So, how is 2022 for you so far in terms of the housing market?
I'm interested in your views.
It seems to me to this point that the housing market is performing much as might have been expected.
At the moment we've got that uncomfortable 'hesitation waltz' going on as vendors, accustomed to seeing prices go up thousands in weeks are going blue in the face waiting for a 'fair price' for their property.
Buyers are playing the 'ah, but it's different now' card and waiting.
So, it's all in a bit of a holding pattern.
How does the standoff end? It really does depend on any number of factors.
At the moment there's no real reason why vendors should have to start dropping their prices.
That only becomes a real issue if they have the proverbial 'change in circumstances' - IE lose their job.
The job market is currently tighter than a tight thing with unemployment running at a barely existent 3.2% as of the December quarter.
A really big point to watch this year then is if there is a substantial reversal in employment.
Why might that happen? Well, there are suddenly a lot of what the economists like to call 'headwinds'. Omicron is a big one at the moment because people aren't spending the way they were.
Some businesses are doing it tough.
And then there's our old friend inflation, which hit an annual rate of 5.9% as of the end of last year and is likely to be heading towards or above 7% some time quite soon, even after the Government's moves to spare some of the misery at the petrol pump.
On the latter point, it's worth mentioning - as others have - that to some extent the Government action will merely 'defer' some inflation. Once the petrol tax is returned to previous levels there will be a one-off inflationary hit then, in the same way as happens when GST is increased.
Such increases are theoretically 'one-off' in nature. But we've seen in the past year what happens when one 'one-off' comes straight after another and then there's another. These are not really one-offs. And they change behaviour and expectations. We get second and third waves of inflation.
Moving to defer inflation in this manner all just leads me further and further to the view that the current inflationary pressures we are seeing will not be a short run thing at all. I think it is here now and it is already beginning the process of getting ingrained.
The Reserve Bank's February Monetary Policy Statement forecast inflation to return within the targeted band of 1% to 3% by June of next year. Admittedly those forecasts were finalised before Putin invaded Ukraine. But even without that I think the forecasts were optimistic in the extreme.
Right now, I reckon if we get inflation back under 3% within three years we will have done real well.
In reality I think it will take even longer than that. Will sub-3% inflation even be a realistic goal in future? Economists are already suggesting the costs of handling global warming will be inflationary. The free trade we've seen in which we've benefited (particularly in the west) from utilisation of cheap overseas labour (don't call it slave labour) may have already started to come to an end. Who knows how permanent the inflationary impacts could be if Russia is once again economically isolated for a long period?
What we do know is that with the current levels of inflation we have here the RBNZ is putting its foot down on the Official Cash Rate accelerator. The wholesale interest rate markets have already anticipated all this and have been driving higher, which in turn has led the banks to effectively 'front run' the RBNZ with mortgage interest rate rises.
And I truly shudder to think what sort of increases some mortgage holders are going to face as they re-fix their mortgages. There are more than a few people out there with seven figure mortgages, such has been the magnitude of the 40% house price surge since the start of the pandemic coupled with the ability of folk to secure mind meltingly large mortgages due to the then low interest rates.
And as I've also mentioned previously these mortgage holders are also now facing the return of the old foe inflation. Little luxuries - such as things like food (ahem!) - are rocketing in price along with everything else. (Food prices rose 6.8% in the year to February).
So, it's crucial that the labour market holds some sort of buoyancy. If large numbers of people do start to lose their jobs then that IS a game changer and there's no more hesitation waltz in the housing market. People would have to sell for what they could get. And that would be a huge problem. Disorder.
Pay rises are likely to become crucial. That will help the mortgage holder buy that 'fancy' loaf of sliced bread and some 'opulent' breakfast cereal - and it will help to meet the 'pass-the-smelling-salts' mortgage interest payments.
In other words if people do stay employed and they are able to get financially compensated for at least a portion of their increased costs, then mortgage holders will get by and they won't be under pressure to sell houses.
It's always seemed to me that people have a marked aversion to selling a house for less than they paid for it. People struggle to accept the concept that a house is just another tradeable asset that theoretically might go down in price. That is not the New Zealand creed. You buy a house, live in it for a while, add X amount of dollars on, sell and then buy another. Rinse and repeat.
So, hence the standoff we have at the moment.
Ah, but what if you can ultimately sell your house for more than you paid for it? Even if it's not a lot? Sounds good, yes?.
Here is a very rudimentary suggestion/calculation. Let's say for example someone bought an Auckland house for the February 2022 median price of $1.19 million and sold it in a year for $1.25 million. A gain of $60,000, or 5%. Hey, it's not a 'party like its 2020-21' kind of gain, but it's okay.
However...What if the inflation rate over the same 12 months is 7%, or even higher? Yep, you've actually LOST money on the house without really realising it. Basic example. But you get the idea. This of course was a common feature in the housing market and even with things like domestic goods purchases in the 1980s.
There was a time when people were getting 18% for term deposits and happily spending their 'gains' on things like new whitegoods (when these were expensive), without necessarily realising that the said goods had actually gone up 20% in the past year! So, yes, they were actually losing money in 'real' terms.
Inflation. It is the thief in the night.
However, it is possible that with continued inflation - providing people can get cost-of living pay increases - then affordability of houses might just start to improve much more quickly than many people were saying was possible even a few months ago.
Inflation as a friend? Not really. It's hideous and corrosive. But it could ironically be helpful in returning some sense of affordability to the New Zealand market.
And this could happen without the obvious falls in house prices that some people are anticipating. But yes, in 'real' terms house prices would fall - and possibly for several years.
As I said in the heading though, there's a lot of 'ifs and buts' with that.
And if we do have a serious rise in unemployment, then forget everything I just said, because that would get ugly. Housinggedon could be upon us.
That 40% house price bender over the past two years left us horribly exposed. We may yet pay for it.
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