Housing slump won’t be sweet for anyone

How badly do you want to buy a house? Badly enough to resort to buying chocolate fish in bulk just so you can show the bank how frugal you are?

Reining back smashed avocado consumption is yesterday’s tactic. A bumper crop in Australia last year means the price of avocados has taken a bit of a hit. Instead it’s the price of everything else that is the problem.

The chocolate fish method is a costsaving technique used by one aspiring homebuyer I spoke to this week. Buying an individual chocolate fish as an afternoon treat costs you more than if you simply buy a big packet of them, wrap each in plastic film and take one to work each day.

The tactic probably saves you less than $300 a year, but costs you more in terms of valuable chocolate fish-wrapping moments of your life that you will never get back. But in these lending-restricted times, the hope is the tactic looks better to a bank manager than spending $2 a day on a chocolate bar.

It is surprising that, within days of hearing this story, I heard another of a homeowner with the opposite problem. If interest rates remain at current levels, this homeowner will be paying thousands of dollars more a year than he was earlier paying in rent. Not so bad if interest rates and property prices get back to ‘‘normal’’ – which for him is actually a period of abnormally low interest rates and everincreasing property prices – but he wonders if it will really be worth his while if they don’t.

The irony is that current economic conditions are tough on both property owners repaying their mortgages and those looking to get into the market. Which is not how some people see it. One person told me they thought the economy was entering a ‘‘golden age’’: high wages, no migration, cheap houses, lots of construction, and ‘‘zombie’’ businesses being washed out of the economy.

Leith van Onselen, an economist who writes about New Zealand’s housing market on Australian economics website Macrobusiness, argues the opposite: ‘‘New Zealand is facing a miserable period ahead,’’ he says. ‘‘[Its] housing market was the most overvalued in the English-speaking world and now faces a serious price crash on the back of Reserve Bank tightening.’’

Van Onselen points to buyers who bought into jumbo-sized mortgages at rock-bottom rates over the pandemic. When their low fixed rates expire from the end of this year, many will face a huge lift in mortgage repayments at the same time as their homes plummet in value. ‘‘That’s a miserable combination and helps explain why New Zealand consumer sentiment is at record lows.’’

Which means good times for aspiring homebuyers currently subsisting on filmwrapped chocolate fish, right?

Not so much. If interest rate rises outpace wage gains, mortgage repayments can actually get more unaffordable even while prices decline.

Higher interest rates also affect future housing supply since all parts of the construction value chain are so reliant on debt. Developers need debt to finance construction, builders and subcontractors work first and invoice afterwards, consumers need banks to lend money to them so they can buy properties from equally debt-swamped developers.

NZ Institute of Economic Research principal economist Christina Leung says there are several ways to look at housing affordability.

While many people look at house price to income as a measure of affordability – which could improve if wages rise and prices come down – there is another measure that could get worse.

This is the ratio of mortgage payments to income. ‘‘The increase in mortgage rates will potentially mean a deterioration in housing affordability, given the sharp rise in house prices we’ve already seen, requiring larger mortgages to be taken out,’’ Leung says.

The key is to hope wage rises keep ahead of interest rate rises and inflation. She sees a chance this could happen thanks to low unemployment.

But just how realistic is it to expect wage rises to keep pace with interest rate rises, even with the labour market as tight as it is?

Van Onselen acknowledges the labour market is ‘‘currently the best in generations’’, then attaches a ‘‘but’’.

‘‘Given the economy is so tied to the housing market and household consumption, it will likely be thrown into recession and unemployment will lift back up. This will kill the prospects of wage growth too.’’

The chances of this housing market downturn morphing into a ‘‘golden age’’ for anyone are fast diminishing.