Melbourne Cup bet proves reserve point on housing


Preparing to tighten investment controls in a leaking housing market, Gov. Adrian Orr issues a timely warning against putting all your money on one horse

Comment: Kiwi runner Ocean Billy could have grossed a bettor nearly a million dollars in last night’s Melbourne Cup. The investor (as we’ll call them) bet $ 27,500 on the Auckland Cup winner at odds that would have cost the TAB $ 977,000 if the six-year-old gelding had won.

He did not do it.

Ocean Billy finished last.

There are two lessons to be learned. First of all, not count on Newsroom for race advice; our story tipped Ocean Billy to win. Secondly, to do count on the Governor of the Reserve Bank Adrian Orr. Because on the morning of the big race, he warned investors against putting all their money on one horse.

New Zealand gelding Ocean Billy won the Auckland Cup, but ran last at Flemington this week. Photo: Supplied

Of course, he was really talking to the New Zealanders’ preferred property board to put all their money in houses, not horses.

New Zealand must continue to improve investor knowledge and options to ensure households develop well-diversified pips that meet their needs, he said. “Why would you want to put all your money on one horse – housing – when you finance your retirement? “

If this was illustrated graphically by the sight of Ocean Billy behind Flemington’s field, it is even better illustrated by Orr’s charts comparing international asset prices.

Compare international asset prices

Stock prices are indices of capital. House prices for OECD members serve as a proxy for world prices. Source: S&P, Australian Bureau of Statistics, REINZ, OECD, Haver Analytics

Yes, real estate investing in New Zealand has outperformed housing in Australia and the United States – but it does not come close to the performance of the equity market in the United States and around the world.

And that’s just over the past three years. Adrian Orr’s real concern, detailed in this week’s Reserve Bank semi-annual financial stability report, is the vulnerability of homeowners and real estate investors in the event of another GFC.

New Zealand did relatively well in 2008/09, but Orr says a number of countries experienced house price declines of more than 30% during the global financial crisis. Likewise, OECD studies show that many countries experienced price drops of more than 25% and house price declines for three to ten years, between 1970 and 2006.

“You don’t have to go far back in New Zealand’s economic history to get a sense of house price volatility,” he says. “We have experienced periods of sustained house price growth (for example, in the early 1970s and mid-2000s) and of declining house prices (for example, in the late 1970s and early 2000s). 2000s) in real and nominal terms.

“The main drivers have been net migration (population growth relative to housing supply) and broader economic conditions, especially interest rates and income growth. We are not alone. volatility in asset prices – including housing – is a global fact. “

House price corrections in advanced economies since 1970

Source: Reserve Bank of New Zealand

This concern is the reason the Reserve Bank reimposed the value-based lending restrictions. As of this week, banks are only allowed to lend more than 10 percent of new homeowners mortgages with a deposit of less than 20 percent. The constraints weighing on investors are even stricter.

And this concern is also why the Bank should now chart the course to impose, for the first time, its long-awaited debt-to-income limits. Loan-to-value restrictions primarily protect banks and other lenders in a downturn – but it’s the star-eyed homebuyers who are protected by debt-to-income restrictions.

“It will come as no surprise to you that in our next Financial Stability Report, we will explain again why we view house price levels as unsustainable and why this is important,” Orr said.

Delta’s outbreak has forced the bank to delay consultation on imposing debt-to-income restrictions and interest rate floors on banks, but unstoppable rise in house prices will make it anxious to push forward things.

The number of new homes granted per 1,000 residents rose to 9.3 in the year ending September 2021, from 7.4 the year before, Stats NZ revealed this week.

Orr told the Real Estate Council that prices are expected to start falling soon, as a result; instead, the pace of price increases unexpectedly accelerated.

CoreLogic’s House Price Index, released last night, showed that the national average house price rose 2.1% in October, after slowing in the previous five months.

“There is no agency or quick fix. Housing prices and housing affordability are affected by both supply and demand factors, ranging from immigration, tax policy, government benefits or transfers, land availability, standards construction, infrastructure and training programs. “
– Adrian Orr, Reserve Bank

The higher they rise, the harder they fall – this is the constant warning of the Bank.

“At the root of the financial stability risk lie the inability of the housing supply to respond in a timely manner to changes in demand, and the factors that lead to housing being favored as an investment choice beyond that. of a simple place of residence ”, declared the governor. said.

“There is no agency or quick fix. Housing prices and housing affordability are affected by both supply and demand factors, ranging from immigration, tax policy, government benefits or transfers, land availability, standards construction, infrastructure and training programs. “

Consulting on the new loan restrictions doesn’t mean she’ll be using them anytime soon, nor that she should. But that will give the Bank another option.

Orr insists that the Reserve Bank’s adjustments to interest rates and lending rules played only a small role in the theater of rising house prices. Small this role perhaps, but it is still a speaking role, and this week he must deliver his lines.

One last remark: Newsroom asks Adrian Orr what bet he placed on the Melbourne Cup. We’re pretty sure he didn’t put all of his money on Ocean Billy, however.

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