House price crash will see a wave of mortgagee sales and bankruptcies not seen since the 1930s

by Peter de Waal

15 June 2008

British commentators are advising of a 5 year slump and 50% loss in value in the UK housing market. I believe the effects will be far worse in NZ, on the periphery of the global market.

The Australian banks have had a sweetheart deal with the NZ government allowing them to loan $200 million for every $8 million they have on deposit for housing. This compares to ordinary business loans where they can only advance $100 million for each $8 million on deposit.

This amount of loan activity has inflated house prices and the banks' profits – up until now. With the global credit crunch banks can no longer find the foreign capital needed to make such huge loans for housing. With the bursting of the housing market bubble house prices in NZ will crash, perhaps down to 2-4 times the average wage ($80,000-160,000).

The New Zealand middle class has most of its money tied up in housing after being thoroughly fleeced by the share market crash of 1987. The loss of the "wealth effect" is going to be profound, much worse than after 1987.

There will be a wave of mortgagee sales and bankruptcies not seen since the 1930s.  

See the Herald on Sunday (15 June) article The boom has turned to bust  
Also see Peter de Waal’s UNITYblog article The 2008 banking crisis: Why the housing bubble? Why the crash?