Economic analysis cannot tell you when the price of a widely held and easily accessible asset like housing has reached a peak.
It cannot tell you what the decline will look like.
It cannot tell you when things will bottom out.
This is because while economics deals with human interactions in the trading of goods, services, assets and labour, motivators of these transactions change over time.
These motivators have definitely altered post-GFC; hence, essentially all economic forecasts since 2007 have been wrong.
Motivators of investment asset purchases cannot be modelled even in steady times which we liked to think prevailed, sort of, in the period before the GFC of 2008-2009.
Therefore, nothing can tell you when an asset market represents dangerous buying except gut instinct based upon one’s experience of such cycles in the past.
To help you get a gut instinct for the current housing market and why I think we have now entered the earliest stages of the end game, consider the case of the regions, or more specifically Wellington.
Over 2014 and early last year, we used to write about how Auckland prices had risen some 90% since 2009 but Wellington had gained just 6%.
Wellington was a screaming buy.
But few people transacted.
Over a year ago, you could pick up good property for what people now consider to be a song. Now we see that prices are soaring, listings have collapsed, and people are flocking to open homes to buy something, anything.
Has the Wellington economy suddenly taken off? No.
Have average incomes soared? No.
All that has happened is that just over a year ago, or even less that that according to some people, Auckland buyers appeared.
Seeing these buyers purchasing properties at low prices relative to Auckland, offering good yields, the locals jumped on the bandwagon. And around the country, it is the locals driving regional housing markets.
Not Aucklanders. Not foreign buyers even though to reinforce their buying determination people swap stories of Chinese buying property – Rotorua being a favoured location apparently.
But just under a year ago, I was told a story of Chinese buying in the Hutt Valley.
It does not matter whether such buying is occurring or not. People simply swap such stories to help them justify their decision to buy anything.
Nothing out of the ordinary there.
We have seen it before. These are the late-cycle buyers now in play, the market entrants who have capitulated from their view that prices would fall.
Matter of Moment
But it pays to think in terms of what is becoming, in former Prime Minister David Lange’s language, a ‘matter of moment.’ And what is becoming important is this. Politicians globally are being sideswiped by voters choosing to express their discontent at many of the trends they see around them – Immigration, housing affordability, young losing out to the old, regions suffering compared with the city agglomerations.
Divisions have become more apparent and voters are expressing their concern about these divisions, about those cast aside and derided, or somehow left behind.
Hence the Brexit success in the UK, the strong support for Bernie Sanders and Donald Trump in the United States, the rising support for far right and far left parties throughout Europe, and the miscalculation of Malcolm Turnbull across the Tasman in calling an early election which he may win – just.
How is this relevant to New Zealand and our housing market?
We like to think of our society as egalitarian, and we get up ourselves discussing how we are doing well while foreign economies and societies struggle with an amazing range of intense problems.
They include the secular decline of sclerotic Europe from which the British have now detached themselves; expansion of China which is about to run into the twin problems of a failing economic model and military superiority of other powers, yet again, such as the United States and Japan; the traditional insularity of the United States and divisive Presidential election contest; the inability of Australia to produce a government able to arrest the deterioration in government accounts and competitiveness; the failure yet again of the socialist model, this time in Venezuela.
And so on.
Tony Alexander is the Chief Economist at Bank of New Zealand (BNZ). The above article is a part of his economic commentary on July 7, 2016. For full text, please visit www.tonyalexander.co.nz.
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