Foreign Homebuyers BANNED

Hello from the Blue Lagoon.

One of the so-called 25 wonders of the world, the Blue Lagoon formed when a nearby geothermal power plant started displacing groundwater.

The remarkable milky blue waters are caused by a high concentration of minerals like silicon.

Taylor Kee

Source: Taylor Kee

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Today, the Blue Lagoon is refilled every few hours with new water. Old water is pumped away from the pools and dumped into the permeable lava fields nearby.

They say that the water has ‘magical’ powers to cure all sorts of maladies.

Your editor is still waiting to see his jet lag cured. No luck yet, but I’ll keep you updated.

 

$22.3 Million

In other news, a lucky Otago resident has claimed a $22.3 million MyLotto jackpot.

That’s not only life-changing money. You’re talking generations and generations of really comfortable living…if it doesn’t burn a hole through the winner’s pocket first.

That’s the big downside to lottery winnings — you’re thrust from one social class to another in a flash…and not many folks transition well.

In fact, 70% of Lotto winners lose everything in five years or less.

It makes sense. Your whole sense of budget, goals, responsibility and wealth changes overnight. There’s a different set of rules when you’re rich…but very few understand that.

They splurge on things that they daydream about — like yachts, travel and houses — until it all disappears.

For this Otago winner, their $22.3 million might be enough to disappear into a starter home.

Maybe this old fix-upper.

But the timing couldn’t be better. On Wednesday night, Parliament passed the Overseas Investment Amendment Bill, which effectively blocks overseas buyers from buying most New Zealand homes.

The common belief is that this will provide some relief to the housing market.

Like stabbing a syringe into a collapsed lung, Labour leadership believes this is the quick remedy to save a suffocating housing market.

Hopefully, foreign buyers will start building new houses instead of buying existing ones…and that will add supply and lower prices.

But we know that’s not going to work. [openx slug=inpost]

 

Deciphering the housing market

For one, the idea that foreigners are crowding out Kiwis and buying up NZ real estate is mostly a myth.

Lots of people seem to think that 25%, 50% or even 75% of homes are going to foreign buyers, but the reality is that it’s less than 5%.

In fact, in the most recent quarter, overseas buyers represented a mere 1.2% of sales.

And, no, blocking this 1.2% of buyers isn’t going to solve the housing crisis. At best, it will decrease prices by 1–2%.

Real Estate Institute of New Zealand CEO Bindi Norwell agrees:

We don’t believe that banning foreign buyers from purchasing property in New Zealand is going to have any impact on house prices, nor will it help young people into their first homes.’

But this bill could cause a big dent in prices for another reason — emotion.

Much of New Zealand’s housing market is based on emotion. Buy soon or miss out on abnormally lucrative appreciation rates. Lock in your capital, sit back and relax. Max out your credit to take part in this remarkable market. Carpe diem!

For home sellers, this bill could suggest that a chunk of buyers are now off the market. That could send a sort of price shock through the system…amplifying the price drop from 1–2% to 5–10% or more.

I’d say that’s a move in the right direction, but the housing market would need to fall much further to realign with normal trends.

This new law could trigger a reset, but it’s doubtful. More likely, we’ll see a short-lived dip then a bounce back.

You see, it’s easy from a political side to point fingers at foreigners and blame them for New Zealand’s woes…but the reality is that the actual issues lie with a supply shortage and a lack of labour resources.

Instead of disincentivising new buyers, how about incentivising builders?

To make real progress, consider ramping up visas for manual labourers. Consider tax breaks for builders. Consider streamlining the consenting process. Investigate the whole process of building a house and cut out any unnecessary middlemen.

Find the bottleneck and resolve it.

To explain it from an economic perspective, the market naturally moves towards equilibrium. If supply outweighs demand, prices drop and builders tap the brakes until supply and demand meet.

The opposite is also true — when demand outstrips supply (as is the present case) builders want to build more because prices are high and they’d make more money. They build until demand and supply meet.

Equilibrium.

In reality, things aren’t that simple. There are heaps of folks with their hands in the cookie jar, each one affecting the market’s self-righting mechanism.

There are other ingredients like materials and labour, which can be affected by outside factors. Think tariffs, visa restrictions or weather.

There are election seasons, lobbyists and political favours.

It’s a messy picture…and in the middle of it all is you — the buyer, the owner, the seller.

You sit helpless, tightly gripping your house keys, hoping that every new whim by the powers that be helps you instead of hurts you.

For those who understand the system, it’s got to be nerve-racking.

For everyone else, ignorance is bliss.

Or maybe the best you can do is cross your fingers and pray…and buy a Lotto ticket every now and then.

Best of luck,
Taylor Kee
Editor, Money Morning New Zealand

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Taylor Kee is the lead Editor at Money Morning NZ. With a background in the financial publishing industry, Taylor knows how simple, yet difficult investing can be. He has worked with a range of assets classes, and with some of the world’s most thought-provoking financial writers, including Bill Bonner, Dan Denning, Doug Casey, and more. But he’s found his niche in macroeconomics and the excitement of technology investments. And Taylor is looking forward to the opportunity to share his thoughts on where New Zealand’s economy is going next and the opportunities it presents. Taylor shares these ideas with Money Morning NZ readers each day.


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