In my recent blog I wrote about New Zealand being the hermit kingdom and I was agreeing with Sir John Key comments. I highlighted that many of our expats and professionals are queued up ready for the freedoms of UK, Asia, and Australia and the NZ economy wasn’t as strong as many may feel.

I have decided to double down and look at the latest issues that NZ appears to be facing right now.

You would have to be living on a park bench to not notice inflationary pressures creeping into your everyday life, you would also need to have had your head in the sand to not notice the extreme rise in house prices. Sir Robert Muldoon was the prime minister of NZ between 1975 and 1984. Under his leadership we had decision making largely in one man’s hands, and a lack of reserve bank controls which was rather a dangerous thing. The economy after his tenure was not particularly pretty. However, Rob Muldoon did some fantastic things throughout his leadership and not for one moment I am comparing Muldoon to the latest Ardern reign in politics. Largely because after the Muldoon era there were some fantastic infrastructure assets left behind for all New Zealanders to enjoy and they still are.

Actually, the two leaders are chalk and cheese really but both appear to have caused economic carnage. Looking in my backyard in Central Otago the Muldoon ‘Think Big’ projects like the Clyde Dam, and many energy infrastructure projects were completed were fantastic in many ways and I think NZ is blessed now that we have such fantastic assets, but one thing is for certain they did leave New Zealanders with many years of difficulty for the economy years after these amazing projects were completed. If you compare this latest Labour government, we may be left with many years of difficulties too…once this Covid-19 pandemic is all over. But the major difference in my opinion is the current government will leave no legacy and no assets for the future generations to enjoy. What appears to be going on right now is a straight economic burden on the society and to me feels completely out of control.

Over the last month the government appears to have plunged even lower into the division camp than ever before. The vaccination vs the unvaccinated, lack of freedom of speech, the sweeping three waters reform, the complete disregard of farming practices, and more and more controls creeping into New Zealanders fabric of life, is rather extreme to say the least.

In 1981 under Muldoon, the division in our beautiful country was brought to a head over sport and apartheid, rather than the economy. This time it feels much more divisive with malice intended to knock out the middle classes and cause real divide in our communities – building a society of the people with ‘the haves’ and the rest of society with the ‘have nots’.

Without the middle class and strong farming communities it makes it easy to knock down the people with ‘the haves’, and I believe this is what our team of 5 million may be walking into if we are not careful.

So how does this circle back to property and the property market in general?

I think there is an argument that inflation is going to cause pressure on interest rates to keep rising. I think in the short term this maybe true. The property market may blink soon and have a price correction, with the desired effect of housing becoming more affordable. But I’m afraid I just do not see this happening any time soon.

Whilst you can see some similarities in today’s housing market to the Muldoon era – with supply issues and high costs of building products. You may have noticed the current reserve bank starting to put interest rates up. However, I think they won’t be able to keep raising them for too long – maybe for a year perhaps. But as I alluded to earlier the New Zealand economy is not at all well. It is artificially propped up by debt right now. The Covid 19 response will unwind soon and you will see the unfortunate cycle of businesses failing, unemployment creeping up again, brain drain, and the ability to increase interest rates will reduce. So, I don’t see interest rates rising anywhere near as high as predicted and the cycle of interest rate hikes maybe short lived.

I flew out of Queenstown last week.. on the ground I saw hundreds upon hundreds of rental cars and campervans parked up. These would normally be on the road full of tourists spending vast sums of money. This normal tourism cash usually sloshes around the NZ economy, it is now being artificially replaced by the government printing machines. I believe that the Kiwi dollar is artificially high at the moment hurting exporters, coupled with no tourism, no education sector running, and government debt running out of control. I think you may see the end sooner to inflation than what you think.

So, what do house prices do?

Not an easy thing to predict but I actually think they will continue to stay around current price levels, they won’t be falling anytime soon, flat at best, and may well keep rising in 12 months. Whilst there will be a little offloading of property when interest rates jump in the short term. The people with ‘the haves’ will come in again soon and purchase more and more property and bolster their property portfolios, they will keep the foot well in the housing camp and momentum on price.

The NZ mum and dad investors generally with one investment property may start to offload difficult rentals, and cash in on the price appreciation that has been going on.

At Proppy.co.nz we are still experiencing a lot of interest in the property market from our team’s open homes - this is a very good gauge of housing activity. We are expecting a huge number of houses coming on stream in Auckland/Hamilton when their lockdown finally comes to an end, and we expect people from these areas also to be very active in markets outside of Auckland and the Waikato when able to travel.

Anyway, it’s going to be an extremely interesting and possibly a very difficult period ahead. Feel free to email your thoughts on the economy and house prices if you have them with me.

Cheers,

Tyson

tyson@proppy.co.nz