There is zero accountability for the blunders that seem to be arriving thick and fast – just PR spin and denial that anything is wrong.
A quick chronology of property investor grievances follows, coupled with advice for landlords and homeowners currently being affected by the Reserve Bank’s decision to provide loose and cheap credit in 2020, followed by an astonishing increase in the OCR in 2022.
The obvious outcome will be a price correction and increased banking conservatism, with late entrants to housing and new home buyers on fixed incomes likely to become the biggest casualties.
But first, let’s remind ourselves what has been going on
- It started in Labour’s first term with the vilification of property investors for house price inflation and accusations that they caused the wealth gap, peddled with a divisive dose of envy-based politics. The narrative was New Zealanders were transfixed with property as an asset class, which was driven by greedy landlords (erroneously labelled “speculators”), and we were called tax cheats after a free ride.
- Stamping it out would be so easy! The Government would build 100,000 houses just to start, because it was as simple as saying so in the election lead up. How hard could it be? And change the tax rules, “to make NZ fairer” for everyone (except property investors that is).
- This anti-landlord narrative was not only offensive, it was quite incorrect. As the Government has discovered, the property scene faced conservative zoning rules that prevented densification (everywhere except Auckland), services shortages (power, telecommunications, three waters, transportation), many councils exhibited blatant anti-development behaviour and were/are short staffed. Every aspect of the house building industry was (and is) severely supply constrained, not to mention significant building supply monopolies pushing up costs. But none of this featured in the Ardern government’s narrative. Instead what we had was “greedy tax cheating speculators” (property investors) pulling the strings to get high rents and capital growth. Stitched into envy based politics (it’s not fair landlords have more), it went down a treat at the polls. I found it utterly offensive, and it was a wake-up call for me to see many Kiwis agreeing with this narrative.
- Once property investors were thoroughly vilified with Finance Minister Grant Robertson leading the charge, it was a natural extension of Labour’s PR to label them unreasonable and overbearing in their relationships with tenants. This justified Associate Housing Minister Kris Faafoi’s anti-landlord tenancy laws, brought in to remedy a problem that never existed (apparently the laws heavily favoured landlords). Now a marginal tenant does not get a look in with private landlords; it’s not worth the risk with no-cause terminations removed. So such tenants rebound into the emergency housing pool (which has exploded in demand under Labour by nearly 20 times).
- At the same time, the Ministry of Social Development's Housing Register for public housing has ballooned by 45% in one year to more than 23,000 applicants in March 2022. Why buy or rent a house when the government will provide you a new one?
- I have been speaking to property managers for Kainga Ora (KO) associated housing providers, who tell me they are struggling terribly with tenants, having had their hands tied behind their backs by these law changes. We see the symptoms of this on the news – KO tenants have parties 24/7 and harass their neighbours. There is little the Government landlord can do about it.
- The Government stated emphatically (through Robertson and Ardern, and well-recorded in the infamous Heather du Plessis-Allan interview) that there would be no new taxes if re-elected for a second term, and no tax changes. Within 100 working days of the 2020 election we had the announcement of the astonishing removal of interest deductions on second-hand houses. These rules are an egregious attack on one of the most capital (and debt) intensive businesses in the country. A back-door capital gains tax brought in to scratch an ideological itch, these rules born from envy-based politics broke the election promise of no change to taxes. Thankfully they will be reversed by a National government, along with Labour’s bright-line rule changes, Christopher Luxon says.
- These interest non deduction tax changes caused an exodus from social housing, as investors exited second-hand housing in disgust. I exited four government tenants and had a lot more in my sights in my social housing portfolio (because the houses were existing stock (second-hand) and I was planning to sell in order to invest in new builds which are exempt from this rule), until the Government exempted social housing from the tax changes. It had to do it; it was losing houses faster than landlord votes. And with private landlords accounting for more than 80% of rental housing in NZ, when they start kicking out Crown tenants due to unfavourable public policy, the Crown has a big problem on its hands.
- We also have the enduring CCCFA debacle, with banks forced to count savings as expenses, inquire how many cups of coffee their customers buy, work out borrowers’ budgets at a micro level, etc. But apparently, as Commerce Minister David Clark explained, the banks were not competent; it had nothing to do with his atrociously drafted, ambiguous legislation and a lack of respect for the warnings and submissions that came in under industry consultation. No no, it's not the government's incompetency; it’s the entire banking industry, supported by the biggest law firms in the country, that got it wrong. The arrogance and PR spin in his response, is galling.
