Here’s a reader question that’s likely crossed your mind recently too… “Will New Zealand house prices ever fall?”
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Reader Jim R. writes:
“There may or may not be a question here but I thought I’d ask. It’s more based around property but may be linked.
As inflation is here to stay for a while the general idea is [precious] metals will rise in fiat value due to demand for a hedge.
The only barrier to metals rising in the short term is selling due to margin requirements or bank manipulation in my view.
My question is based around kiwis love affair with property and if prices will correct.
We all know property is way overvalued due to low rates and FOMO but with tradesmen demand, supply issues and inflation, will property ever come down or is a plateau all that we can expect?
If not then the only reason not to buy property now is the potential rising rates. And that’s another story.
I see rate rises as a sure thing next year and many overleveraged people coming unstuck.
Either way I won’t be selling my metals just yet.”
So What Do We Think?
We’d say our reader’s statement “The only barrier to metals rising in the short term is selling due to margin requirements or bank manipulation in my view.” is accurate. Our guess is precious metals will continue to trend up, albeit with corrections along the way. Just like the one we have experienced since last August 2020. A correction that looks to now be over, as shown in the chart below.
NZ Crowned World’s Frothiest Housing Market
But yes you could make a good argument that property won’t crash. This is despite New Zealand recently getting crowned as the “world’s frothiest housing market” by Bloomberg:
“Real estate prices around the world are flashing the kind of bubble warnings that haven’t been seen since the run up to the 2008 financial crisis, according to Bloomberg Economics.
New Zealand, Canada and Sweden rank as the world’s frothiest housing markets, based on the key indicators used in the Bloomberg Economics dashboard. The U.K. and the U.S. are also near the top of the risk rankings.
…Bloomberg Economics’ dashboard compiles five indicators to estimate a country’s ‘bubble rank,’ with a higher reading indicating greater risk of a correction. Among the indicators, price-to-rent and price-to-income ratios help assess the sustainability of price gains. House price growth measures current momentum.
For many countries in the OECD [Organisation for Economic Co-operation and Development – which the study focussed on] the price ratios are higher than they were ahead of the 2008 financial crisis, according to the Bloomberg Economics analysis.”
While rates remain at record lows people are likely to continue pouring money into real estate. Especially given New Zealanders obsession with property. For many it is their only form of investment.
We could make a good argument that nominal property prices will keep going up in New Zealand. In fact we recently did that in this article. See the section about 1970’s repeating:
Will Property in New Zealand Ever Fall?
As for will property ever come down? We’d guess that it will at some stage in dollar terms. But that could still be some years away yet.
However, any fall will likely depend upon whether we get a period of deflation or not. With such high debt levels for many people, the central banks may not allow this to happen. Instead they could continue to pump things up whenever we get a stall. Although, we don’t think that can continue forever. So either the central planners produce runaway inflation, or deflation and a crash results. The timing of this is the hard part to predict.
Rising Interest Rates Could be an Issue
As Jim says, rising interest rates could be a head wind for property prices. A Stuff article this week highlighted the risk with so many $1 million mortgages now in existence in New Zealand:
“…people with large mortgages will feel the squeeze of rising interest rates more keenly.
Mortgage rates on one to three-year fixed terms are in the 2 to 3 per cent range.
While a $1m mortgage might be serviceable at this rate, it was important to think about what it would mean in repayment terms when rates did start to go up again, Lintern said.
His analysis showed that if interest rates were to increase to the level that was typical in January 2015, monthly repayments for a median Auckland home could increase by almost $2000 per month.
…Lintern said it would be a similar story in the other main centres, where repayments would increase by more than $1000 per month if rates were to rise to the January 2015 rate.”Source: Rise of $1m mortgages sparks interest rate warning | Stuff.co.nz
An extra $1000-$2000 a month could be difficult for some people to find. Particularly if we were also to see rising prices for everyday consumer goods at the same time. As this would further eat into peoples disposable income.
However, there was a somewhat contrary opinion to this:
“But Loan Market mortgage adviser Bruce Patten said there was too much speculation about interest rate rises, especially as there had been no change to the official cash rate yet.
Rate rises were likely to happen in an orderly fashion and an increase of 1 per cent to 1.5 per cent was likely to be sufficient to curb inflation issues, he said.
“That will leave rates settling in the high 3 per cent range, or maybe around 4 per cent. Unfortunately, the people that will have the most impact on is those who have bought over the last 18 months.”
Many other homeowners would have been hunkering down to repay debt while rates were low, he said.”
Timing A Correction is Very Difficult – Here’s What to Do Instead
Even if a correction in house prices may seen likely, timing when this will happen is very difficult.
But a correction in nominal property prices is far from a given.
We think what is more likely is that gold and silver will start to catch up and then overtake real estate’s gains in dollar terms. Which the housing to gold and housing to silver ratios will then show.
Check out these articles for exactly how these ratios work:
So rather than looking at the dollar price of housing and trying to work out when to sell gold/silver, we instead will only look at the ratio between housing and precious metals prices. Because if we only track the nominal or dollar price of housing, we may be misled.
Why? Because house prices may continue to be boosted by low interest rates and reserve bank currency printing, just as they have over the past year since COVID19.
Instead using the housing to gold (and housing to silver) ratio allows us to compare prices to what has happened in the past.
If we use history as our guide, then we will only trade our gold and silver when the ratios get down below 100 ozs of gold and around 1000 ozs of silver. And we are a fair way from both of those still.
Otherwise your guess about property prices in dollar (or nominal) terms is as good as ours!
But now is likely a good time to buy gold and silver, as they remain cheap compared to real estate.