As I get older (by the day!) I’m learning that financial commentators are no better at predicting the future than my pet snail Bob. Bob will likely have a fairly short life because my wife is a gardener and he won’t be able to resist the strawberries.
Has anyone else spotted how often financial commentators flip flop and nobody holds them to account for their opinions. Yet the public rely on their financial leadership to make sense of the world. Even bank economists seem to constantly reshape their stories to suit the current day.
At one point there was a financial tsunami about to hit. Now, many are saying that there will be a pronounced recession which we should ride out by the end of 2009. Commentators who were saying house prices will drop by 25%-30% are slowing retreating to about 15% simply solidifying the falls that have already taken place.
In my opinion the media (in all of its forms) plays an increasingly important role in our lives and in shaping our opinions. We need to hold our media and commentators more accountable for the quality of its commentary.
One area that seems to get the superficial once over is our Debt to Income ratio and Housing Affordability. At one stage we were told that house prices will drop by 30% and won’t increase in real terms above 2007 values for 30 years!
I am yet to see a convincing argument and I don’t have all of the answers, but do have some observations and questions.
A single-minded focus on Household Debt to Income ratios ignores that New Zealand is a small country of SME businesses. These business owners naturally borrow against their homes. Although technically banks are supposed to treat these as Business Loans many are written as Home Loans because it’s cheaper and easier that way.
I also wonder about the reliability of our statistical income measures. Our tax system heavily encourages us to reduce our taxable income. How many self-employed people adjust their income to $38,000 or $60,000 simply to pay less tax? From what I can see we have a big cash economy among the Asian community and the Trades.
We have also invested heavily in residential property. Much of the debt growth of the past 5-7 years has come from baby boomers buying 2nd and 3rd properties. With high interest rates (and depreciation) the majority of these are “loss making” and increase our Debt to Income ratio by increasing debt and reducing income! But what happens when interest rates fall or property prices increase? Income by way of capital gain is not captured in our income measures.
Commentators say New Zealand has poor housing affordability. How is it that Kiwis can afford to pay 9% on their mortgage compared to say 4%-5% in most overseas countries? What happens when interest rates drop from 9% to 5% – are houses suddenly affordable again? Only 3 months ago we had Bank Economists telling us that mortgage rates would not decrease – but they have!
Increasingly, I’m convinced that we will not see a further collapse in the property market, just more of the current situation with prices dropping where owners have to sell.
Headline property prices will fall a further 5%-10% but this is just the statistics catching up with what has already happened. There is good buying out there for those looking hard enough.
