• Peter Lyons

The Future of the Housing Market is in the Hands of the Banks.

The Real Estate guy on TV said the property market should hold up. The mortgage broker said there was unlikely to be a downward correction. The economist said the property market was likely to fall.

My father died at the start of lockdown. I have inadvertently became a part-owner of the family home. I have never owned property in my life. I prefer to lose my money on the share market.

But I have always had a fascination with the housing market in New Zealand. So much of our sense of economic well being is related to the prices of our houses. But ultimately the prices of our houses are bound to the level of our incomes. This is a basic law of gravity that we have managed to suspend for a very long time. This suspension has been allowed due to the accumulation of huge amounts of debt. The level of our incomes is determined by the state of our economy. Our economy has just fallen off a cliff.

During the Global financial crisis, our median house prices dipped slightly. But the main impact on the housing market was a huge drop in the volume of sales. Sellers were reluctant to cut their asking prices so fewer deals were made. The other key feature of the post GFC era, was the reluctance of the banks to lend for fear of bad debts. This further dampened the demand side of the market. Yet house prices eventually resumed their upward march , particularly in Auckland. As did mortgage debt levels assisted by ultra-low interest rates. In recent years, areas such as Wanganui, Dunedin and Nelson surged despite little income or population growth. This became known as the halo effect.

But the GFC was a much different situation to what is happening now. It was a financial crisis within the financial sector. The current situation is an economic crisis. It is much broader. The real economy of jobs, incomes and output has taken a major hit. The liquidity crisis is in the entire economy, not just the financial sector.

During the GFC, central banks responded by flooding their financial sectors with easy cash and providing guarantees to keep the banks afloat. It worked, and a major Depression was averted.

But in the current situation the big issue is a lack of liquidity in the broader economy. People are running out of money. The credits in their accounts are dwindling. Over 100, 000 households have applied for mortgage holidays but it's not a holiday. It's a debtor's home detention.

We appear to be heading for a strange deflationary period of falling prices, rents, profits and wages as economic activity falters and unemployment rises sharply.

It is likely the volume of transactions in our housing market will fall dramatically due to the initial spread between buyers and sellers. Banks will be wary of lending for fear of bad debts. But eventually some sellers will be required to meet the market. Especially those who are highly geared and reliant on rental incomes that have disappeared.

No one can predict the effect on the housing market. It may be a rout or a stuttering patchy decline in different regions. It depends on how many highly geared buyers have lost their incomes. But most importantly it depends on the banks and their willingness to extend credit to potential buyers and provide support to those under financial stress.

The future of the housing market in the hands of the banks. It always was.

Peter Lyons is a regular columnist for the Otago Daily Times, teaches scholarship-level Economics and an author of several New Zealand economic texts. His inspiration often comes after a dram of whiskey. Just one mind you. So if you're ever stuck in a room full of economists, grab the seat next to him. For a conversation peppered with wit, wisdom and weirdness.

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