Uncertainty v's Confidence

Uncertainty v's Confidence

At the time of going to press our Election is still a few days away and the popular media is awash with uncertainty. So before looking forward it is useful to briefly look back. NZ’s previous property boom period peaked locally in the late winter early spring of 2006. In early 2008 prices tailed off sharply. Back in 2007 house prices were also considered excessive. Economists such as Gareth Morgan wrote extensively about a market overpriced by 20% - 30%. There were predictions by many of ‘bust inevitably following the boom’. Dire predictions echoed across the media. And external events far beyond NZ’s ability to influence forced change. For by 2006, the progressive deregulation of the US finance industry had facilitated the fraudulent instruments that would almost take down the Global Financial System. And NZ caught the side-wash of that. The resulting clamp on finance choked the property market and put builders and developers out of the market. In early 2008 prices dropped abruptly. Locally, residential sales volumes fell from 497 in FY 2007 to 308 in FY 2008 before lifting to 402 in FY 2009.

Ironically as the GFC resolved, NZ’s favourable geopolitical and economic position made it a destination of choice for many, triggering a further immigration and property boom starting in 2012 and peaking in mid-late 2016. Then by 31 March this year, even though sales volumes dropped and prices faltered from October 2016 to March 2017 Pukekohe’s average and median prices had risen to $666,066 and $632,000 respectively, fitting neatly into the ‘affordable home class’. As near as darn it $200,000 above the highs of 2007. Sales over $700,000 were now commonplace and the top end of the market was where significant value growth had been.

,

NB Graph though illustrative is probably not critical

Whatever the final shape and thrust of NZ’s next government we may again catch the backwash of events beyond our control. The Aussie economy looks to remain stalled, with structural matters to sort out. More significantly, the trillions of US Dollars and Euros issued by the Federal Reserve and the European Central Bank combating the GFC still overhang financial markets. The politics of the Korean Peninsula have re-activated the cold war phrase ‘mutually assured destruction’. International relations remain strained with multiple Russia – USA rub points and a new set of strained relationships within the Arab nations.

Domestically, even though central government has provisioned substantial regional infrastructure development to support new home builds the building industry has limited capacity. It is short of skilled workers. Meeting politicians’ campaign promises on home build numbers will be challenging even if financial restrictions are lifted.

With a National Party lead Government there will be fine tuning and pretty much business as usual. With a Labour Party lead Government it will take a while longer for the market to settle into a new pattern. Changes to tax write off regulations will hurt those who own one or two rentals and are negatively geared. Not until their first budget, in May 2018 probably, will a Labour Coalition’s new policies become truly transparent.

So even though NZ’s economic position in 2017 remained strong: with our election behind us what lies ahead is uncertain. For our market it’s simply down to confidence, cash and timing. Developers need both, as do builders and first home buyers. Timing is a Government issue. Employment levels are high, there are hints of wage growth, so an easing of loan restrictions would release buyer confidence and demand. Release this demand before there are sufficient homes available and prices will spiral upwards. Keep the demand choked off, change the tax regulations and development and building will slow further mortgage sales will become more commonplace and prices will slide downwards.