The opinion piece posted by Bernard Hickey on the Interest Rates blog yesterday titled “Don’t expect capital gains until 2018” has certainly captured the interest of main media and the public at large.
The premise of the article, which is well worth reading takes the position that affordability criteria sets the long term property pricing trend line. We are currently well off this line today. The likelihood is that unless unforeseen circumstances intervene it is unlikely that NZ property will re-attain their peak median price ($352,000) again until between 2018 and 2027 – a staggering 19 years at the most pessimistic!
Now I do not profess to be as close to the financial markets as Bernard, however I do consider myself sufficiently well read of the market factors today as well as being well positioned to see the trends in the real estate market through the website. I have also witnessed property markets falls – specifically having owned property in the UK in the late 1980’s.
The fact is whilst I completely agree with Bernard as to the reasons behind the current state of the market, the underlying drivers that have got us here and the factors weighing heavily on the future trends; I at this point tend to take a different view of the long term outlook. Whilst I cannot see any great silver lining on the billowing dark clouds ahead, I do not see such oppressive blackened overbearing clouds for the next 19 years!
Here’s my take on this situation:
To view the market as a homogeneous group is to over simplify, equally to segment the market too finely can lead to bias and misrepresentation, however I hope to make a point by doing a degree of segmentation.
Let’s for a moment look at the motivations of differing groups in the property market today.
1. For those that purchased their properties as a home to live in pre-2005, then a sale in today’s market or even next year’s market in the face of falling prices will only see them lose a paper value of their home. Should circumstances change for these people and they have to move house and sell; they could justify selling at what might appear to be a “paper loss”. These people are more likely to stay put and ride out what they see today as a storm – why sell?.
The net result for this group will be less people selling their home.
2. For those that bought between 2005 and 2007 – for these people I would suggest that they are pretty concerned and to some extent extremely worried as to whether they paid what now might amount to a too higher price for their property. They may be worried that the value of their “asset” may actually be worth less than their mortgage. For these people a psychological phenomenon will kick in where logic says sell now (to at least realise some net gain) however the reality is that they do not sell because they deny the reality of the situation and feel the urge to stay – this is what happens with shareholders that start to see stock prices fall, but for property this scenario will be compounded by the fact that a home is more than just a financial investment.
The net result of this is that this group of people will not sell their home unless driven to by extreme circumstances such as financial hardship.
3. The other group are people who are cashed up as investors looking to buy-to-rent or people who sold in the last 6-12 months and are now more cautious about buying, as well of course first time buyers. These people whilst less motivated to buy than a year or so ago will be keeping close tabs on the market. They will not be adding to the stock of houses on the market; equally they will not be taking properties off the market by buying property.
These 3 groups whilst not the most exhaustive set of players in the market would represent a a significant component of the market. The net impact of their actions will be to significantly reduce the stock of properties coming onto the market and equally significantly reduce the demand side of the market buying up properties.
As a measure of the skittishness of the market our website has seen a steady increase of properties being added at the rate of close to 1,000 per week taking the current stock of just homes for sale to over 65,000 from the total site inventory of 107,000. This represents a inventory of close to 12 months based on current sales level – this stock level will fall. Not as a consequence of sales, but as a consequence of the reaction of the groups above as they pull back and hunker down!
I would expect to see that in the next 6 months (especially heading in to winter) a continuing fall in sales volumes – this full year to around 72,000. A significant fall from the heady days of 2003 at 120,000+ and a level not experienced since 1993.
Prices will fall – we could well see median prices down from the current $337,500 to around the $300,000 mark. The big issue here is that with declining sales the median price point will become more erratic especially at a local area level where with small sales volumes individual sales skew the figures. We may well see some very inconsistent swings in prices. Compounding this will be the fall out from the speculative investment property sector collapse (Blue Chip etc.) This will drag median prices down as the majority of these properties are sub-median priced. This outcome could occur without any change in the average price for most of the rest of the market.
As caution slows demand and the “ride out the storm” mentality dries up listings; sales volumes could well fall to a level where a new state of equilibrium is reached and the market responds with supply meeting demand and the pricing logic kicks back in as people always need to move for a whole host of reasons. House purchasing is a naturally liquid and dynamic market and cannot be likened to other bubble markets (stock markets, tulip bulbs, precious stones), they cannot dry up. Homes are just that; a home – one of Maslow’s 3 primary needs and as such reflect genuine demand for a roof over our head either as a rental property bought to rent out to meet a rental demand or a house to live in.
The view that we will see a stagnant property market for near on 20 years is for me too close to pure economic theory of straight line graphs, and too far removed from reality – we live in a global connected world and a global economy with enormous mobility and liquidity – too much of the global economy relies on financial service which themselves rely on property as a key investment source for the property sector to stagnate. Don’t get me wrong – the future is not bright – but to say we are all going to have to wait 10+ years before we can move house to enjoy capital gain is for me a hard pill to swallow – it may well be a more traditional 3 to 5 cycle of which the remainder of 2008 & all of 2009 are not looking that pretty.
The article instead of laying blame at the feet of any one party (although it is titled “Estate Agents become scapegoats for the property market slowdown“) skilfully and with a large dose of “tongue-in-cheek” highlights that dependent upon your perspective (alluding I feel to a very English class level adjudication) you can blame:
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