Lockdown has taught us a thing or two
What’s happening to the national average house price has never been more irrelevant.
Many of us have hurtled out of lockdown with barely a backwards glance. Keen to get haircuts or go out for lunch, we’ve not wanted to dwell on the memory of levels 3 and 4.
But it seems New Zealanders have picked up some financial lessons during the lockdown. If they stick, they could set us up for a more secure financial future.
LIFESTYLES CAN COST LESS
Many purchases we previously thought of as ‘‘essential’’ have turned out not to be. The experience of living under heavy restrictions for five weeks has proved to many people how little they can spend, if they need to.
Given the economic uncertainty we are facing, that’s a lesson that’s likely to stick for some. Gareth Kiernan, Infometrics’ chief forecaster, expects a 4 per cent decline in private consumption over the year to March 2021.
Unemployment and house prices. The evil pair of economic indicators with the power, the drive, the emotions of a nation. They’re physically and psychologically contagious. They control our willingness to spend and our ability to make decisions.
Right now, buying and selling houses brings uncertainty for many people.
Will we see a big downward swing in prices due to unemployment? Are the smart people going to wait in the wings for other people’s desperation and snap up a bargain?
Let’s put some perspective on it. For the majority, any price movement is entirely irrelevant. In New Zealand, roughly 6000 to 7000 houses are sold each month. It equates to 75,000 houses a year. We have 1.85 million residential properties, so 4 per cent of the housing stock sells annually.
In normal economic conditions, 96 per cent of us sit around doing nothing with our homes. That’s why the housing market and the sharemarket are the tortoise and the hare. Price movement is incredibly slow and sticky, because so few of us have any need to transact.
My prediction is some people who were planning on lifestyle moves will be cautious and pull back from
their plans.
Others will have their hands forced and will sell. It seems unlikely that supply will outstrip demand and that’s what it takes for a proper price shock.
As usual, 96 per cent of us will be glued to every movement like a soap opera, even though we are not involved.
These conditions could grind away for several years depending on whether we get a second or third wave of unemployment, caused by social distancing regulations limiting our sales and production capability.
In the meantime, first-time buyers sit on the sidelines wondering what to do.
The fiction of economic forecasts
ANZ predicts a 10 per cent to 15 per cent fall in house prices and Bank of New Zealand predicts a drop of 11.5 per cent. You only have to open the weekend paper to see a cartoon house falling off a cliff.
It’s all a bit over-dramatic for a setback to prices we saw one year ago.
The truth is these economic predictions are a work of fiction in a practical sense. An economist’s job is thankless because their numbers reflect the modelling of an average across an entire economy.
Covid-19 presents such unusual
economic challenges
‘‘That might not sound like much, but this measure of activity only fell 0.9 per cent in the wake of the global financial crisis,’’ he says.
‘‘By comparison, retail trade volumes dropped 5.4 per cent over the year to March 2009, so a drop of about 10 per cent in retail volumes seems possible this year.
‘‘Categories most at risk must be durables – people cut back on durable spending in a downturn given high costs and the ability to make do with what they have – [as well as] transport, recreation and culture, restaurants and hotels.’’
You’ll hear people say less spending is bad as we need money to cycle through the economy. While that’s true, don’t feel guilty about getting your own finances in order before you try to prop up the country with handbag purchases. that very few property buyers and sellers will end up ‘‘average’’. It seems more likely that some segments of the market will suffer quite pronounced falls, which are localised and not particularly widespread.
They’ll make for some doozy headlines, though. Other areas will soften. Mostly the market will simply freeze. When people delay their decisions, volumes become thin and the figures are unreliable.
The best thing a first-time buyer can do is learn to read the local market and not compare it to the national averages.
Which industries drive local jobs? How many people are losing jobs and do they tend to own homes? Unemployment could put pressure on landlords, but what does your market of local landlords look like? The more grey hair, the less likely they’re flinching. They simply don’t have debt.
Will your local Airbnb market come under pressure or are they bach owners who cover expenses by renting to other Kiwis over summer? Learning to read the market means watching local numbers and listening to people around you. A tradie walked into my home last week and said he’d spent lockdown doing home maintenance and discussing how to get ahead in life with his
LIMIT CONSUMER DEBT
There’s nothing like an intense, unexpected downturn to make you realise that the time to start paying off your debt was a while ago.