- After a bull run in the overheated housing market up to 2017, we had the anomaly of petrol being thrown on the housing fire, via cheap and loose credit in 2020 and 2021 under Covid response provisions. Apparently the Reserve Bank and Government could not join the dots between loose credit and cheap interest rates, and massive house price inflation. I mean, who could have predicted house prices would boom if you dropped interest rates from the 5s into the 2s and reverted from LVRs of 60% to 80%? (Answer: everybody except Adrian Orr and Grant Robertson, and the big four bank economists at the time. Astonishing to watch. Clearly none of them are property investors.)
- And so in 2022 the government and RB began the year with egg all over their faces, having spiked asset values to unbelievable levels in 2021. We all saw the “most evil” of citizens (property investors) profiting from capital gains on Labour’s watch. And speculators emerged, taking windfall gains in 2021.
- Covid was/is the excuse – how could they have known asset values would explode? The world had not seen a pandemic in recent times, and somehow a health scare is used as a ruse to excuse all manner of things, including basic monetary policy being mishandled.
- There is no doubt the Labour Government and RB caused a second and premature housing boom, only three years after the 2017 peak. There is no doubt that excessive Government spending continues to spike inflation (as I write). We shouldn’t be in this position, because rates should not have been dropped so low and LVRs should not have been relaxed as they were.
- But now we are in this inflationary position, the correct solution is tighter fiscal policy coupled with tighter monetary policy. But Robertson won’t have a bar of having his budgets being clipped; the only answer is to raise interest rates and punish house owners. And high rates will cause mayhem in the construction sector, not to mention a recession. The knock-on consequences won’t serve the public, or Labour in the ballot boxes come 2023.
- Everyone in property saw the boom coming. There was no Covid recession outside of hospitality, retail, and the travel industry. There was potential for disaster, but the RB and Government didn’t need to be so aggressive and front-footed with interest rate drops and lolly scrambles. They should have waited and been more moderate. The outcome is a disgrace for the Reserve Bank and Government, and has set New Zealand up for a hard landing.
- It’s no excuse to say it’s also happening in some places offshore. Just because other countries have been imprudent, doesn’t justify why our country had to behave badly as well. Orr and Robertson were in charge; they are supposed to get his stuff right. Getting it wrong hurts New Zealanders, and our kids will pay it off for decades.
- Waving the flag of inflation and monetary policy, this RB and the Government will (in the next 18 months) destroy the lives of many fledgling homeowners, as interest rates skyrocket from 2% to the 6% range and possibly 7% plus. Could this Government and RB have set these people up to fail more, having been enticed with low rates and loose credit, and then smashed with rapid increases? It’s not the banks’ fault; it’s erratic governance from the RB. Give it six months, and nearly all the short-term fixed rate agreements will have expired, and the pressure will be peaking.
- In my view, we find ourselves in such a mess because the Government changed the Reserve Bank’s mandate to look at things traditionally managed by politicians. Climate change, employment, and housing volatility are now on the Reserve Bank’s agenda – and these policies can conflict with inflation policies. It’s little wonder, given how close Adrian Orr and Grant Robertson appear to be, that our RB governor was in Zurich two weeks ago giving a speech describing the RB as Tane Mahuta – legislation being the roots, the sap being the money the RB prints, the trunk being payment systems allowing the money to flow to the branches which represent financial institutions. Does this woke narrative have a relevance in international banking? Is this serving New Zealand’s reputation as a modern stable banking environment, or making us look like a an economy under siege by ideologues? I would prefer he became famous for his focus on banking and inflation, than being the most woke RB governor in the world.
What’s next?
I think:
High interest rates will cause a recession, with a massive contraction in consumer spending (it’s starting now). The RB will get its way with inflation; it will come down rapidly. But I also predict the RB will push the rates too high, for too long. This RB governor (Adrian Orr) oversteers the economy. Just as he pushed rates too low in 2020, he is now overcorrecting and pushing rates too high. He needs to be more moderate.
Next we will have a dropping of interest rates to restimulate a crashed and recessionary economy. I expect one to two years to get to this point. It will be a quick reset of values, slow recovery.
National will come in, and open immigration doors. A flood of migrants will mop up surplus housing that is emerging due to zero migration under Covid and massive building programmes that are ongoing.
