May 31 2018
Big Air and Broken Bones
At the moment we don’t seem to be hearing much talk about property busts, not in NZ or many other countries. Are property markets maturing, is the age of a boom bust cycle at an end?
It reminds me a bit of my bike riding age when I was about 10….bear with me…
As kids we spent a lot of time at the Windmill Road tennis courts and reserve. We rode down on our bikes, no hands of course, and played tennis on the stinking hot black tar seal in bare feet. Or we’d run down to the park and a game of soccer would just happen. But it was one afternoon I particularly remember, we arrived down on our bikes and were stopped in our tracks… There in the middle of the reserve was a massive mound of dirt….bike jump!
The first jumps weren’t really jumps at all, the front wheel came off the ground and that was about it. But we quickly figured out that more speed = more air. Then I got bored and went for it. The air was huge. At the apex I suddenly felt like the coyote in road runner…a long pause while my excitement turned to horror, realising that I needed to come down. I threw the bike aside and waited for certain death. But as I hit the other side of jump, my fall was broken by the steep gradient and the speed was washed of rather than coming to an abrupt halt.
Rather than broken bones I escaped with scrapes and bruises. I learnt from that jump, any future jumps would be more sedate.
What’s my point?
My point is, that it seems NZ and other economies have learnt what can happen when property prices get too lofty, too fast. It can result in a bust, a bust that breaks economic bones, from which recovery is lengthy. Have we learnt that it’s better to throttle back the speed, to make sure there are softer landings?
I’ve just got back from Hong Kong and was reminded that property prices dropped by up to 60% in the 90s. Now the HK monetary authority introduces controls such as maximum LVR early in a cycle and aggressively. Ireland, having been burnt during the GFC now does it. Singapore does it – minimum deposits, foreign buyer restriction, stamp duty. Australia restricted foreign ownership and the reserve bank ‘instructed’ the main banks to reduce their property lending.
And now….NZ does it too. It’s nothing new, and we know it is largely proven. It doesn’t guarantee prices won’t go down, and I suppose it doesn’t guarantee a bust. But even if we do hit bumpy times, what we know is that for several years now investors in particular have been forced to carry much greater levels of equity, and doesn’t that make them far more resilient to challenging financial times, and therefore reduce the risk of carnage?
In cycles past, the RBNZ has experienced soaring property prices with consequential strain on the banking system. They are now using the tools at their disposal to create softer landings.
Here’s to being more Road Runner than Wile E. Coyote.
Alan Henderson, Director