Price retreat from unsustainable levels is underway
NZ house prices rose 46% between May 2020 and December last year. The increase occurred at a time when there had been extensive debate and concern about a shortage of housing in New Zealand. This resulted from a doubling of the population growth rate between 2015 and 2019 and a housing stock struggling to grow after falling to the weakest production levels in decades after the Global Financial Crisis.
These factors and massive monetary policy easing contributed to a surge in FOMO – fear of missing out – and it is the feeding frenzy of those not wanting to miss the boat which pushed prices to extreme levels.
As we now have evidence of prices falling 1.5% in December and 1.1% in January, thoughts naturally turn to how far prices will decline. But there are so many unpredictable factors in play and buyers and sellers need to be wary of trying to pick market timing. Instead one needs to remain strongly focussed on long-term housing requirements and desires.
First, we do not know to what extent prices were pushed to unsustainable levels simply because of a pyramid-scheme type of mentality in play for a while. FOMO has already disappeared in most regions, and we have entered a buyer’s market. But did prices get pushed 10% above reality by the frenzy, 20% or even 25%? We don’t know.
Second, the Omicron wave of Covid-19 infections is sweeping through New Zealand and we are beginning to envisage a staged return to “normal” with the virus endemic to the population. How quickly will we switch our spending focus back to offshore travel and away from for instance buying one’s first home?
Third, many older people used the pandemic as a trigger to retire early to some preferred locations around New Zealand such as Northland and Hawke’s Bay. Others have chosen to downsize earlier than planned. Have these accelerated plans ended and does that mean there is now an unusual decline coming in the usual internal migration to some of our regions?
Fourth, opening of the borders is widely expected to bring a wave of Kiwis back to New Zealand. But what about the high tendency for us Kiwis to go overseas when labour markets are strong offshore and the fact that demand for our employ in Australia particularly now is the highest it has been in decades? The risk is we see net outflows of people from New Zealand but how much and the extent to which people focus on that is impossible to know.
There are other factors. But the upshot is that if house buyers or sellers base their plans on predictions of what prices might do over the coming 12-24 months, they could easily make some costly mistakes. Buyers anticipating large declines may hold off. But if falls are limited to 5% - 10% and they expect more they may miss out on making a purchase when the range of properties available for purchase is about to reach the best levels in a decade.
Sellers believing an influx of migrants and rising construction costs will see prices rising again soon may remain stuck in a property no longer meeting their requirements for a long time.
The upshot is this. Over the decades very few people have ever said they are better off now because they delayed making their property purchase. Very few sellers have ever said they dodged a bullet by offloading quickly and avoiding price declines. All those who kept an eye on what is best for them and their families made a decision with a long-term focus that historically has made all price fluctuations around the upward trend get lost in the wash. Such will eventually be the case for the correction underway currently. For the record, my current best pick is prices decline 5% - 10% on average.
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