggle to survive…and could very well collapse.

But when central banks make borrowing cheap and easy, the inefficient firm can manage to operate. At the same time, the efficient firm can take on jobs that wouldn’t be viable when the cost of money was high.

Basically, both companies started projects that they could only afford because of cheap borrowing.

As easy money threatens to disappear, these companies won’t be able to afford these projects…and they’ll cancel the contracts, liquidate their worst-offending branches, or fold.

Think Ebert, Corbel, Accent, and Matrix Homes.

Now, Grant’s explanation works for the consumer side too. Homeowners have enjoyed cheap borrowing just as much…

They’ve bought homes they couldn’t otherwise afford…and they loaded up on debt to do so.

When the era of easy money comes to a close, as the US Federal Reserve has indicated it might, thousands of new Kiwi homeowners might lose their homes, liquidate, or go bankrupt.

It’s a lesson that Americans learned 10 years ago…and one that New Zealanders mostly avoided…until now.

 

A reckoning upon us

Now, before you dismiss me for a fire-and-brimstone preacher, realise that this is only one possible scenario.

The market could very well rebound like the mainstream predicts it will.

We might never see the correction we’re owed. Instead, the Kiwi market could bounce higher and higher…from ‘soft landing’ to ‘soft landing’.

It’s made it this far…why stop now?

I’m not suggesting you sell your home(s)…nor am I suggesting you go all-in on property either.

Instead, simply consider your wealth — where it’s stored and how it’s vulnerable.

For many New Zealanders, most (if not all) of your wealth is in property. All your eggs in one basket.

If the NZ property market were to sustain a 5–10% correction, how would you fare?

What about 10–25%? 25–50%?

If you run the numbers and don’t like what you see, maybe it’s time to consider diversifying into different types of assets like stocks, bonds, or gold.

A little diversification can go a long way in balancing the risks you might experience as this property time bomb counts down.

Tick…tick…tick…

Best,

Taylor Kee
Editor, Money Morning New Zealand


Taylor Kee is the lead Editor at Money Morning NZ. With a background in the financial publishing industry, Taylor knows how simple, yet difficult investing can be. He has worked with a range of assets classes, and with some of the world’s most thought-provoking financial writers, including Bill Bonner, Dan Denning, Doug Casey, and more. But he’s found his niche in macroeconomics and the excitement of technology investments. And Taylor is looking forward to the opportunity to share his thoughts on where New Zealand’s economy is going next and the opportunities it presents. Taylor shares these ideas with Money Morning NZ readers each day.


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