Staggering the terms of your mortgage is an option. Photo / File
OPINION
As we close the book on 2022, there is a plethora of questions we can ask about how this year is shaping up. Here are six of the most common ones that many of us will be pondering.
Will the cost of living pressures ease?
Yes and no.
Inflation looks to have peaked, and is set to come down in 2023.
The Reserve Bank expects the annual inflation rate to be sitting at 5 per cent by the end of the year, and to be back below 3 per cent in the second half of next year.
However, that only means the pace of increases will slow. Prices will still be pushing higher, and the increases of the last year or two are here to stay (in aggregate, at least).
How long should I fix my mortgage for?
This is a tough one, as it often comes down to individual circumstances. That’s why getting professional advice is a wise move.
The Official Cash Rate is almost certain to go higher in the coming months. That’ll push floating mortgage rates up, although the banks have already adjusted some longer-term rates in anticipation, which means any increases could be more limited.
If you need certainty of repayments, locking things in for longer makes sense. On the other hand, one-to-two-year rates can provide some flexibility in case the winds change.
Who knows what the economic backdrop will look like in 2024 or 2025? Interest rates could be falling again by then.
Another option is to hedge your bets by splitting the mortgage into three or four pieces, then staggering the terms.
Is it a bad time to buy a house?
The housing market had a tough year in 2022, with the Real Estate Institute’s national house price index (HPI) down 13.8 per cent in the year to November.
That’s a hefty fall. In Reserve Bank data going back to 1979, there’s never been a worse 12-month period for nominal house prices.
Then again, let’s not forget that values surged 48 per cent in the two years leading up to the November 2021 peak.
The average annual rise in New Zealand house prices since 1990 has been 6.4 per cent, so that was more than six years of gains squeezed into two.
Even though house prices have fallen sharply, they’re only back at February 2021 levels. That probably means there’s more heat to come out of the market.
This might put investors off for a while, but it’s good news for prospective homeowners with a long-term mindset.
Owning your own home provides stability for families, not to mention a launchpad for your financial future.
It always feels scary buying into a falling market, but you’ll do just fine if you look beyond the next one or two years.
Is a recession inevitable?
Not necessarily.
The 50 or so economists surveyed by Bloomberg see a 65 per cent likelihood of recession in the US (on average).
That’s a particularly high result, but there’s still some water to go under the bridge and things could change.
One thing I do know is that when everyone overwhelmingly agrees how something will play out, it sometimes doesn’t.
The same goes for New Zealand.
Reserve Bank projections suggest a shallow downturn in the second half of this year, rather than a severe one like the GFC in 2008 and 2009.
Having said that, their forecasts might be wrong, just like they were when it came to seeing the inflation risks ahead.
It’s also possible Adrian Orr’s tough talk works, and we cool our jets as he’s hoping.
After all, consumer confidence fell to the lowest on record in December (in figures going back to 1988), while business confidence slumped to levels below those seen during the GFC.
Have sharemarkets passed the bottom?
The million-dollar question.
Nobody has a perfectly-calibrated crystal ball, so you’ll struggle to get a definitive answer out of most fund managers or investment strategists.
What we do know is that while financial markets look forward, throughout history it’s been rare for US shares to hit bottom before a recession starts.
The last time that happened was during the recession of 1945, which the market sailed through without a major decline.
In the 12 recessions since then, the US sharemarket has typically reached its nadir during the first half of the recession, before rebounding strongly.
Should I put my investing plans on hold?
If you’re in the recession camp, and you’re of a short-term trading mindset, there’s a strong case for holding back and picking your moment later in the year.
However, if you’re a long-term investor with a multi-year view, I’d keep calm and carry on rather than getting too cute.
There have been 17 recessions in the US during the past 100 years. That’s one every 5.9 years, on average, and it means they’re par for the course.
Despite that, US shares have delivered an annual return of 10.3 per cent during that period. That’s an exceptional reward for those willing to keep their eye on the long game.
It’s been a similar story here in New Zealand. We’ve had seven recessions in the past 50 years, and while each of those has seen the sharemarkets fall by varying degrees, domestic shares have returned an annual return of 9.6 per cent during that period.
What’s more, the most buoyant periods often come as the market rebounds from a downturn.
Investors might need to endure some more volatility from here, but those who stay the course and keep investing are likely to be rewarded with some astute purchases.
Mark Lister is Investment Director at Craigs Investment Partners. The information in this article is provided for information only, is intended to be general in nature, and does not take into account your financial situation, objectives, goals, or risk tolerance. Before making any investment decision Craigs Investment Partners recommends you contact an investment adviser.