If I hear the word ‘unprecedented’ one more time this year I’m drinking one of the 4-litre containers of hand sanitizer under my sink.
As with much of noise we’ve surrounded ourselves with this year, this year I’ve really learnt that pessimism is more expensive than optimism. We’ve seen this play out with our KiwiSaver accounts, and we’ve certainly seen it in the property market. In this article I’m going to share some candid thoughts around what I think is happening with property, for better or for worse, and what I see going forward.
For background, in April, amid a flurry of doom and gloom predictions from our local economists, I jumped on a call with the only two people I could find who didn’t fully agree with the narrative accompanying the property market. I’m pleased to say I called this rebound in the property market…but, is this post about how right I was and how everyone should have listened to me? If I could get a decent rate of return on my ego then it certainly could be viewed like that! In all honesty, when I was saying here that I thought the property market would surprise us this winter, I was operating on informed optimism, but that’s it.
Here are some of the reasons why many were calling the property market down, amid the panic seen with the first lockdown.
Airbnb stock ‘flooding the market’. Airbnb properties will be converted into longer rental properties, thus driving down rental yields across the board due to over-supply.
Less seasonal workers and international students. If there’s less people who desire short term accommodation, this force could drive down demand for rental stock and by default, hit yields and inevitable property prices.
Rising unemployment levels. If there are more people not able to pay market rent, this could drive down rent and therefore the value of property also.
Supply-side. What impact will there be on the new supply that’s been building and only hitting the market now – will property developers be dumping stock into a [newly] over-supplied market?
Sources of deposit coming under pressure. Bank of mum and Dad more likely to withhold cash that would have otherwise be given to kids as their deposit to purchase their first home. KiwiSaver balances may decrease.
Lenders applying more conservatism. Although counter-intuitive, lenders conservatism may exacerbate an already difficult lending environment.
Here’s what I thought were the forces that could more than support our property market in contrast to the above:
Lower interest rates will increase property prices. See the Cantillon effect. This is so simple you may miss it. It’s now approximately $10,600 less each year, to pay for a $1,000.000.00 mortgage. With that saving, you could borrow a further (approximately) $415,000.00. In other words, for the same cost, you could now purchase a $1.415 m property for the same price as a $1 m property last year. It won’t happen right away, but the lower interest rates we’ve seen this year has lit a fire. That fire could very quickly get out of control See Austrian economics.
NZ as ‘safe-haven’. Many Kiwi’s have come home. This happened shortly after 9/11 and around the time of the GFC also. It makes sense to go back home when things get scary, but there’s more to it than that. Many wealthy individuals from around the world, view NZ as a safe haven. It’s not a matter of if, but when, New Zealand will become a prize asset in the portfolios of many well funded people. As our country can only contain so much land, we’re quite sensitive to changes in demand – this could cause prices to continue to increase.
Changing RBNZ policy around LVR regulations. The Reserve Bank of NZ changed the Loan to Valuation restrictions this year so now, technically, you can access more of your equity in your home to purchase more property. So now, money has never been cheaper, and it also hasn’t been this easy, at least from a regulatory point of view, for first time property investors to make a move.
Irrational exuberance. No gambling, more time to think about things, access (for some!) to cash to invest, has led to an influx of everyday investors via Hatch and Sharesies playing a game in the markets they haven’t played before. This is great, but it comes with some unintended consequences. What we may be witnessing here is some irrational exuberance – it could end in tears, but then again, there are some fundamental reasons why the markets may continue to rise. What happens in equity markets, can often be reflected in property markets – I’ve been observing throughout the last 24 months in particular, that the number of [missed] calls on my phone increases during large run-ups in the share market. When things pull back in the markets, some people shy away from making decisions around property too.
Okay, so to sum this up so far. There are reasons why you would expect the property market to stay flat or even decline. There are reasons why the opposite would (and did) happen, and I’ve outlined them above. Now, let’s have a quick look at the next 12 months, keeping it really simple.
What to watch
Low interest rates, ignited a fire in the property market. The interest rate lever (as well as accompanying quantitative easing by the Reserve Bank), created some availability of credit, and reduced it’s cost. I would expect this little spark to catch the whole forest on fire shortly, and to be honest, it could get out of control. What happens at a household level, happens at a corporate level, and also a government level. As debt get’s cheap, more debt is accrued, which increases our sensitivity to higher interest rates in the future. ‘We’re stuffed’ if interest rates increase is effectively what I’m saying. Regulators and even banks, will try their hardest to manage affordability (and therefore allow interest rate setting to stay low for longer) during this time, so let me ask you this – Is this something you should take advantage of?
Property prices will continue to increase. I don’t say that lightly either – what happens in the field takes time to filter through in the data, then through the media. We’re used to hearing contradictory news headlines around property in NZ, but shortly, you can expect everyone to be talking about property again at your local cafe. Over decades in NZ, we’ve observed that property prices seem to double roughly every 10 years (general rule but not a guarantee it will happen in the future). When you consider your own home, can imagine it being worth twice as much in 10 yrs time, then twice as much again for the following 10 yrs? The more you do this the more you acquire thoughts of disbelief in your mind. It’s not rocket science though – as money gets cheaper, house prices rise. But…
Regulation/Taxation will get far more difficult for property owners. If interest rates cannot increase and if house prices gain momentum, what happens? Well, it gets politicised. ‘It’s not fair’ will be the cry from those (who vote) and in time, this group could be large enough to start motivating some policy around wealth-equality in NZ. The focus in NZ may shift from providing individuals the opportunity to expand their choices (wealth), to creating outcomes that are deemed to be more ‘equitable’. This is wealth-redistribution. We’ll see it initially targeting Porsche Cayenne owners driving to their Omaha bach, but once it starts, everyday people like you and me will have a little less, so some one else can have a little more (with government taking a slice on the way through). Regardless of whether or not you agree with this, chances are, ‘middle class’ people will be viewed as ‘upper class’ by the vast majority of New Zealanders.
Lending criteria will toughen. It currently doesn’t matter if you can afford the mortgage you’re thinking of obtaining. It used to matter, but now criteria matters so much more. The distance between affordability and eligibility are the furthest apart they have ever been. Yes, money has never been this cheap and yes, the LVR regulations have been eased, but this doesn’t mean the following adage no longer holds true: ” Those with the gold make the rules.” The banks have to act responsibly, but this motivation is also mixed up with a 100 other things they need to balance out, like the outflows of credit and risks associated with that in the current climate.
There’s a window of opportunity for many in the current climate, to expand their footprint and invest more with property. If something is possible to do today, what is it about why you are not taking action? What fears or concerns do you have and are they valid?
Uninformed pessimism often affects those with more to lose. Uninformed optimism affects those with little to lose. Informed optimism is what should be filling your mind . What are your longer term goals and objectives / What happened (wars, oil shocks, natural disasters) in the past and what happened shortly afterwards? Is it really going to be different this time around, or is this potentially one (if not the last) easy on-ramp to further property exposure that you’re going to see in a while?