In March, the amount owed by credit cardholders in New Zealand dropped 5.4 per cent – or about $300 million. The reduction was more than five times the size of the drop in credit card debt in the immediate aftermath of the GFC.
It’s likely that trend will continue as the combination of lower spending and concerns about the future combine to keep our cards in our wallets.
If New Zealanders can avoid carrying balances on credit cards – and limit expensive consumer debt – that should position us for a more sustainable post-Covid financial future.
BE WORK-VERSATILE
wife. They’d like to buy a rental property. That brought a smile to my face. There are job-secure couples in the wings.
A friend put a property on the market just as the lockdown was announced. It’s a tiny house a couple of minutes’ drive from the beaches of the Abel Tasman. Bad timing? I just clicked on the Trade Me Property app and it’s had a remarkable 15,000 views. In lockdown people had time to discuss what’s important and make plans. It stokes the demand side.
Two sets of neighbours are about to embark on home extensions and renovations. There’s a noisy geotech rig hammering away next door and it’s like music to the ears knowing the construction industry hasn’t stopped.
I’d usually be off to Europe about now. What to do instead? There’s a temptation to rent a house in Wa¯naka for a month or two. Airbnb owners down south will be doing loops of the lounge reading that idea.
It’s only anecdotal evidence, but real stories can offer up a different type of leading indicator at a local level. Unfortunately economists can’t scoop up anecdotes
into their models.
The crisis that no-one saw coming has forced a lot of people into some quick decisions.
People who’d never had as much as a desk set up at home were suddenly working full time from their kitchen tables, and businesses that previously had no website sales were working out how to take online orders for delivery.
With entire sectors suffering significant disruption, many people have had to quickly turn their attention to how they can use their skills in other areas.
The businesses that can harness technology and find new ways to cater for a changing world, and the employees who can adapt to new methods of working, new places of work and even new industries, will find it easier to thrive.
Trying to decide? Remember these tips
■ Prices won’t shift quickly, if they shift at all, in some areas.
■ Don’t look at Queenstown and expect your area to behave the same. It has a different population and employment structure.
■ Some housing types will act like a separate market within an area due to their resilience or responsiveness to unemployment.
■ The national average has never been so irrelevant. Getting granular is key.
■ Expect to see distorted figures and big headlines in the next six months. Unless they are at meaningful volumes, they are confirming no more than that we are living through an extraordinary event.
Janine Starks is a financial commentator with expertise in banking, personal finance and funds management. Opinions in this column represent her personal views. They are general in nature and are not a recommendation, opinion or guidance to any individuals in relation to acquiring or disposing of a financial product. Readers should not rely on these opinions and should always seek specific independent financial advice appropriate to their own individual circumstances.
CHANGE CAN HAPPEN FAST
We had an idea that the run of economic growth had to stop at some point – but no-one was expecting the dramatic shutdown caused by Covid-19.
It’s a good reminder that you never know what is ahead. Having emergency savings in the bank or an insurance policy that can pay out to help you through personal disasters can make the difference between powering ahead or falling off course.
INVESTING ISN’T JUST FOR THE GOOD TIMES
The downturn on sharemarkets in March was a shock to many people who had only seen positive returns for almost a full decade.
For many KiwiSaver members, it was the first time they had properly seen their balances fall. It reinforces the message that you need to be in the right investments for you – not chasing the ones giving the best returns right now.
Data from investment research firm Morningstar shows that in March more than $1.6 billion moved out of higher-risk KiwiSaver funds, which its data director Greg Bunkall described as ‘‘extraordinary’’.
‘‘Anecdotally we are hearing KiwiSaver providers telling us that they are now seeing some of those same members moving back into growthier funds again, after the markets rallied on the back of central bank and fiscal stimulus.
‘‘This crystallised those losses forever. These sorts of decisions can have meaningful outcomes on the quality of someone’s retirement.’’
Get financial advice from the outset so that you are confident to stay the course whatever markets do in future.