Everything Costs More, Well Most Things

by James Heard

by James Heard. — The Housing update: Everything costs more By James Heard.

My favourite coffee shop now charges an extra 30 cents per FW. Everything has gone up on the back of the fuel levies they explain and I get it. Am I going to hunt around for a better price? Nope. They’re good folk and I like the coffee. And an extra $75.00 a year doesn’t really impact me. But it will for some people when coupled with the incremental price shifts we all experience across all the services and goods we need: electricity; rates; fuel etc. All of these increments nibbling away at that thing labelled discretionary spending, an enabler of ‘life balance’. Even though the median household income in Auckland is now a bit north of $120,000, perhaps Pukekohe’s is closer to NZ’s average of $98,621, it takes some discipline to find the discretionary dollar given the price of housing here.

Motor vehicle costs are the uncontrollable biggie for most families. The Automobile Association has estimated that the fuel levies will add some $250 per year for the average Auckland motorist. Well I’m not average and at least another 50% of the motorists aren’t average either. Some are saying it is adding $40 to $60 per week which again by itself is not much for many. However that is $2,000 to $3,000 per year. A healthy chunk of mortgage interest charges.

Assuming for a perhaps delusional moment that you only needed a mortgage of $600,000, or that you had already had the home and a mortgage of only $600,000 at a mortgage interest rate of 4% your annual interest charge is $24,000. That fuel levy, if $40 per week, now represents 1/12th of the annual interest charge and has consumed at least some of your ‘life balance’ dollars. However if you have yet to buy or are in the process of buying and selling your mortgage power has been reduced by 50 big ones, $50,000. And as a buyer your decisions will be shaped by your newly restricted level of affordability.

Earlier this month it was announced by one of the major bank’s economists that it was now a ‘buyers’ market’. With sales numbers constrained it is perhaps hard to argue otherwise. And with new builds improving the supply of first homes there is less demand for existing homes. Baby boomers who have decided to trade down, rather than trade into a retirement village, also have a preference for new homes and small sites. So what? The market segment where demand has first weakened is the mid-range, for us in Pukekohe that’s the $650,000 to $850,000 range. Weakened demand generates downward price pressure. And as most people don’t step into a million dollar home as the first move, they step up the property ladder. But now that next step is larger as sale price has been squeezed. So eventually even those sellers in the top market segments are ultimately affected.

Downward price pressure in the residential homes market may be an untended consequence of the fuel price levy, but the Reserve Bank and Labour NZ First Greens Government are unlikely to weep any tears. If anything they may well ask, “Why didn’t we do this sooner?” Perhaps the hinted at LVR rule changes are now closer.