Economists, podcasters, talking heads, finance professionals, government agencies — so many agendas and a whole range of motivations to spin the story here. Let's be clear, though, on why people like me (mortgage brokers/financial advisers), don't normally tell people like you where we really think the market's going. Straight up, it's simply not good for business. We know that in most cases, being the messenger occasionally involves getting shot. No one buys nightmares, so we keep selling the dream.
So, contrary to what's in my best interests, here are three reasons why I think odds are high on a market correction next year.
1: Interest rates
If there's one factor everyone understands, it's interest rates. While we've been arguing about vaccinations, traffic lights and climate change, fixed interest rates have been increasing almost to the point we were at in 2019. If we agree that low interest rates at least contributed to significantly higher house prices recently, we must accept the very real possibility that higher interest rates could pull property prices down.
As many us often fix at the cheapest rates on offer (which has been the one-year fixed rate), the impact of higher rates will likely be spread out over the next 12 months. A 1 percentage point higher interest rate works out to be another $830 a month on a $1 million mortgage.
2: Credit creation
In my best attempt to sum up the credit-creation theory of banking, banks create money out of thin air every time you take out a loan, it sloshes around the economy for a bit, and then ultimately it dies when you pay tax, or repay debt.
That's oversimplified and not entirely true from an accounting perspective, I know.
However, it does suggest that a reduction in the desire to obtain credit (like taxation, regulation, higher interest rates) fights against the birth of new dollars. If money creation through mortgage lending slows down, an economy (which may be far more anaemic that we realise) now has even less "blood" running through its veins.
Amendments to the CCCFA (Credit Contracts and Consumer Finance Act) will (legally) force the banks to take a more cautious approach to dishing out new loans, too. Credit was once a "cheap and easy" date; now it requires a good salary and proper financial discipline — something not every Kiwi has in spades.
3: Taxation
What's of greater concern with taxation changes targeting property investors, is that it disincentivises investors from seeking out new lending. Perhaps enamoured by recent paper gains like a possum and the proverbial, there's been something of a willingness to accept a higher tax bill, as it's "for the greater good". Socially, perhaps there's a case for this if we can assume the government's a more efficient landlord than private individuals.
Thinking more broadly, though, higher rates of taxation, on top of higher interest rates, on top of tougher lending criteria, might be too much medicine for the housing inequality sickness. Shouldn't we take one step at a time, then allow time to observe the impacts?
I was always told, if you see something, you should say something. Well, I see something, and it's not that pretty.
Long term, I'm a "perma-bull" when it comes to property — and that's not changed one bit. Owning a home, and ideally more than one, as soon as you can, if you can, is one of the best ways to provide for your future retirement needs independently.
However, in the short term, I'm incredibly concerned by the entourage effect of increasing interest rates, less credit creation and the increasing size of government. It may not happen overnight, and I honestly hope it doesn't happen at all, but next year this may all come to a head, and the free market (what's left of it) can't be the root cause of blame this time.
- Darcy Ungaro is an authorised financial adviser and host of the NZ Everyday Investor Podcast.
