Falling Prices? Don't believe the hype

The Press - 16 May 2020 - Janine Starks

Falling prices? Don’t believe the hype

The fiction of economic forecasts Trying to decide? Remember these tips

What’s happening to the national average house price has never been more irrelevant.

Unemployment and house prices. The evil pair of economic indicators with the power, the drive, the emotions of a nation. They’re physically and psychologically contagious. They control our willingness to spend and our ability to make decisions.

Right now, buying and selling houses brings uncertainty for many people.

Will we see a big downward swing in prices due to unemployment? Are the smart people going to wait in the wings for other people’s desperation and snap up a bargain?

Let’s put some perspective on it. For the majority, any price movement is entirely irrelevant. In New Zealand, roughly 6000 to 7000 houses are sold each month. It equates to 75,000 houses a year. We have 1.85 million residential properties, so 4 per cent of the housing stock sells annually.

In normal economic conditions, 96 per cent of us sit around doing nothing with our homes. That’s why the housing market and the sharemarket are the tortoise and the hare. Price movement is incredibly slow and sticky, because so few of us have any need to transact.

My prediction is some people who were planning on lifestyle moves will be cautious and pull back from their plans.

Others will have their hands forced and will sell. It seems unlikely that supply will outstrip demand and that’s what it takes for a proper price shock.

As usual, 96 per cent of us will be glued to every movement like a soap opera, even though we are not involved.

These conditions could grind away for several years depending on whether we get a second or third wave of unemployment, caused by social distancing regulations limiting our sales and production capability.

In the meantime, first-time buyers sit on the sidelines wondering what to do.

ANZ predicts a 10 per cent to 15 per cent fall in house prices and Bank of New Zealand predicts a drop of 11.5 per cent. You only have to open the weekend paper to see a cartoon house falling off a cliff.

It’s all a bit over-dramatic for a setback to prices we saw one year ago.

The truth is these economic predictions are a work of fiction in a practical sense. An economist’s job is thankless because their numbers reflect the modelling of an average across an entire economy.

Covid-19 presents such unusual economic challenges that very few property buyers and sellers will end up ‘‘average’’. It seems more likely that some segments of the market will suffer quite pronounced falls, which are localised and not particularly widespread.

They’ll make for some doozy headlines, though. Other areas will soften. Mostly the market will simply freeze. When people delay their decisions, volumes become thin and the figures are unreliable.

The best thing a first-time buyer can do is learn to read the local market and not compare it to the national averages.

Which industries drive local jobs? How many people are losing jobs and do they tend to own homes? Unemployment could put pressure on landlords, but what does your market of local landlords look like? The more grey hair, the less likely they’re flinching. They simply don’t have debt.

Will your local Airbnb market come under pressure or are they bach owners who cover expenses by renting to other Kiwis over summer? Learning to read the market means watching local numbers and listening to people around you. A tradie walked into my home last week and said he’d spent lockdown doing home maintenance and discussing how to get ahead in life with his wife. They’d like to buy a rental property. That brought a smile to my face. There are job-secure couples in the wings.

A friend put a property on the market just as the lockdown was announced. It’s a tiny house a couple of minutes’ drive from the beaches of the Abel Tasman. Bad timing? I just clicked on the Trade Me Property app and it’s had a remarkable 15,000 views. In lockdown people had time to discuss what’s important and make plans. It stokes the demand side.

Two sets of neighbours are about to embark on home extensions and renovations. There’s a noisy geotech rig hammering away next door and it’s like music to the ears knowing the construction industry hasn’t stopped.

I’d usually be off to Europe about now. What to do instead? There’s a temptation to rent a house in Wa¯naka for a month or two. Airbnb owners down south will be doing loops of the lounge reading that idea.

It’s only anecdotal evidence, but real stories can offer up a different type of leading indicator at a local level. Unfortunately economists can’t scoop up anecdotes into their models.

■ Prices won’t shift quickly, if they shift at all, in some areas.

■ Don’t look at Queenstown and expect your area to behave the same. It has a different population and employment structure.

■ Some housing types will act like a separate market within an area due to their resilience or responsiveness to unemployment.

■ The national average has never been so irrelevant. Getting granular is key.

■ Expect to see distorted figures and big headlines in the next six months. Unless they are at meaningful volumes, they are confirming no more than that we are living through an extraordinary event.


Janine Starks is a financial commentator with expertise in banking, personal finance and funds management. Opinions in this column represent her personal views. They are general in nature and are not a recommendation, opinion or guidance to any individuals in relation to acquiring or disposing of a financial product. Readers should not rely on these opinions and should always seek specific independent financial advice appropriate to their own individual circumstances.