COMMENT: In 1932, as part of his inaugural address as incoming US President, Franklin Delano Roosevelt declared that “the only thing we have to fear is fear itself”. Roosevelt was referring to the impact of the Great Depression which had started in 1929 and which was ravaging the US economy and he made the statement to reassure the American people that they would come through the crisis stronger – a prediction which proved to be correct in the fullness of time.
His statement was intended to calm the nerves of his people after three years of economic uncertainty. Many people could see no way out of the crisis and were making life-changing decisions based on the circumstances immediately in front of them. Businesses were collapsing, families were destroyed, and some people were even taking their own lives, so real was the despair and sense of hopelessness.
Sadly, it’s a pattern of behaviour which is not confined to the early 20th century and the tendency to panic in the face of unforeseen economic events has been repeated many times around the world in the almost one hundred years since, including here in New Zealand.
In fact, if anything, the tendency has become worse and our capacity for resilience has deteriorated. Whereas once we could endure hardship for a while, now we panic at the slightest indication that things might be turning in the wrong direction, and we treat that new direction as the template upon which to judge the entire future. The borders open and we fear that Kiwis are going to abandon the country in their droves; petrol prices increase and we fear we’ll never be able to fill our tanks again; Omicron numbers spike and we’re all going to die; mortgage interest rates go up and the property market is going to collapse. You get the picture.
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Ashley Church: “The increase in mortgage interest rates isn’t directly related to the property market.” Photo / Ted Baghurst
This isn’t to trivialise some of the silly political decisions which often create these problems – but rather, to reflect on the fact that no crisis, however grim it might look at the time, is forever. Right now, there is a definite turn in the tide of the property market and the narrative has been turned on its head. Just three months ago all of the talk was around the market being overheated and the mantra of the day was “the fear of missing out”. Now, some (although definitely not all) pundits are predicting a market collapse and have coined a new phrase – “the fear of over paying”.
So what changed?
Two things: firstly, the Reserve Bank made the decision to increase the OCR (which impacts on mortgage interest rates), and secondly, the Government introduced draconian changes to lending rules which have all but killed mortgage lending for first home buyers and others.
The result is palpable. Property markets which, just three months ago, were overheated and the subject of headlines predicting that many would never be able to afford to buy a house again, are now predicting a buyers’ market in the wake of these developments.
But contrary to the breathless headlines and avalanche of predictions of doom, neither of these things is forever. The increase in mortgage interest rates isn’t directly related to the property market – it’s the mechanism the Reserve Bank uses to fight inflation. They’re pushing up mortgage interest rates to reduce household spending and squeeze inflation out of the market – and it will work. The Reserve Bank Governor claims that these increases will peak in 2024. Whether that’s true, time will tell. Unlike his predecessors, Adrian Orr has demonstrated a willingness to change his position on economic pronouncements – a practice which has all but killed the once iron-clad certainty around Governor announcements on which the market could rely – but he’s right that the strategy is temporary and, once inflation is back under control, mortgage interest rates will stabilise, and start dropping again, bringing new energy to house price growth.
Likewise, the ridiculous CCCFA lending rules will be relaxed – either by this government or by an incoming one - simply because the current situation isn’t sustainable. Watch for a big announcement on this within the next couple of months, if not earlier.
The point is things in the property market change constantly in response to local and international events and treating specific events as if they’re the template for everything that will happen going forward, is silly and unnecessarily stressful. While there are discernible cycles to which the market adheres, it’s also in constant flux and nothing is forever.
Things may be uncertain right now but, in the oft-used words of yet another American president, Abraham Lincoln: “This, too, will pass."
- Ashley Church is a property commentator for OneRoof.co.nz. Email him at [email protected]
