Here is my guesstimate and prediction for what will happen this year (& beyond).
I have said previously that I think that housing will be the major factor here in New Zealand, that marks the difference between recession and depression (and revolution?). There will be a number of triggers, the cost of oil, the cost of food, increasing taxes and increasing unemployment. But it is housing that is the elephant in the room. The current major indicator on this is the current situation with renting in Auckland. Auckland is the canary in the mine (or perhaps more accurately it is the furiously boiling pot). Auckland is where the money is and where the jobs are and the biggest concentration of people. It is the economic centre of gravity of the country. What happens to Auckland is what shapes the country. There are other sectors of the economy and the country that may in large part be insulated from Auckland’s economic troubles, but they are secondary and marginal, Auckland sets the benchmark. Interest rates, rentals, house prices are all lead by Auckland, what happens there is integral with what happens to the whole country.
For the last decade house prices, and rents(to a lesser degree), have been increasing rapidly. For most of that time there was also a cry that houses were getting priced out of the reach of first time home buyers. That is true, they were. Although that didn’t stop an awful lot of people taking on monumental debt in order to finance their way into the property market. Many of them may have thought they were brilliant investors and every time the market surged higher it only went to prove how smart they were, and how much money they were making in capitol gains. Although, that only works if the market continues to climb. Huge numbers of people were convinced(or convinced themselves) that that was the only possible future, and housing Always appreciates. Well in fairness, in their lifetimes that may well be true, but on a slightly longer timeline, actually not so much.
However, leaving that issue aside for the moment, lets drill a little deeper into the current situation.
We currently have a bulge in the demographic of people who were priced out of the market and have never owned their own home, they have always and continue to be renters. We also are on the front face of another demographic wave, those who over-leveraged themselves in property and are now having to back out of the market, either voluntarily or via foreclosures. Significant numbers of these people are returning to the rental market looking for accommodation. Whether or not there is actually a shortage of houses, there is definitely a shortage of available housing, and this distinction is the critical part of the equation.
Take Auckland, it has a particular number of people and a particular number of houses(and bedrooms). Divide one by the other and you have one measure of whether there is a housing shortage or not. I suspect there isn’t actually a housing shortage if that was how things were actually worked out. But it’s what is actually happening that is creating the crisis, and that boils down to what is happening with the ownership of property and housing. It all has to do with the convolutions of the money flows and the financing of the market.
In a nutshell, it all has to do with everyone with a financial stake in the game trying every trick they can to avoid taking a loss. Best of luck with that.
Unfortunately there is no way out, the losses will eventually have to be faced. But in the meantime the biggest game in town is all about what can be done to avoid, evade and postpone the process, in the hope that it will be some-one else who pays the price. And in that regard, morality, ethics and rationality have no place in the equation. This is all about pure rat-cunning and survival. This is a pure power play, kill or be killed.
The way it is playing out is that no one wants to sell their property – evidenced by the shortage of listing by Realtors. To sell now would mean taking a loss they either don’t want to take, or can’t afford to take. The rationale being that if they can hold on for a year or so then the market should have recovered and they can get the price they want. That’s a fools dream because under no circumstances is the market going to recover, but that is the whole point about wishful thinking isn’t it, there are none so blind as those who don’t want to see. So in the end they are going to get squeezed out of their positions, they will lose the house, their equity and their savings, but they will drag the whole process out as long as humanly possible. An objective assessment would say to cut your loses as fast as possible and move on, but that wont happen because that’s not human nature.
Some of these people who will eventually lose it all will be owner-occupiers, others will be landlords with a small portfolio of rental properties. For this second group, in order to try and save their investments, what they are forced to do in the meantime is to increase the rents they are charging their tenants as far and as fast as they can. For tenants, they are getting hit on two sides, the pool of people looking to rent a property keeps growing bigger while at the same time the rents keep rising as well. One factor reinforces the other.
Another phenomenon that is happening is empty houses, properties sitting vacant because there are no buyers for them(or there is disputed title). The previous resident has moved out, but for whatever reason no-one else can move into the property as a renter. Generally this is at the upper end of the market. One reason for this is that the rent that would be required to cover the mortgage on the property is still too high even in the current circumstances. In a recession, there simply isn’t the numbers of people earning enough to pay over $1,000 a week in rent. If you could afford that, then why would you not just buy a cheaper property and put that money to use for your own advantage. So the property owner keeps holding out for a rent they will never get, the property remains vacant, and the rental squeeze continues.
