There are essentially two types of people in my life right now*. Both are equally worried.
The first type are in possession of a house (or houses) and a mortgage large enough to deserve its own acronym. They pay much more in interest each year than I do in rent; and their 'investment' is only a good one if house prices continue their climb, and the Chinese their saving. Whenever the subject of the housing market comes up, their voices take on tones of forced confidence and their eyes start to twitch. "Housing prices have increased 300% over the last 5 years," they opine, "I see no reason why this won't continue".
The second type have neither a home nor mortgage, nor much prospect if ever having either unless they take the plunge as soon as possible. At social engagements they can often be heard making anxious statements such as, "crazy to buy at this price", "it's a bubble for sure, mate" and "what goes up must come down".
The question that keeps both types up at night is, obviously, 'what will house prices do now?' If you don't own a house and prices trend over the next 5 years as they did over the last, then you may never do. On the other hand, if prices stagnate (or even drop) then you've bought a real bad investment. Likewise, if interest rates rise significantly.
The answer to the all important question question of future price trends all comes down to the degree that we are in a speculative bubble. If it's a bubble, it ought to deflate eventually. If it's not - if some underlying reality of the housing market has changed - then things could continue indefinitely (perhaps not rising as fast, but still going upwards).
For what it's worth. I think it has to be a bubble. Have a look at this graph from this Brian Easton comment if you don't believe me.
But, then again, I would say that: I don't own a home.
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*There's also a third type, who I try not to think about, who bought their home some years ago at a farcically low price and now wander round with Buddha like serenity.
Monday, January 21, 2008
Housie
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7 comments:
cactus kate has a much better graph from robert shiller. tracks house prices back to 1860.
What is more important is affordability. I was gobsmacked when i read how high NZ house prices are compared to median income.
My guess is nominal price stagnation for the next 2-3 years as high CPI inflation and wages bring a catch up.
Yup, definite bubble.
I'm more pessimistic than sage. Soon the negatively-geared investors will be forced to sell, all at about the same time.
Put me in type II (by choice)
Sage, where is the wage inflation going to come from, it aint the 70's. You want a pay rise bwahahaha, were sending the factory, call centre etc to 'insert developing economy with cheap wages'...
we will see a revert to mean, I work in Property and in south aucks there are hundreds of rich mastery "graduates" (or as we call it rich misery) trading with each other and all desperately trying to clip the ticket for 10k, settled one property with a contemperanious settlement with 4 sets of traders.
This year will be the fire sale year, I wish i could do ggogle word stat stuff to see how the trade me advertising language HAS changed.
People are walking away with nothing after owning in sth aucks for two years, not able to roll over mortgages because of affordability, so they sell and after lawyers fee and real estate costs, are back zero.
Those type threes are starting to get nervous, lots of my type threes went to trade up, got a fright about how big the payments would get.
One last thing am 35, babies are the new black at the moment, all these people of my age are breeding like mad and also got in the market in the last 3 years, welcome to one income and mortgage reset hell on a scale we have not seen. Took me alot of talking to convince the wife it was babies or house not both YET! Think i dodged a bullet?
Thanks Sage, Stephen and Andy,
For what it's worth I think that the correction when it comes, even if only a flattening of price rises, will be longer than 2-3 years. I think things could be worse than this too. But I'm really not sure.
The nightmare bubble burst scenario would be Stagflation. High unemployment so people would really struggle to pay their mortgages and high inflation (probably leading to higher interest rates courtesy of the RBs mandate). Given the current global economic environment this would seem a possibility, but how likely I don't know.
Similarly, even without stagflation if the current market mess turns into a global credit crunch and interest rates really start to bite , that would be bad too.
But I could be wrong. I was several years ago when I thought the market had gone as far as it could go.
One final thought - part of the reason why I think this has to be a bubble is the attitudes of my friends. Their decisions about house purchases just don't seem rational; the either appear to be motivated by: belief of sure capital gain (based on the certainty that things will rise in the next 5 as they did in the last); fear of never owning a house; or the desire to buy because everyone else they know is.
Of course, as Sage might well point out, I'm a tree hugging lefty so maybe my friends never was that rational in the first place...
"One final thought - part of the reason why I think this has to be a bubble is the attitudes of my friends. Their decisions about house purchases just don't seem rational; the either appear to be motivated by: belief of sure capital gain (based on the certainty that things will rise in the next 5 as they did in the last); fear of never owning a house; or the desire to buy because everyone else they know is."
Thats what alerted me too, then went on the intertubes and got scared. i hope we get flat house price growth, a crash we don't want or need.
A question that my 4th form level at best math can't figure :)
Are we already looking at house price appreciation below the rate of inflation. In other words house prices look to be going up but are in fact dropping due to inflation and the cost of money??
Have you read 'Shock doctrine' by Naomi Klien ?
Hi there Andy,
Are we already looking at house price appreciation below the rate of inflation. In other words house prices look to be going up but are in fact dropping due to inflation and the cost of money??
According to Stats NZ (http://tinyurl.com/2mmeym [PDF]). Housing prices were still rising in the December quarter and were still just above the rate of inflation. This would, obviously, vary from locn. to locn.
I haven't read the 'Shock Doctrine" Yet I plan to - is sounds really interesting although I wonder whether it doesn't perhaps veer a little close to trying to fit one snug metanarrative over of messyness of history.
Have you read it?
Hi Terence,
My argument about housing and inflation wa not to well thought out, but in my head the cost of borrowing has increased, the rate of inflation olus increases in the cost of borrowing would outstrip any 'gains' in housing to my mind.
Shock doctrine is a big book, would have been better as an essay. It has a good argument running through it, but kind of gets repetitive and gets a bit lost at the end. I got it for xmas and had it finished pretty quickly.
Kind of solidified in my mind what I thought but bought the strands together.
My advise, borrow from library! Or I can lend you my copy, my Dad wants to read it some time too..
I think you should read it and post a review.
Cheers
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