16/5/2107 The NZ Herald reported
“New Zealand’s housing market has a 40 per cent chance of going bust in the next two years, according to global investment bank Goldman Sachs.
In a research note published this week Goldman says the New Zealand’s housing market is the most over-valued amongst the G-10 group of developed economies, Bloomberg reports.
Goldman, Bloomberg said, defines bust as house prices falling five percent or more after adjustment for inflation.
Bloomberg reports that Goldman looked at housing markets in the G-10 countries -those with the 10 most-traded currencies in the world – and finds they are most elevated in small, open economies such as New Zealand, where house prices have rocketed in recent years.
Goldman compares house-price levels across economies using three standard metrics: the ratio of house prices to rent, the ratio of house prices to household income and house prices adjusted for inflation.”
The weakness in this sensational report is in the last sentence “ three standard metrics”. Whose standard metrics ? Not mine!
This report ignores the three prime factors that are driving house prices . Supply, demand and interest rates. Why an “expert’ opinion should ignore these is staggering. Supply and demand are the two factors that define all pricing in all markets. The next most important factor in house prices is interest rates. Low interest rates drive prices up.
While the three most important measures of house pricing have been ignored two of the measures they have used are seriously flawed . . Let’s look!
- Ratio House prices to Rents. There is always a lag behind house price rises and rents. The house prices go up first and then the rents tag along behind, but there is a delay. Initially tenants resist the higher rents and it only as necessity hits that they buckle and pay the higher rents. There are numerous rental glass ceiling that have to be broken in this process for the rents to rise. In Whangarei one was the $400 a week barrier. That ceiling is well and truly shattered now and rents are rising rapidly. Every news report you see on rents is saying how fast they are rising and how new record rentals are being paid. This catch-up process lags about 2-3 years behind price rises so to compare current rents to current house prices in a rising market is very poor research. It may work in stable markets but not rising ones.
- Ratio house prices to household income! This is another fantasy measure. It was introduced in the 1930’s to assist with state house pricing. It doesn’t have any validity in current house values. Firstly you couldn’t compare a 1930’s house with a house of today. Today’s houses are over twice the size and have more electrical points in the Kitchen than the 1930’s house had in its entirety. This measure has no relevance in today’s real estate pricing yet it still gets held up as a standard of affordability. It isn’t an accurate measure and hasn’t been for the last 30-40 years.
Coming back to the basics of “ Supply and Demand.” There continues to be a SERIOUS shortage of houses ( in the vicinity of 40,000) with the supply of new houses not keeping up with the growing demand. We are falling further behind rather than catching up
There continues to be a growing demand for houses as our net population grows by just under 100,000 people per year. (72,000 from migration and 28,000 by natural growth).
Interest rates are expected to stay historically low for at least another 18 months.
There is a lot of emotional talk in the marketplace, fuelled by the media who latch onto, and headline, every bit of controversial data they can, but at the end of the day logic will prevail. Until our supply catches up with demand we will have upward pressure on house prices.
And How good is this American owned Bank at predicting their own market yet alone New Zealand’s
- Almost everybody on Wall Street missed the financial crisis. But you would be hard-pressed to find a major analyst at a major Wall Street shop caught more unaware than Abby Joseph Cohen, the Goldman Sachs chief strategist who still had her rally cap on well into 2008 as the market imploded. Cohen set an uberbullish 1,675 price target for the S&P 500 for that fateful year, not foreseeing that the world was crumbling before her eyes. The stock market index would close at 903.25, a 37 percent drop and 46 percent below Cohen’s target. That same year, Goldman replaced Cohen with David Kostin and moved her over to a position as “senior investment strategist.” Yet on Wall Street there’s always room for a second act: Cohen maintains a prominent role at Goldman and even was selected to go first at a recent high-profile question-and-answer session with Federal Reserve Chair Janet Yellen.
- Goldman Sachs was unable to see the risk in the USA subprime mortgage market, was heavily exposed , and required a 10 Billion bailout (Federal Loan ) to survive the 2007 financial crisis.
- Would have to pay $550 million in fines after the Securities and Exchange Commission said the firm misled investors on the other side of the Paulson trade. Goldman Sachs tried to keep their clients in the subprime market during the Subprime collapse against the advice of Paulson. ( Read “The Greatest Trade Ever” Gregory Zuckerman)