House prices should worry reader
I’ve just re-read an email from a reader, and it concerns me — especially in light of a recent Economist cover story.
The reader put $80,000 into two rental properties six years ago, and it has turned into $255,000, “with very little effort on our part.”
He adds, “Some years ago I had a rather large sum of money in so-called ‘blue chip’ stocks and managed to lose quite badly…. I am quite happy that I decided never to place any further money in the sharemarket as I have no real control over what external forces will do to my investments.”
He has also lost money in bank superannuation schemes.
“We currently have freehold assets in excess of $1 million due largely to property. My advice to anyone is forget the sharemarket, unit trusts etc and go for property,” he says.
My advice is just about the opposite.
Sure he’s done well in property. He was lucky with his timing. And with his investments in shares and the super schemes, he was probably unlucky with his timing.
To conclude that it’s best to confine your investments to just one asset class is worrying — especially if that one class is property right now.
The article in respected British magazine the Economist is titled, “After the fall — Soaring house prices have given a huge boost to the world economy. What happens when they drop?”.
It states that house prices have risen “at an alarming rate all around the globe.” The current boom is “the biggest financial bubble in history,” when you look at growth relative to GDP — bigger even than the global share boom in the late 1990s.
“Throughout history, financial bubbles — whether in houses, equities or tulip bulbs — have continued to inflate for longer than rational folk believed possible…. It is impossible to predict when prices will turn. Yet turn they will.”
While New Zealand’s 66 per cent house price growth since 1997 is lower than some other countries’ — including America’s 73 per cent, Britain’s 154 per cent and Australia’s 114 per cent — we rank fifth out of 20 countries for growth in the first quarter of this year.
Prices are falling in Australia and Britain, but we are continuing upwards, albeit more slowly than before.
And we are among nine countries in which prices are at record levels relative to rents and incomes, says the Economist. That can’t last.
“After many previous house-price booms, most of the adjustment came through inflation pushing up rents and incomes, while home prices stayed broadly flat. But today, with inflation much lower, a similar process will take years,” says The Economist. “It seems more likely, then, that prices will fall.”
The article acknowledges that house prices tend to be “sticky” downwards, unlike shares. “People have to live somewhere, and owners are loth to accept a capital loss.” But eventually some people have to move for job or other reasons.
Prices “tend to drift downwards, more like a brick with a parachute attached. But when they land, it still hurts.”
Also, in this boom many more people are buying rental properties. And “over-exposed investors are more likely to sell, especially if rents do not cover their interest payments.”
Another difference between houses and shares “is more cause for concern than comfort: people are much more likely to borrow to buy a house…. As a result of such borrowing, housing booms tend to be more dangerous than stock market bubbles.”
The article’s conclusion: “The housing boom was fun while it lasted, but the biggest increase in wealth in history was largely an illusion.”
Note to the reader who emailed me: How about spreading your savings around, at least a bit?
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Mary Holm is a freelance journalist, a director of Financial Services Complaints Ltd (FSCL), a seminar presenter and a bestselling author on personal finance. From 2011 to 2019 she was a founding director of the Financial Markets Authority. Her opinions are personal, and do not reflect the position of any organisation in which she holds office. Mary’s advice is of a general nature, and she is not responsible for any loss that any reader may suffer from following it.