The Benefits of Experience

21 October, 2020

I can recall gaining my first knowledge about the housing market back in the 1970s when unfortunately, my father’s home building business was taken down by the collapse in house construction back then. I learnt that the building of houses can be a dangerous thing if demand dries up and you are left with some unsold property.

My next housing experience came in 1987 when I returned to New Zealand after a couple of years in Sydney and landed in the euphoria of a booming economy and surging housing market driven by very loose lending conditions. I recall rumours of Reserve Bank economists buying houses and, driven by a visceral need to buy something, ran four credit cards up to their limits, called it a deposit to my bank, and bought a very cheap house in a gully near Karori in Wellington.

From that experience, rather than the sharemarket collapse four weeks after I moved in, I learnt that basic human instincts, especially fear, can be a strong driving force, and finding a way to remove the worry of not owning a home can cause people to take big risks.

My next housing cycle learning came in the 1990s when I sold my little house and jumped to a very large residence and acreage north of Wellington when appointed Deputy Chief Economist at the BNZ. I learnt that if you can afford it you leap forward as soon as possible to your “final” purchase for family purposes, rather than mucking around slowly working your way up the ladder.

It helped that I bought when the cycle was weak and lifestyle blocks were struggling to sell. The second thing I learnt that decade was that if you sell out of an above-average price location such as Auckland, then decide to move back after a few years, you might find yourself locked out. That happened to quite a few people back then.

The third thing I learnt came late in the decade when prices had been rising over 10% per annum and many people were saying the situation was unsustainable. I remember blindly parroting what they said in a radio interview and fairly quickly regretted saying these words “Kiwis are thick-skulled and stupid if they think house prices will keep rising 10% per annum”. I was right about 10% annual price gains not continuing, but the language could have been better.

I learned that you have to consciously take a step back when popular commentary is all in one direction and do your own analysis of the fundamentals before making big claims.

That learning paid off late in 2008 when collapsing house prices overseas led some people in New Zealand to predict 30% - 40% price declines here. I did my analysis and concluded that the absence of bad bank lending and excess house construction meant house prices would fall 10% - 15% and that would be it. They only fell 11% on average from peak month to trough month.

Why have I run through some of my housing market learnings? Because they help explain why I did not adopt as negative a view as other market analysts earlier this year when we were hit with the Covid-19 global pandemic. My experiences told me that you need to step back from the hysteria and focus on the underlying fundamentals to get a good feel for what is likely to happen.

Hence, from the start of this crisis my focus has been on these sorts of factors helping to mitigate the decline in our housing market, and which have set the scene for a period of price growth likely to run for the next 3-5 years.

· Interest rates are at record lows, set to fall further, and will stay low for many years.

· Net immigration boomed to record levels before lockdown and will strengthen again once the borders eventually reopen.

· There is a very large stack of pent up demand for housing from frustrated buyers unable to find an affordable property.

· Job losses this shock are being experienced mainly by young people on low incomes who do not own homes – hence the absence of mortgagee sales.

· Labour shortages and the bulk of planning rules will continue to prevent a house construction surge as my father enjoyed for a while over half a century ago.

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