How price cuts and offshore funding are impacting the Auckland housing market
I met a bloke at National Farm Fieldays in Hamilton in the middle of June and he outlined how he had seen his paper wealth soar to near $1 million recently from a bunch of bitcoins someone gave him a short number of years ago. Many people probably don’t understand the nature of this crypto currency and explaining it is not what this article is about. Instead, it is to point out that when we see something rise strongly in price we often wish for some event to come along to push its price much lower so we can then buy it cheaply.
This desire is based upon an expectation that the price will go right back up again. Maybe it will. We don’t know. And that is why when the price of something we want goes down we change our view on what the acceptable price for that thing is, where we think prices will go in the future, and what we do in response to the price fall.
What this means for Auckland
This is relevant just about every day of the week in the foreign exchange market. But it is also relevant for the remainder of 2017 and this year into mid-2018 perhaps for the Auckland housing market.
We have been seeing evidence of the Auckland market plateauing for quite a few months now, with sales well down on a year ago. Prices for some properties are falling, and as mentioned in last month’s column we will see some reports of prices falling perhaps as much as 20% for selected properties some people simply paid much too much for.
They paid excessive prices probably whilst gripped by FOMO – fear of missing out, on expected future price gains. Now they are trying to sell quickly because of a fear that the longer they wait the lower prices will go. This is the way markets for everything function all over the planet since trading began.
The relevance of the bitcoin comment above is this. As we see sales flatten out, some people who have been desperately searching for an affordable property for perhaps years risk falling into the trap of changing their expectations for where prices will go over the next few years. They will embrace a fear that if they buy a discounted property it could fall in price further. They will completely miss out on the purchasing opportunity which this temporary corrective phase in the Auckland housing market offers.
To buy or not to buy?
My message to young struggling buyers in this environment is exactly the same as it has been since the middle of 2009 for exactly the same reasons. Growth in demand for housing in Auckland has exceeded growth in supply since the mid-2000s and is going to continue to do so for a great number of years. Prices will continue to drift up. This current environment offers an opportunity for young buyers to make a purchase as FOMO in others reverses from fear of missing out on rises to fear of recording losses.
Do not be fooled into thinking that this lull will prove long-lasting. We don’t know specifically when the market will turn upward again. A and if it does turn upward within the next year there is a good chance the Reserve Bank will take measures to stop it – such as raising the investor deposit requirement to 50%.
But fundamentals continue to argue in favour of prices rising over the long-term. The current market offers an opportunity to be a bit more picky about what one buysers, to face fewer other buyers at auctions, and to play one seller off against another. Think about taking advantage of this lull because none of us has a model which tells us when the next such pause will come along once the current bout of indigestion is over with.