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I'd forgotten about this blog but you'll find me here www.sustento.org.nz

too much money but not enough to go around

House prices keep rising but wages don't. So if you own property you keep getting wealthier whic hallows you to buy more property. If you don't own property your wages don't keep pace with the increase in house prices and so you are condemned to rent.

What's going on here?

The real economy is starting to split from the credit economy. This is bad news and almost always signals an asset crash in the near future. As rental yields fall, property owners start to focus purely on capital gains to support their investment. As capital gains moderate, due to house price increases running out of steam, property owners hit the sell button and in doing so precipitate a self-fulfilling rout in the market.

What keeps this from happening is the constant availability of credit and continued confidence in "bricks and mortar" being a safe investment.

Migration also plays a major role in supporting asset prices, particularly in a small economy like New Zealand. In general emigration tends to see younger people heading overseas in search of opportnuity, adventure and better wages. Immigrants tend to be older and better off looking for a improved quality of life, security and a stable society. So positive migration is a major positive for the housing market in terms of price as well as demand.

Unfortunately this leads to a situation where rents cannot support prices and immigration becomes the major support. Without immigration the market will stagnate very quickly and prices will start falling. A booming economy may offset this for a while but still relies on immigration for sustained upward price movement.

There is nothing wrong with asset price rises but when they are way ahead on inflation then there is a real problem. When prices rise 15-20% annually against a 2-3% inflation rate it suggests something is out of alignment.

It suggests that inflation is not being measured correctly, interest rates are way too low or credit is far too easily available.

Whilst on the face of it higher house prices are an indication of the health of an economy it is a tragic waste of resources. It takes money away from other areas of expenditure which could be more productive. In an environment where energy is becoming more expensive this poses serious questions about where to spend one's money. There is not much use in having an expensive house if you can't afford to heat it.

In reality those at the higher end of the scale are not in any discomfort. Those in the middle to lower incomes brackets will feel the pinch a little tighter.

No one wants to see house prices collapse but clearly prices need to moderate now to avoid a more serious fall later. Banks need to look carefully at the valuation process as well.

The inflation numbers need some serious scrutiny also...more on that another time.