5 reasons why the real estate market can't stay down
Monday, November 22nd 2010, 12:33PM 
13 Comments
Activity in the housing market is still at a very slow and weak pace at the moment. It seems there are no real hard signs that a pick up is around the corner, however Harcourts did say on Friday that it was expecting a lift in activity.
One point which is often discussed is that banks are holding back the housing market by keeping lending criteria tight and keeping properties, which should be going up for mortgagee sale, off the market.
Here are five reasons why banks aren’t deliberately holding back the market or trying to keep house sales at a low level.
- The real estate market is an important part of the economy employing thousands, probably tens of thousands, of people directly and indirectly. It’s not just the real estate agents here either. It includes lawyers, accountants, valuers, media companies and builders. In fact the list is quite long when you think about it. It seems this industry is nearly at a tipping point. It can’t go much slower without serious damage being done to itself and the economy. This is not in the best interests of the banks.
- Banks need to make money for their shareholders. Currently they make little in the highly competitive term deposit space as margins are under pressure as they battle for funds (thank the core funding ratio for that). The mainline of business for banks is lending and currently their margins in this space are pretty good. To get an idea of how they have changed check out this graph. During the home loan wars margins were nearly non-existent. Now they are pretty fat. To grow profit banks need to increase their lending. It’s a volume game. Reserve Bank figures show lending growth is weak.
- At some stage banks will “pull the trigger” and ease up on lending criteria. Sources I have spoken to confirm there are active discussions going on within banks about when to do this and by how much.
- When the trigger is pulled it will be a substantial fillip for the housing market. One key real estate industry figure summed it up like this: “The volume of sales is not at true market levels.”
“If banks ease their criteria there could be a 10 to 20% lift in sales volumes.” - Finally it is worth noting that mortgagee sales make up a pretty small proportion of houses sold each month. Arguably it is not material enough to have a big impact on the market.
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Comments from our readers
On 22 November 2010 at 3:53 pm Peter II said:
This is a very vague article. Of course Harcourts expect the market to improve - but they have no facts to support their hope that it will. On 22 November 2010 at 5:05 pm Jerry Trebilcock said:
It comes down to housing affordability, something that seems to be overlooked. Most salary and wage earners have had little in the way of wage increases and the tax reduction has mainly gone in increases in the cost of living. Just go out and ask Joe Blow.
Most people are more concerned about reducing debt than splurging on housing.
Our market is one of the most expensive in the OECD so wait for a correction.
On 22 November 2010 at 7:35 pm Jay said:
This site is so biased. Our housing boom was completely false, we have made money by selling properties to each other for inflated prices, thousands of people are negatively geared and have borrowed to buy strings of houses, we have close to record mortgagee sales, and despite record low interest rates the housing market is falling. Property are still ridiculously over inflated, and they aren't going anywhere but down for the foreseeable future. Banks aren't going to relax anything - they're already in the crap bad enough without making it worse. If you think it's bad now wait til next year when rates start rising. Our houses will be worth even less than they are now. Wake up everybody! On 22 November 2010 at 10:08 pm barry simpson said:
Hi The banks have been making huge profits this year so this reasoning from harcurts carries no weight On 22 November 2010 at 10:13 pm barry simpson said:
Hi The banks have been making record profits this year. So sorry this mades harcourts reasoning not so hot. On 23 November 2010 at 9:12 am Craig said:
The banks have already loosened criteria and are still pretty strict at high LVR's. Trying to loosen lending further would only keep house prices at already still inflated prices. The only thing that will spark a revival in the housing market will be for sellers to get real with the prices and 'drop their pants'. If a house hasn't sold after 6-8 weeks it's price is probably too high.
Just because the property market is important for the economy doesn't mean people will start selling their house for less than they expect, so point 1 is irrelevant. Only cheaper land could possibly help this.
On 23 November 2010 at 9:38 am Jim said:
Nothing like a bit of positivity to bring out all the negative thinkers who probably own nothing anyway On 23 November 2010 at 10:57 am tony said:
The slowdown in the market can be laid at the feet of the Nats,who would have believed it?.Think it is bad this year,wait till next year when the savage attack on investors by the Nats will really kick in. On 23 November 2010 at 11:05 am Peter said:
Great real estate spruiking!
Pity it's nine tenths BS.
The banks are making healthy profits and good returns for their shareholders if the annual reports of our Aussie owned banks are anything to go on
Aside from the obvious affordability and changes to taxation on investment issues what is not addressed in this article is the huge change in the cost and availability of funding that the banks are facing post the GFC.
Immigration figures for NZ are not showing the convincing improvement needed to possibly hold up real estate prices.
Also have a look at the falling mortgage clearance rates trend across the Tasman and you will see that the market there has already entered a definite tipping point. The downwards trend in the upper end prices of the previously very buoyant WA market over the past 6 months is also an ominous sign that things have changed for our neighbours in the lucky country where immigration figures are favourable to a housing market boom.
On 23 November 2010 at 11:55 am Andrew said:
Harcourts (now under LJ Hooker control), like all real estate agents will be hoping for a rise in activity. There have been a significant number of job losses in the industry. Unfortunately, NZ is likely to see a prolonged dip in sales given the highly overvalued market, the high unemployment figure, and the lack of a undiversified economy that NZ has been allowed to become (thus restricting growth). The time for a shift in focus to reduce the number of property investors with a capital gains tax and restrictions on hoarding and land-banking is now required to move investors out of viewing accommodation as an investment. On 23 November 2010 at 12:41 pm Christopher said:
So the banks in NZ are to blame for tighter lending controls or the government is to blame for changing the rules around investment properties or people have sensibly decided on a bit of debt reduction ? ?
We are going through a reasonably recognisable cycle after a period of buoyancy. A different factor in this downturn is the severity of the GFC with the accent on Global.The financial strife is never far from the news and this has prospective purchasers back pedalling. It isn't really a buyer's market because most vendors are seemingly hanging tough on their asking prices unless there is some urgency
about the sale.
Bit of a delicate balance involved which will settle down to the usual pattern of people upgrading to better houses and rental properties becoming more attractive as rents increase. However it isn't going to happen in the time frame that any of the real estate agents would like to see and real estate is not going to rocket in price like it did through to 2007.
On 23 November 2010 at 2:14 pm Jerry said:
I am actually surprised at the amount of people waking up. LOOK AT IRELAND PEOPLE, ASK YOURSELVES WHY ARE THEY BANKRUPT AS A NATION? It was because of property speculating. We are not doomed, we are simply going to go through a very rough patch, but we will survive. On 5 December 2010 at 12:43 am Dean said:
Agreed with most of the comments above. Our govt needs to wake up and control those profit driven banks and investors. Educating people about other forms of investment including businesses and shares could be an alternative to bringing down highly overvalued property prices. However any solution will need government backed initiatives if they are to work. Commenting is closed
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