If you’ve ever learned to fly, one of the first things you learn is the ‘go around’, a simulated aborted landing. When you’re in control of the plane it’s all good, but when you’re not, it’s a little concerning. I had that experience once in a 747 flying into Rome. The pilot pulled out of a landing just at the last minute twice– the Vatican never looked so good from the air!

Anecdotally (which, if you read the Herald, is as good as fact), the property market has cooled, especially in regional New Zealand. I know this as I talk a lot with people purchasing property and also with the ‘odd’ real estate agent. Pairs of shoes are down at open homes and auctioned properties take longer to sell. We’re also talking with banks, and whilst there’s still a load of applications on the go, it’s clear they’re not attached to many new property purchases. You’d think this would have an adverse effect on property prices but it hasn’t really – not in Auckland anyway – perhaps the smell of blood in the water has fed the greed of the opportunists? Have a read of this candid article from Jonno Ingerson at Corelogic – I wish the bank economists would be this humble when their predictions don’t come true!

So house prices haven’t yet collapsed in Auckland – I’m not surprised as in the past, when there’s been a decent reason to panic, house prices never really collapsed at all in NZ’s biggest city. The real story I believe, which affects house prices much more than the powers that be care to admit, is bank lending criteria.

The more credit is made available, the more demand there is on residential property – and up goes the price. It really is that simple. We can blame the Chinese, the Baby Boomers, or the first home buyer all you like but in reality, it’s your banker.

When credit expands (via ‘loosening’ of criteria), more dollars chase after a fairly static amounts of assets (houses).

We’re in an environment now of decreasing credit growth. Banks are exposed and are struggling to find money to lend – there are a lot of reasons for this. Think of it like a railway: in the late 1800’s the rate of expansion of the rail network in the US peaked at over 12,000 miles of new rail built in one year. It then declined to just over 100 new miles built in 1950. Profitability however increased almost exponentially as the growth of the network leveled off. Banks are like railway companies – they go through phases of expanding their network via credit growth (new customers / new loans) and then later on, margin growth. Get new customers, and then work on separating them from their income – simple model really.

We’re only at the start of this phase and I’d expect to see interest rates rise in the next 12 months for no other reason than this: the banks need to keep profit levels high (for their shareholders), and the only lever they can pull is margin. How much then will rates increase? By as much as they can. They will extract as much profit out of you as they can, without breaking you. In fact I’m sure they have people right now figuring out the most acceptable rate of mortgage arrears to profitability – expect around 0.5-1% more across the board this year in fixed and floating interest rates. It’s hard to say if this will be maintained in subsequent years but for a lot of reasons right now if you’re keen to play things safe, fixing for 1-3 years could be a tad risky.

So yes, this ol property plane she needs to land, re-load and re-fuel, but perhaps now’s just a tad too early – maybe the conditions aren’t quite right on the approach. One more circuit before landing perhaps?