Your Property Nest Egg Could Splatter in 2019

Despite the pleas of denial from the mainstream, we’re beginning to see that the NZ housing market isn’t as bulletproof as most folks thought…

In fact, Kiwi homeowners could be in for a slap in the face this year!

And those who have all their eggs in this basket may find themselves postponing their retirement by a few years…

All the details in a moment, but first — a quick story about a man who, instead of putting his eggs in one basket, decided to tape them to his belly.

Jeffrey Lendrum was caught on May 3, 2010 in the Birmingham Airport with 14 peregrine falcon eggs strapped to his abdomen by surgical tape.

The small eggs were destined for wealthy Middle Eastern falconers with the expensive desire for these rare raptors. These eggs are worth $50,000 to upwards of a quarter million per bird.

So Lendrum’s unhatched prizes attached to his midriff represented over $700,000 in smuggling revenue.

Allegedly, he ‘helicoptered up and rappelled down to aeries on cliff faces from Patagonia to Quebec’ to harvest the eggs. After being caught, Lendrum was handed a massive fine, along with two and half years in prison.

I suppose that’s his yolk to bear.

 

Could we see this NZ investment splatter?

Now, you might think Lendrum’s a crack-up for trying to smuggle a bunch of easily breakable eggs and sell them on the black market. It doesn’t seem like a secure income stream…

I mean, imagine if airport security had patted him down…and smashed the eggs under his shirt.

He wouldn’t just have egg on his belly. He’d have egg on his face too. All of that hard work, just to lose it all in a fleeting moment.

But it’s not too different from a Kiwi property owner today, is it?

Too many people have loaded up on debt to buy overpriced properties…properties that could easily see a 10%, 20%, even 48% haircut in value in the coming months.

It’s a fragile and risky venture.

But few would call it as such. In fact, most Kiwis I talk to consider property as one of the safest, most reliable investments they can make.

They’d look at the meteoric rise in property values over the past several decades and call it ‘normal’.

In truth, New Zealand’s property market is far from ‘normal’ in the global context. It’s a freak. It’s an abnormality…and one that’s overdue for a correction.

Perhaps this correction has already begun…

Listings are down 17.7% year-over-year. Auckland listings alone are down 23.6%. Between November 2017 and 2018, Auckland asking prices fell 2.9%. And residential building consents fell 4.4%.

At the same time, NZ lenders are now taking a closer look as to how well applicants can service their loans. Thanks to the Aussie scandal last year, banks are squirming under the spotlight.

This is all happening at the same time as the foreign buyer ban stifles demand, as capital gains taxes are being discussed, and as ring-fencing regulation pushes out investors.

Overall, we’re seeing a lot of reasons for the local property market to tank…

But how far? That’s the million-dollar question right now…

 

How far do New Zealand property markets have to fall?

We’ve read a lot of differing views on what the correction could look like…from negative 48% to single digits. Frankly, there doesn’t seem to be much science behind it.

And there’s a reason for that. Based on the science, New Zealand’s property market has been overdue for a correction for a long time now.

Just a few days ago, I came across this article on Forbes titled, ‘12 Reasons Why New Zealand’s Economic Bubble Will End In Disaster’. Here’s what author, Jesse Colombo, cited:

  1. Interest rates have been at all-time lows for almost a half-decade
  2. Property prices have doubled since 2004
  3. New Zealand has the world’s third most overvalued property market
  4. New Zealand’s mortgage bubble grew by 165% since 2002
  5. Nearly half of mortgages have floating interest rates
  6. Mortgages account for 60% of banks’ loan portfolios
  7. Finance, not agriculture, is New Zealand’s largest industry
  8. New Zealand’s banks are exposed to Australia’s bubble
  9. Australian and Chinese buyers are inflating the property bubble
  10. New Zealand has a household debt problem
  11. Government overseas debt has nearly tripled since 2008
  12. The New Zealand dollar is overvalued

The crazy part? Colombo wrote that article nearly five years ago…and basically all 12 of those threats are still relevant.

So if Colombo was so certain back in 2014…and had reasonable points to back up his argument…why hasn’t the bubble popped?

Frankly, I don’t know.

Economic theory suggests that it should have popped years ago…and yet, here we are.

All I can do is add up the factors pointing to a crash…and compare them to the factors pointing to a boom.

On one hand, you’ve got everything from regulation, to global market tensions, to economic indicators, to expert evaluations, to currency concerns, to diminishing demand, to interest rate hikes, to new taxes.

On the other hand, you’ve got a couple decades of skyrocketing prices that hardly seem like slowing.

To me, the scales are heavily-tipped towards correction…and even if things go well, the risks greatly outweigh the potential rewards. An ‘asymmetrical’ investment, as it’s called.

If all your eggs are in that basket, it might be a good time to ask yourself:

‘How would I fare if my property nest eggs get squashed this year?’

Best,

Taylor Kee
Editor, Money Morning New Zealand

PS: If you’re unsure how’d you do in a property market downturn, it’s a great time to get into stocks. An underappreciated investment in New Zealand, stocks regularly outperform property investments…and can often provide security and returns that our property markets can’t. Take a look at this new report for more information…


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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