The thing about being in Real Estate is that you will always be asked after the state of the market and the manner in which it is likely to perform in the expectation you will know. If I did, I would be rich and wouldn’t need to work.
Here are some random thoughts that might provoke discussion.
Firstly some notes taken from an address by Tony Alexander, guru extraordinaire
• “Young people are entering the market – there is a 4 year catch up
• Real Estate activity is very much regionally based with Auckland and Christchurch a sellers market, stock hard to find and prices rising. Other regionals will follow over time and the sellers market is likely to be wider across the country through until mid to late 2014.
• Banks are and will be reluctant to support property development as it is perceived as high risk. (Ironically this function is increasingly being undertaken by Chinese Banks funding Chinese developers.)
• Prices are no longer going to go down
• There is a major shortage of housing, in particular in Auckland and Christchurch
• There is a major shortage of tradespeople
• Auckland construction has commenced ahead of Christchurch
• Low interest rates are likely to be here for a long time
• Aging population is likely to use their home for different reasons including room/s for grandchildren
• Migration is negative 3,000 [last 12 months] but it is likely that the cycle will change to positive again soon
• Aussie – most business in recessional mode other than mining
• 600,000 New Zealanders live in Australia and 1m elsewhere in the world. They are starting to come back to NZ.
• Europe will effectively be “munted” for the next 20 years. USA not far behind.
• 30% of Auckland population will be Asian by 2015
• Our Government debt is 38% of GDP; 40% of NZ debt funded from overseas”
Interesting and along the lines of previous thoughts espoused. I was asked today about interest rates and what might happen; I believe we will be in a low interest rate environment for over 5 and possibly the next 10 years. Simply, low low interest rates are probably the sign of an unhealthy economy; higher rates reflect risks of inflation, lots of trade and consumption etc. very simplistic I know.
The distribution of wealth plays a significant part in the capacity to recover from any downturn in the economy; the essential ingredient is a buoyant middle class confident, able and willing to spend. The middle class and their spending are the Job creators and the economic drivers of the economy; not the poor who lack capacity; nor ironically the seriously rich who only spend a fraction of what they earn.
Sadly it is the middle class all over the world who have copped a serious beating, seen their assets shrink and who have suffered huge financial losses, the middle class can no longer spend as it did in the past. The middle class cannot borrow to spend as they did; the capacity to borrow and spend, 2000-07, completely disguised the declining purchasing power of the middle class and they drowned in debts magnifying the financial meltdown.
The middle class shrank markedly and then decided to pay down debt, live within the means they had and finally, to save. A trifecta of disaster for a national economy, sales and consumption slowed and slowing , less tax revenue generated; employers become reluctant or unwilling to hire and so it goes on for longer. A happy middle class, optimistic and confident has always provided the rise from recession but look at the graph below, optimism at high levels has not translated to high spend and GDP increase.
Thanks to Tony Alexander for the Graph.
Apply the thoughts to the consumers in the Eurozone, add those of the USA (our traditional saviours of the world economy) and I see no reason to believe enough consumption will take place to see interest rates go north, taking our exchange rate with it. I believe it to be more probable that rates will even decline further before they rise as a domestic stimulus; and that the rise when it comes will be slow and distant.
How to survive a sustained low interest rate environment when you have never been a part of one becomes a daunting task. Look at the next little graph and it may help clarify why I believe in residential real estate, there just isn’t enough of it to go round and the affordability of people to support mortgages increases with the lower rates especially taken in comparison with increasing rents.
Courtesy of Tony Alexander
Look at that, no sign at all that construction levels will rise to a level sufficient to tread water with organic increase, no relief in sight to current shortage; au contraire, the shortages will maintain or get more pronounced. When the emigration/immigration figures turn as they are expected to, the shortages will become dire.
I can’t see any immediate set of circumstances that will set the middle class spenders spending, it is a vicious circle, until they do the recovery such as it is will be sporadic and vague, wishy washy and unconvincing – we need ‘convincing’ for an end to become visible.
September 05 2012 11:31 am | Uncategorized