"Land never falls in value," said the millennial.
Am I having a Joe Kennedy moment was my reaction.
The hugely wealthy father of President Kennedy was given a stock market tip by a shoe-shine boy.
"When shoe-shine boys are giving stock tips it is a sign," thought Joe Kennedy. He sold all his shares just before the 1929 Wall Street crash.
If millennials think house prices cannot fall is it a sign of a property market correction?
I bought my first house in Auckland in 1973. My plan was to subdivide to pay off the mortgage. When my subdivision was completed the Oil Shock had occurred. I got no offers.
The largest subdivision in Auckland was selling two sections every week. After the GFC they sold no sections for eight months.
What is the value of land no one wants to buy?
Last year, houses prices increased an incredible 28 per cent.
There was zero immigration. Councils zoned more land. There was record building. There are significant tax changes. There are debt-to-income ratios. Foreign speculation has been banned. We are in a pandemic.
None of these factors made any difference.
2021 revealed why house values have been increasing: The Reserve Bank printing money and the resulting easy availability of cheap bank loans.
The Reserve Bank has stopped printing money and raised the Official Cash Rate twice. Banks are increasing interest rates and tightening lending.
Sir John Key is right. "The rapid rise in house prices is not sustainable and it can't and will not continue."
A QV spokesman is quoted this week saying that there had been no significant decline in home values. He did note that the increase in price of the cheapest entry-level homes has dramatically slowed.
When the sub-prime mortgage crisis occurred the official line was lending to the bottom 2 per cent of the market could not possibly affect the rest of the property market.
A paper accurately predicted the sub-prime mortgage crisis would cause a property crash and a recession. The writer likened the property market to a glass of water. Remove the bottom 2 per cent and the water level falls.
If we are going to have a property correction, the cheapest houses will fall in value first.
Property corrections start with land, like my section, not selling.
Two adjoining property owners own sections each valued at $2 million. In November they offered their combined sections so a developer could build a five-story luxury apartment building. They got zero offers. Developers said escalating building costs made it too risky.
Is land with zero offers worth $4m?
Like Key, I do not know if it will be a huge correction. We have a brake on valuation drops. In America, if your mortgage is worth more than your house you just give the keys to the bank. In New Zealand, you still owe the bank whatever the sale does not cover.
New Zealanders in a property correction hunker down. I kept my unsellable section for years. Banks are reluctant to hold mortgagee sales. A significant fall in land values would affect the bank's own credit rating.
A property correction is a huge shock to the economy.
It leads to a drying up of credit to small business. Banks do not lend to small businesses. Banks lend on the business owner's house. If house values fall some business owners will be asked to repay their loans.
It will reveal the zombie businesses. These are companies that are not making a return on the capital. The businesses stay afloat because the owners have been using the increased value of their houses to increase their mortgages.
The Reserve Bank has run out of options. At times of full employment, prudent governments reduce spending to lower inflationary pressure. Grant Robertson is doing the opposite. He has announced record government spending in 2022.
The Reserve Bank cannot stop its interest rate rises. The bank has lost credibility with its inflation forecasts. In May the Bank said inflation today would be 1.5 per cent. The latest CPI, a backwards-looking index, is 4.9 per cent. If we project the rate of price increases forward then inflation today is over 8 per cent.
If the Reserve Bank does not vigorously tackle inflation it will lose all credibility.
The Turkish Central Bank demonstrates what happens when a central bank loses credibility. The bank in September stopped fighting inflation and issued cheap credit. Inflation is at 36 per cent. The lira is 31 per cent weaker.
Imagine the pain of filling your car's tank if the Kiwi fell 31 per cent. Traders have to keep the US dollar; it's the currency of international trade. No one overseas needs to keep the Kiwi. If our Reserve Bank loses credibility traders will dump our currency.
In 2022, millennials will discover land can fall in value and how a property correction impacts the whole economy.