It is the question that everyone seems to want to know – and rightly so, given the extent of investment savings NZ’ers have tied up in real estate. I am not going to make any judgment here about the rights and wrongs of that. Nor am I going to make any predictions as to where property prices are going in the next week, month or year.
If you are about to click the back browser button – thinking that I have mislead you with this title, then please wait a moment to hear the rationale.
I heard a quote a year or so ago from a credible and respected economist. He stated that there were many expectations put on him to make predictions and foreshadow future trends with all kinds of economic indicators. At the end of the day the one he was most reluctant to make a prediction on though was the property market and especially the future price of houses. I took away from that quote a very clear view that if an economist who has (a) far greater access to a far greater set of data than I do, and (b) is far better positioned to make such extrapolations due to focus and extensive financial career experience is not prepared to make such predictions – then I am certainly not going to.
However to provide some helpful insight to current property owners and aspiring property buyers and investors, I would recommend a read of this great article from the New York Times of last week titled “Great time to buy (famous last words)“. It does offer as would be expected an economists view of the 3 macroeconomic drivers of property prices: Affordability (median price to median income); Alternative options (rent vs buy) and Asset Appreciation (Asset value of housing stock to GDP). Interestingly a recent guest article on Interest.co.nz covered these metrics for NZ by Philip O’Connor who is a Senior Lecturer in finance at the University of Auckland’s Department of Accounting and Finance.
Whilst the article from the NY Times speaks to the US property market – the relevancy of a comment within it from Glen Kelman, the CEO of online real estate company Redfin is the blinding flash of inspiration in his statement:
“Instead of betting on home prices, you make a bet on whether money will become cheaper or more expensive, allowing you to buy more or less house”.
I have often read and from personal experience believed in the principle of buying a family home based on personal affordability. The key question is, or should be: “based on my current earnings and future prospects, can I afford the mortgage repayments assuming future interest rates?” This is the question that is far more important than the question of what will happen to house prices in the next week, month or year.
For the majority of property buyers in NZ the decision is a major commitment, one they will likely make only a few times in their lives. Given the average occupancy of a home owner in any one property is 7 years, the most important question is personal affordability. A repayment mortgage is a great savings vehicle and as long as property prices keep close to long term inflation then at the end of the period of ownership most people will benefit in owning more of their home as an asset than they owe their lender. To try and play the market in terms of future property pricing is the same as trying to play the stock market on a daily basis.
As to the question of future interest rates. I am not going to offer any personal opinion, again there are more qualified people to offer advice – Interest.co.nz provides a rich source of data and comment and John Bolton at Squirrel has recently written a view on 2010 mortgage rates on his blog