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Auckland development blowouts reminiscent of run up to GFC: KPMG's Kensington

Wednesday 12th October 2016

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The collapse of property developments in Auckland is "almost groundhog day" to the run-up of the global financial crisis in 2007/2008 as banks refuse to fund projects due to blowouts in construction and labour costs, says John Kensington, the author of KPMG's Financial Institutions Performance Survey. 

The most recent development to be cancelled is the Flo apartment project in Avondale, with buyers' 10 percent deposits refunded this week and the developer citing funding issues and construction costs. 

Speaking to BusinessDesk, Kensington said "at the start of the GFC, exactly the same thing was happening. Banks were looking at property development opportunities back then, and going, 'we’ve got a record rise in prices, we’ve got shortages of materials, we’ve got shortages of labour, we don’t think this property development has been correctly analysed, we don’t think it's going to work', so they declined to fund it."

Kensington said 2016 was different because the finance companies were diminished and no longer in a position to take up the slack. "The money went to finance companies [before the GFC], who having got the money had to find a home, and probably invested in the very things the banks had said no to. At least this time round there is not as strong a property finance company sector there to take up the slack when the banks said no. I’m sure if there was, they would happily bank some of this."

He added that there was currently a "real strain on the construction industry, labour costs are blowing out, and there are some shortages of building materials".

Prime Minister John Key yesterday told the NZ Herald he stood by comments that young people should be looking to buy apartments as their first home.

"While they [the developments] might not be happening, the consenting looks very strong ... so from time to time you will always get a few developments that fall over."

KPMG's FIPS report for the three months to the end of June 2016 showed total lending rose by 2.2 percent or $8.08 billion in the quarter, the second-fastest quarterly growth in the last five years. 

This was mainly driven by lending to investors, with a 39 percent increase in new lending to property investors. Lending to first-home buyers increased by 31 percent while lending to owner-occupiers was up 24 percent. 

KPMG's Kensington said two things were happening: "What you are seeing is the appetite for New Zealanders to borrow, the desire to borrow has not slowed down, in fact, it's running at a peak. At the same time, as that is happening, the desire from New Zealanders to receive to a low-interest rate on their deposit has run out".

Kensington said the money was being withdrawn from term accounts as they mature and is being invested in homes, extensions, baches and the stock market. 

The report covers a period prior to the adoption of new Reserve Bank restrictions on property market lending which requires investors to have a deposit of 40 percent. These were announced in July and almost immediately adopted by the major lenders, but formally came into force at the start of this month.

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