Martin Hawes: Hope's on the house

I used to be able to say that I don't have a crystal ball, but my wife ruined that excuse by buying me one for my birthday.

When I look in it, it shows a fairly grainy picture but, in any event, I cannot see any improvement to economic conditions until some time well into next year.

The full force of the global recession is yet to hit New Zealand. However, it is not too early to ask the big question: when will it end? The answer is difficult (predictions always are, even with my crystal ball) but it is, nevertheless, a valid and useful exercise.

The global recession started with the US property market and it will not finish until housing there has stabilised. At present, it is showing no sign of recovering - the best-known housing index, the S&P Case-Shiller, is down nearly 30 per cent and still falling.

The housing market is important for two reasons: first, a strong housing market engenders confidence, which encourages people to buy. Everywhere around the world where the housing bubble has deflated, consumers have stopped spending.

Second and perhaps more importantly, until house prices stop falling, banks and finance houses will not know the value of the mortgages they hold.

This means that we will continue to see difficult credit conditions. Businesses and consumers will continue to struggle to get funding.

The recession started with a credit crunch because sub-prime mortgages were in difficulty and banks could not tell who it was safe to lend to.

However, things are getting worse still as falling house prices put not only sub-prime mortgages in jeopardy, but better quality mortgages as well.

This will increase banks' losses and, of course, do nothing to decrease their suspicion of each other.

I hope that within perhaps 18 months we will have solved the immediate crisis of tight credit and the possibility of deflation, and will start to see a little economic growth. However, the trauma will not heal quickly - unemployment will remain high, confidence will remain low and the spectre of inflation will hang about. The effects of this crisis will last for years.

A pick-up in US house sale numbers and halt to falling values will signal light at the end of the tunnel. However, even when we see that light, it may still be a long way till we breathe some fresh air.

* Each week financial author Martin Hawes shares strategies to help you grow your wealth. You can email finance questions to info@wealthcoaches.net or andrea. milner@heraldonsunday.co.nz

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