Don’t forget that medium density residential standards (MDRS) will cause a flood of high density housing across NZ, similar to what Auckland has already experienced. More houses on a declining population, will drive oversupply, unless immigration is allowed to recover.
People still think NZ is running huge positive migration numbers. My understanding is we have been running negative migration, since borders closed two years ago.
And on the topic of immigration, we have a huge brain drain developing in our low wage economy. All of the social changes being rammed through, the spiked housing prices, the spiked interest rates, are causing Kiwis to flee overseas. But it’s not showing up in our stats yet, due to the 12-month lag in the reporting of immigration by Statistics NZ. (We need a new system for recording immigration; it’s not working.)
Following this (distant) OCR drop to restimulate an economy smashed by anti-inflationary monetary policy, house prices will eventually recover, and the long-term cycle will restart house price inflation. How long this takes, no one knows, especially with the backdrop of global financial uncertainties, war and offshore inflationary pressures.
We might also have a disruptive shock from another meltdown globally. The Global Financial Crisis (GFC) was like a can kicked down the road, with all the money printing artificially masking serious problems in the U.S. In the event of the next meltdown, can the US print its way out of it again? What will happen in NZ when the American banking system hits the wall again? I don’t think anyone knows, quite frankly.
My advice to investors
The market is going down again. Note the use of the word “again” – this is part of a long-term boom-bust cycle. We are in a downturn. What tends to happen in downturns is the media commentators loudly sound the alarm, stating the property market is going to crash permanently and possibly never recover. This time it’s different they say. (It’s more interesting to say this!) While the facts of the day look different, the pattern repeats. Boom, downturn, bust, recovery – repeat.
Meanwhile, the media roll sometimes questionable economists, like the one that predicted a housing bust in 2013 and refused to buy a home, saying it was smarter to buy shares and rent. He missed a double boom and along with anyone taking his advice, got poorer in relative terms. He didn’t understand the benefit of leverage, or housing cycles. This guy was all over TV in 2013 giving incorrect advice, and he is still there telling us what to do and talking to the Government. It’s only funny because it's true! He is the media’s pet, willing to predict doom on any landscape. Inflating fear, selling newspapers, and encouraging profitable clicks. “Noted economist says it’s a race to the bottom for housing” (made-up example headline). The only thing I’ve noted from guys like this is that they are short sighted and enjoy the media limelight, more than being right.
But because property is cyclical, at some point these doomsayers are eventually right (for a period), the market recedes, then the downturn passes, interest rates settle down, the clouds disappear, and a better market emerges. And on it goes over 10 years. It’s a cycle, although this 2021 boom was a break in pattern with a double boom (thanks to the above-mentioned Government and RB mistakes in regard to ill-conceived monetary policy). So following a double boom, I expect a double sized bust, unfortunately.
While all of this negativity is happening, experienced investors keep level heads and take advantage of the market conditions. They play the long game, not the short game. They stand above the fear and hysteria of the media. I’m buying at present, and getting the best deals I’ve seen in years. Shortly I will be building terraces in Rotorua (where there is high demand for housing) and Auckland (a little more challenging, but a good strategy in the right areas). I’m doing greenfield subdivision work in South Canterbury. I’m buying development sites off motivated vendors in Auckland (thanks to the RB). And I’m quite confident the assets I’m picking up will recover in value; it’s just a matter of time.
So for property investors, my advice at present is:
Choose better leadership in the next election. This country really is going to the dogs (financially) under this well-meaning but incompetent government.
Invest counter-cyclically. A downturn is an opportunity over 10 years. The season for buying assets at bargain prices is returning.
If you are distressed, take a 10-year view, and don’t panic as the media wind up and report a property slump. What will your property be worth in 10 years? Answer: more than today; inflation will make sure of that. Don’t dump your assets if you can afford to hang on.
Get lines of credit in place – now, while you don’t need them. It can be very hard to get credit if you’ve lost your job in a downturn.
Think about the recent tax changes and how they will affect your cashflow – don’t ignore this and then get a nasty surprise when your accountant presents you with a tax bill from Labour’s interest non deduction rules.
If you are in trouble with your bank, communicate with your bankers and act early. They tend to shoot the borrowers who don’t respond or don’t react. It’s about proactivity and being seen to be actively solving the problem. Otherwise it’s more likely the bank will take over and mortgagee sell a defaulting borrower’s assets.
As always, ask for help from experienced investors and experts if you need it.
