‘The authorities should prepare contingency plans for a severe collapse in the housing market. These should include the possibility of a crisis situation in one or more financial institutions.’

—OECD

The Organisation for Economic Co-operation and Development has issued yet another warning regarding the over-inflated Australasian housing bubble.

This one was directed towards the bubble mostly concentrated in Sydney and Melbourne.

These are two markets which have been hit hard. Sydney’s down 9.6% since July 2017.

And here’s the crazy part — the OECD’s warning comes after an apparent ‘soft landing’.

In other words, you ain’t seen nothing yet.

At the same time, ANZ in Australia revised their property forecasts down to 20% off the 2017 peak…meaning Sydney and Melbourne have another 10% to fall.

Coming from a bank which profits from optimistic home-buyers, that’s an alarming prediction.

ANZ’s Head of Australian Economics David Plank then asks, ‘Can we have a sizeable correction in house prices, and this will be the biggest we’ve ever had, without it having a flow back effect on the rest of the economy?’

That’s the million-dollar question…

And for Kiwis, it’s implied that he’s talking about us too.

Historically, our housing market has followed Australia’s by 6-12 months.

That means we’re already six months overdue for a downward slide…

Some would argue that the two markets have separated…that New Zealand’s market has become uniquely immune to downturns…and that we’ll wave cheerily to our poor friends across the Tasman as our modest homes reach multimillion-dollar valuations…

Personally, I’m not so sure…

It seems as though things are just as messy here as they are in every other pumped-up bubble around the world…

For one, we’ve got KiwiBuild.

We’ve known from the beginning that the scheme was a bit of a mess…and we’ve always been doubtful that Minister Twyford could execute the KiwiBuild strategy efficiently…

But with KiwiBuild CEO Stephen Barclay mysteriously absent from his post for the past six weeks, it appears that the foundations are already starting to crack.

On the scheme itself, Mike Hosking recently found two economists to comment…and why it might be failing. Cameron Bagrie and Gareth Kiernan say they’re worried about the pricing strategy and the locations chosen.

Makes sense to me. Both price and location are market-determined factors. When you strip the market out of the equation — as KiwiBuild fundamentally does — you get off-target products.

Then when you throw in disruption in the rental markets…the scales teeter even closer to crisis.

Up until this point, landlords could use any loss incurred on their rentals to offset the taxes that they pay. Not just rental income, but any income.

In other words, rentals have been a no-brainer…because if you don’t make money renting, then you can use that loss against your personal tax liability. You’ll never go under the break-even point.

But that’s set to change. Right now, there’s a proposed law that will cut out a big benefit of property speculation. If it goes through, losses on rentals can only be used as tax credits when that property starts to turn a profit.

So now, you’ll feel every punch of those losses on your rental property…at least until you manage to cross back over the break-even point.

For property investors, this adds in a dash of uncertainty. And it could result in fewer investors playing the game… [openx slug=inpost]

All of this is happening against a backdrop of Kiwis putting every cent of their retirement funds into property.

It shocked me when I first heard that some New Zealanders do that.

It goes against every rule of investing — don’t put all your eggs in one basket…especially not one that could crash by 20% at any given moment.

Nonetheless, far too many Kiwis are putting their faith fully in property investments.

As Martin Hawes from Interest.co.nz says, ‘Most property investors I know are so wedded to their properties that they own little or nothing else. This means their future wealth hangs on just one asset type. The New Zealand property market has largely done well over the last few decades but that is never a guarantee that the good times will continue uninterrupted. It’s risky.’

Many people are even choosing to draw out funds from their KiwiSaver to pay for property. It’s gotten to the point where one’s KiwiSaver is talked about as a piggy bank for house deposits. Who cares about saving for retirement, right?

According to ASB research, one in four people under 30 plan on using their KiwiSaver to buy a property.

And yet, in the same research, 56% of polled respondents thought they won’t have enough for retirement.

Why? Probably because they’re only investing in property. They’re missing out on the whole other side of retirement saving — stocks and bonds.

Don’t believe you should be in stocks?

Consider this…

According to REINZ data, if you had put $500,000 into property in 2008, on average, you’d now be sitting on $805,000 in value.

OK. Not bad.

Now, if you had put that same $500,000 into NZX50 stocks in 2008, do you want to guess what your nest egg would look like?

$2.205 million

Big difference. And if you’re one of the many Kiwis who’s nearing retirement and realising you may have undershot your goals, this might be a perfect time to reconsider how your wealth is allocated.

Best,

Taylor Kee
Editor, Money Morning New Zealand

PS: If stocks sound like something you’d like to know more about, I’d be happy to show you more about it. Take a look here for my latest research.