Until there is a major surge of properties onto the market at distressed prices which serves to force down the whole property market, things are not going to start improving for anyone. But in the meantime, and even for some time to come into the coming property crash, the numbers of people forced out of home ownership and into the rental market will continue to grow. What is more, they will actually be less and less able to afford higher rents. Inflation of all other prices is going to be a major and increasing problem this year and impacting everyone’s budget.
At some point what must and will happen is that the market capitulates – eventually. Sellers realise they are not going to get the price they want and they can’t hold on any longer, I believe rising interest rates will be the major driver of that. A large number of houses will finally get released onto the market for whatever price they can get. Probably the Banks will be the major instigators of that. They will repossess houses on a large scale and will simply look to flick them on for whatever price they can get (and in New Zealand it will be without the problems they are having in the United States). When the prices are low enough, then either home buyers can re-enter the market, or investors will have an opportunity to make whole-sale purchases of cheap housing. With lower overhead costs, they will be able to rent these properties at far lower rentals than the current landlords can. That will set the market rates and the existing landlords will have to either take the hit and lower their rents too, or exit the market and sell their properties. Once again the effect is self reinforcing, there is a surge and a lag, but always demand and supply is out of sync with the other and it never hits a stable steady state. I am sure everyone would love it to, and all sorts of measures will get thrown at the problem to try and achieve that, but in the end all the interventions(by government and the Reserve Bank) will do is make the problem worse. Indeed it could be argued that interventions started the problem in the first place. But, that aside, at the moment we have got surging rents because of a shortage of available housing, the housing is unavailable because the whole market dynamic is unaffordable. Finally that will roll over, house prices will plummet until they reach an affordable level again (hint: it wont happen fast, it will be slow and grinding). And in the process there will be a massive hit to the wealth of the country and personal fortunes.
No one is going to enjoy that prospect or process. They will bitch and moan and fight it all the way down, but that which cannot be sustained, wont be.
The negative wealth effect will be dramatic and pretty much universal, large numbers of people will be bankrupted and foreclosed on. When housing is such a major part of the wealth and business of this country, cutting that value in half will not be pretty. As well, between losses suffered and a dead property/building market, inflation, interest rate hikes and global economic depression; business margins in most businesses are going to get destroyed and unemployment is going to soar. We have had high unemployment for a long time actually, but the government has until now been hiding it by employing about half the country – that will change, because it must, because government simply wont have the money. Why pay one civil servant $60,000 (who doesn’t really do anything useful anyway) – when you can support three people on the dole for that. Mass redundancies from the public and private sector, at the same time, will be deeply resented and politically explosive.
At what point does an army of unemployed simply become an army? The current situation throughout the middle-east demonstrates exactly what this can lead to – Revolution.
N.B. I would make the point though, that just as in Egypt et al, decapitating the government doesn’t solve the political and economic problems. You are still going to get the destruction of wealth, and costs are still going to climb painfully higher. The time to stop that wasn’t when the pain finally forced the crowds onto the street, the time to stop it was before the issues ran away beyond saving. But hey, too late for that now!
So in summary: Rents will climb higher until they can’t any longer, but in the meantime the process will have bled dry all those people who must rent. The property market will also eventually capitulate and roll over, house prices will start dropping. In a long slow process they will eventually be cut in half (at least), a process extended further because so many people will have been impoverished. The wealth destruction effect will eviscerate the political economy and leave a lot of very hurt and angry people. They will have managed to do it to themselves, but none of them will see it that way. The final result will be house prices a lot lower, rents even lower still, and some sort of political revolution will happen. Just what the nature of that Revolution is, will depend on the speed of change, the personalities that lead it, and the agendas advocated and supported.
(hopefully too, there won’t be any external interference…)
Doesn’t that all sound cheerful 🙂
On the other hand, revolutions aren’t the product of peaceful, prosperous and happy times, they are the product of times of troubles. That I do see in our future, that’s my prediction.
Shall we check back in a year and see how I did?