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From FOMO To Fear Of Overpaying To SOS?

1 Mar 2022

From FOMO To Fear Of Overpaying To SOS?

The perfect storm is here. It began late last year and now buyers and sellers are battening down the hatches. 

In the last six months, housing market sentiment has switched from FOMO (fear of missing out) to FOOP (fear of overpaying). 

Media coverage has amplified this, with daily headlines like “The Tide Has Turned”, “Buyer- Seller Standoff Developing as House Prices Fall” and “Bigger House Price Falls Expected” now the norm. 

Yet the media were late to pick up on the signs that real estate agents were noticing as early as September 2021. But there’s no doubt we’re now in an environment where fears of the market turning are being realised and we’re on the downward leg of the property cycle. 

The key catalysts were hawkish Reserve Bank rhetoric about interest rates in mid-2021 and reform of the Credit Contracts and Consumer Finance Act 2003 (CCCFA). 

The former led to interest rate hikes just ahead of the major changes to the CCCFA putting the brakes on lending, which created a classic credit crunch that fundamentally changed the market. 
Who knows how long it will last or how steep the decline will be? Unlike the share market, the housing market behaves more like a boat than a Formula 1 racing car. When it goes adrift, you can’t just hit the brakes or the gas — it takes longer for a ship to turn, especially in rough seas. In the meantime, everyone on board is desperately scanning the horizon to forecast what will happen next. 

Will relaxing the rules of the CCCFA make a difference? What’s going to happen with net migration? Are people going to flood the border and prop up the market? Or will thousands of COVID-liberated Kiwis head offshore? 

As a result, both buyers and sellers feel at sea. 

When the market was going up, buyers didn’t want to miss out and risk being priced out of the next opportunity. But when it’s going down, they’re subconsciously saying, “hang on, if I’ve got a 20% deposit on a million-dollar home, and that home goes down 10%, as economists are predicting, I’ll lose $100,000 in equity.” 

The fear of overpaying becomes pervasive and it changes behaviour: buyers sit on their hands, they don’t want to make a decision, they’re tentative and they won’t commit to making an offer. It’s like the market is full of falling knives, and they don’t want to risk catching the sharp end. 

Meanwhile, sellers are anchored to expectations of value, that were set at the peak of the market, and they’re prone to waiting for an offer they’ll never get. A few will even change significant plans, just to avoid making a “perceived loss”, rather than meeting the market. It is “perceived” because it is completely unrealised – they never had the higher price to begin with – it was simply an expectation set at a higher point in the market, that may not have been realistic to start with. This is an error of human misjudgment; it is only today going forward that matters. The past is just the past. If someone has a genuine reason to sell, decisions should be based on those reasons, plans for the future and the true market value. Not what a home may have been worth in the past. 

So, what will happen next? No one knows for certain. However, while history does not repeat, it does often rhyme. 

The last boom was sunk by the GFC. Like this current downturn, it started earlier than most people realised, with the share price collapse of Lehman Brothers Holdings, one of the biggest investment banks in the US, which began in August 2007. It took a long 19 months to hit the absolute bottom of the market. It then slowly started to recover, and the property market, in Wellington, went sideways for eight and a half years until 2016 when it started to track upwards again at the start of the boom that just ended. 

Between 2009 and 2016, about 30% of houses that came to market were withdrawn because they didn’t sell. You only had a 70% chance of selling if you went to the market in that period. 

But in the last downturn, we started with high mortgage rates (8-9% in 2007) and the Reserve Bank aggressively cutting rates to support the economy, which helped stabilize the market. This time around, we have the opposite situation; low interest rates caused the boom, and high global inflation is making much higher interest rates a near certainty over the next couple of years. It seems probable, considering interest rates, human nature and the disparity between property prices and incomes, that we are going to see a sharp drop in property values in the short term followed by a similarly protracted period of no growth in the market. 

Will this downturn be worse than what we experienced in the GFC? I’ve never seen the number of transactions in Wellington drop by more than 40%. We are very close to that now, in Wellington, over the most recent quarter. 

Is it all bad news? Well last year no one could ever imagine property prices ever being affordable again. But if you combine a long period of price stagnation with income inflation, it is conceivable that, in 5 – 10 years, houses will be significantly more affordable – in a relative sense. It is hard to argue that that would not be a great outcome for society. 

In the meantime, no one’s going to be in any hurry because they’re not going to feel the urgency of rising property values. Both buyers and sellers are in a stalemate. Sales volumes have gone down, stock levels have gone up and there is a massive increase in supply — not from new listings coming to the market, but because houses will take longer to sell. The average time for a house to sell in Wellington has already doubled from as low as 20 days to over 40. 

My advice? If you’re a seller, we’ve just had 6 years of the greatest property price boom that NZ has ever seen. We’re just past the peak. If you accept the market price today, you can lock in five-and-a-half years of that six years of capital gain. 

Don’t get caught up in loss aversion. If you’ve paid $1 million for a house that is now worth $1.2 million instead of $1.3 million six months ago, you’ve still made a $200,000 tax-free capital gain. 

That perceived loss is paper-only and doesn’t matter, especially if you’re buying in the same market. In fact, if you are trading up to a much more expensive property, you’re going to be better off with the market going down than you are if it goes up (assuming your property and the more expensive one drop by the same percentage). 

It can take time for owners to adjust to new prices. But if you just stay put and wait for things to get better, it is worth asking yourself what you are waiting for? You might have missed the absolute peak, but who expects to pick the peak anyway? If you’re not prepared to lock in 90% of the greatest property price boom we’ve ever seen, by meeting the market now, do you have time to wait for the next one? And what will stop the exact same situation occurring next time around anyway? 

People often say they don’t need to sell. But a better question is do you want to sell? Unless you purchased incredibly recently, you can still lock in much of that gain now, and maybe save yourself from changing your mind again in a year’s time when things might be worse. Work collaboratively with your salesperson. You’ve got to be on the same team. Take your cues from today’s market together, shipshape, or otherwise. 

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