Crash spectre hovers over housing market

There are better approaches than trying to second-guess property prices, writes

First-home buyers have a dilemma. On one hand, you have commentators saying it is inevitable that a property price correction – or crash – is just around the corner. But on the other, there is year after year of house-price inflation. If you sat on your hands in 2014, waiting for prices to come off the boil, you would be kicking yourself now.

So what can buyers do if they are worried that a house price drop might be imminent?

How likely is a crash?

Predicting the likelihood of a major house price correction is crystal-ball territory.

Infometrics recently forecast that building consents would hit record levels by 2018, which would result in house prices falling 11 per cent over two years, from next September.

Even ANZ boss David Hisco has registered his concern about the heat in the property market.

Nick Tuffley, chief economist at ASB, said he agreed that price growth would slow over time but was not convinced there would be a drop as big as 11 per cent. He said building activity was not expected to even match population growth in Auckland until 2018.

‘‘In the meantime there is still a big supply shortage building up. It won’t be 2018 until it starts eating into that. Supply constraints take so long to overcome it does put a floor under prices.’’

Once an equilibrium was reached there might be a drop in prices of a few percentage points, he said.

But economists’ predictions are notoriously inaccurate, says one of them, Shamubeel Eaqub.

‘‘Why would anyone trust anyone’s forecasts? They are always wrong. It’s not the job of economists to make forecasts, we are terrible at it.’’

But he said it seemed likely there would be a drop at some point as people started to tire of the hype and fever that had built up in the market. ‘‘When the music stops it won’t end pretty.’’

Should you avoid buying at the moment?

If you can afford to buy and you want to own a house, it is still worth buying.

‘‘If it’s a place to live in, it’s not worth hanging out [for a drop] if you can afford it,’’ Eaqub said. ‘‘It’s your personal decision. But if you do buy, make sure you have got income protection and life insurance up to your eyeballs.’’

Gareth Kiernan, of Infometrics, agreed. ‘‘I see a lot people trying to time the markets. They sell a house because they think the market is going to crash but then two years later they’re regretting that. You’re always going to need somewhere to live.’’

What should you do if you’ve just bought a property and prices drop?

If prices do drop away substantially once you have bought, the best thing to do is hang in there and ride it out.

‘‘Generally, buying and holding tends to give the best results,’’ Kiernan said.

Eaqub said that if a correction occurred, homeowners should focus on ensuring they could meet their repayments. ‘‘There’s no easy fix, you’ve just bought yourself a 30-year hire purchase.’’

The biggest risk was a forced sale when prices were low, he said.

Banks do not generally call in loans on houses, even if the properties have fallen in price substantially, unless there are significant indications that the borrower can no longer service the loan.

As long as you can afford to keep making your loan payments, you can afford to sit tight.

Kiernan said most the biggest risk to homeowners would be unemployment – but at the moment New Zealand’s labour market seems sound.

A drop in property values might mean you cannot move because you might not be left with enough equity to finance another purchase.

But Eaqub said buying houses was not a short-term fix, anyway.

‘‘If you’re planning to move some time soon, why are you buying a house?’’

Adviser Martin Hawes recommended that anyone who owned a property in a falling market should focus on paying down as much of their mortgage as they possibly could, to avoid a situation here they ended up in negative equity.

In other countries that had experienced big property price crashes, people who ended up under water, with more of a mortgage than their house was worth, were the ones who really suffered, he said.

Many Americans in that situation walked away from the property. But New Zealanders cannot do that. Even if you decide to forfeit the property, you will still be left with any debt left over after the sale.

‘‘We’ve got to stop treating houses like a financial instrument or thing to make us wealthy. They are a roof over your head,’’ Hawes said.

What about investors?

For property investors, it’s a bit of a different story. Hawes said he would recommend not buying at the moment – and even selling properties that were highly-leveraged.

‘‘I don’t think it’ll happen any time soon but I wouldn’t be 100 per cent in rental property at the moment.

‘‘There’s the potential there could be quite a big crash. We haven’t seen that in New Zealand before and we can’t say definitely that it will happen but as prices continue to climb it becomes more and more [likely] and the risk of a major fall becomes greater.’’