Global housing boom about to bust may affect Kiwi elections

Friday 17th May 2002

Whether 2003 will be the year of the bull market's return to equities has been something of a pre-occupation among analysts this year.

General consensus has it that stocks should show broad evidence of upturn worldwide, although opinions are divided as to which quarter of the year this rebound will occur in.

Pretty grim news keeps coming in on the US corporate profit front.

The tide is turning on interest rates, with inflationary potential leading central banks to start pushing up official rates. The big daddy is, of course, the US Federal Reserve.

This year the Fed has shifted its stance from cutting rates to neutral and the implication is that it will swing over at some stage to a rate hiking stance.

Global Asset Management hedge fund managers guesstimate a US federal funds rate of 2.75% by year end.

Higher interest rates will put stress on companies, consumers, bond prices and real estate markets.

House price increases have so far helped many economies remain relatively buoyant. The global recessionary climate has been fairly mild for major economies such as the US and the EU and for smaller ones like Australia and New Zealand.

Consumers have felt richer thanks to the housing boom and because more people are likely to own homes than shares the impact of the bear market in US stocks - now more than two years old - has not been so savage on John and Jane Citizen as plunging sharemarket indices might suggest.

The Economist, which has been following the effects of the real estate bubble, is concerned now that the bubble will burst.

The impact from higher interest rates should dampen the ardour for residential property.

The timing of any downturn in property will be significant for the chances of avoiding double-dip recession.

If housing slumps sooner rather than later, efforts to kick-start economies will be sorely hampered and consumer sentiment, so intrinsic to recovery, will be dealt a severe blow.

In its May 4-10 edition the Economist issued a warning about British real estate prices.

In an article titled "Bust ahead," it cautions that house prices in the UK have taken on the characteristics of a late boom cycle.

The Nationwide Building Society reported that average house prices shot up 3.4% in April, the highest single-month move since the bubble of the late 1980s.

All up, British house prices rose an average 16.5% in the year to April, an unsustainable rate, if the Economist is to be believed.

A critical statistic is the ratio of average house prices to average earnings. As the ratio rises, the odds increase that housing is overpriced. According to consultancy firm Capital Economics, the British ratio is only 2% under the 1989 peak of the last property boom cycle.

Roger Bootle, author of the book The Death of Inflation and a consultant at Capital Economics, is quoted as saying, "The longer the house price boom continues, the more likely a crash becomes."

New Zealand has been helped through the US-led recession by a firming housing market benefited by lower interest rates and a short burst of net immigration.

However, official interest rates are tracking back up again and the immigration inflow has slowed considerably with net loss in skilled workers.

A small residential property bubble could be poised for pricking.

Taking into account lower primary sector export prices ahead, we appear to be set up for a fall economically.

Whichever party heads the government after the general election will probably face a cooler economy and falling confidence statistics.

Again, the timing of a
property downturn could be important. If it happens sharply before the election, then Labour could have some trouble in realising its unstated goal of a de facto FPP victory.

An early election is unlikely as the collapse of the Alliance and concerns about the policy instability threatened by the Greens will cripple Labour's putative coalition partners next parliamentary term.

National seems to be targeting a return to power in 2005. In the meantime it is apparently trying to crush Act New Zealand in preparation for a likely "two-ticks" campaign.

New Zealand First will not be helped in an anti-immigration campaign by fall-off in population inflow.

It looks as though 2005 is shaping up to be an old-fashioned FPP campaign between Labour and National but if the housing market sours enough between now and November we may yet see the finest political calculations thrown awry.

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