So the last will be first, and the first last. For many are called, but few chosen.
—Matthew 20:16
You already know this: Kiwi property investors are now experiencing a turbulent time.
We’re talking about sleepless nights.
We’re talking about strained finances.
We’re talking about uncertain futures.
Source: Image generated by OpenAI’s DALL-E
Right now, for property investors, the five stages of grief are well underway:
- Denial.
- Anger.
- Bargaining.
- Depression.
- Acceptance.
So, where exactly are we in this grief cycle? Well, perhaps we’re still stuck in the bargaining stage:
- According to Interest, the overhang of unsold properties has soared by 289% in June 2024, year-on-year. This means that houses for sale have reached a record high. Unfortunately, few buyers are actually showing up. Auctions seem to be hitting a 11-month low.
- Meanwhile, the economists at ANZ Bank have adopted a more pessimistic tone. They are forecasting more downside risk for the rest of the year.
So, given the circumstances, will we see relief from our Reserve Bank? Can we expect them to cut interest rates very soon? Well, yes, all the signs are certainly there. However, it’s by no means a slam-dunk. Here’s why:
- Today’s base rate of 5.5% is hugely elevated from the record-low 0.25% that we saw during the Covid years.
- This means that even if the Reserve Bank does cut, you should expect a gradual easing of monetary policy. What you cannot expect is immediate relief.
- You have to remember: our economy is a very complex animal. It has millions of arteries in its body. Millions of blood vessels. It’s about push and pull. Production and consumption. Demand and supply.
- So, this means that even if rate cuts happened today, it would take roughly 18 months before these changes flow through the entire economy.
- Sadly, this might be too little too late for some people. They may be struggling to see past the next three months, let alone the next 18.
Ultimately, the main issue here is one of liquidity. Here’s how Investopedia defines it:
Liquidity refers to the efficiency or ease with which an asset or security can be converted into ready cash without affecting its market price. The most liquid asset of all is cash itself. Consequently, the availability of cash to make such conversions is the biggest influence on whether a market can move efficiently.
The more liquid an asset is, the easier and more efficient it is to turn it back into cash. Less liquid assets take more time and may have a higher cost.
So, are we seeing a lack of liquidity in the property market?
- Well, just think back to the glory days. When house auctions were packed affairs. When properties were being flipped at a breakneck pace. When everyone was hyped up on the easy profits.
- But what we’re seeing now is the complete opposite. There are no more trumpets and confetti. Instead, what we have is a more sombre mood. You can’t move housing stock that easily anymore.
So, why exactly is all this happening? Well, what it comes down to what’s known as ‘the pain trade’. Here’s how it works:
- From time to time, the market will suddenly turn psychotic. Without warning, without pity, it will inflict violence. Delivering the maximum amount of pain to as many investors as possible.
- Indeed, housing is the most popular asset class in New Zealand. Therefore, it has become the most crowded trade in the country. And the most crowded trade is always the one that’s ripe for mass murder.
- So, if you’re an investor, this moment will surely test you. Do you continue to hold on in the hope that the punishment will eventually work out in your favour? Or will you cut your losses because you cannot bear the agony any longer?
Of course, you might argue that the pain trade for our housing sector has long been overdue. Just think about how we got here:
- From January 1992 to November 2021, the median price for a New Zealand house rose from $105,000 to $925,000. That’s a surge of around 780% — or a compounded annual growth rate of around 7.5%.
- So, for almost 30 years, New Zealand has been the best-performing housing market in the Western world. A gold-medal victory. A podium finish.
But wait. Hold on. Look a bit closer. You’ll start to see the cracks in that achievement:
- New Zealand is not a high-income nation. In fact, our median annual wage is only $65,000. In real terms, our salaries have been sliding backwards for a long time. Clearly, our productivity and efficiency have deteriorated.
- To make matters worse, our real estate has become one of the most expensive in the world. In the third quarter of 2023, it was reported that housing in Auckland had a median price-to-income ratio of 8.2.
- To put this into perspective, a ratio of over 3 is considered unaffordable. Meanwhile, a ratio of over 9 is considered impossibly unaffordable. So, for the average Kiwi, the cost-of-living squeeze is undeniable.
Ultimately, here’s the problem:
- Basic economics suggests that we’re going to see what is known as a ‘reversion to the mean’. Quite simply, this means that a period of outperformance for an asset class will eventually be followed by a period of underperformance.
- You can think of it as being a reset button. The growth in asset prices must reset to some kind of reasonable long-term average. Therefore, a reversion to the mean is due.
Of course, I could be very wrong here. My assessment could be totally inaccurate:
- New Zealand property may shrug off this pain trade. It may shrug off elevated interest rates. It may even shrug off any talk by the government of ‘flooding the market’ with affordable housing.
- Perhaps property prices will recover by the end of the 2024. If so, perhaps an annual growth rate of 7.5% will resume by 2025. If so, perhaps the median price of a Kiwi home will hit $3.9 million by 2045.
I am humble enough to admit that I really don’t know what the future holds. I’m keeping an open mind:
- However, do you have personal experience with property investing? How are you coping during this challenging environment? I value your insights, and I’d love to hear from you.
- You can reach out to me at cs@wealthmorning.com.
Regards,
John Ling
Analyst, Wealth Morning
(This article is the author’s personal opinion and commentary only. It is general in nature and should not be construed as any financial or investment advice. Wealth Morning offers Managed Account Services for Wholesale or Eligible investors as defined in the Financial Markets Conduct Act 2013.)