ANALYSIS: I was making a presentation in Takapuna last week and when it came to the question and answer session someone asked how much of what I said was “actual” economics and how much was psychology. I replied that it is all psychology.
Economics is a social science sitting alongside the likes of sociology and psychology. It looks at the ways in which people and businesses react to certain changes such as higher wages, living costs, interest rates etc. For instance, the way we react to a 5% wage rise will vary from person to person and economics is about averaging the responses out to gauge a likely market impact.
The trouble is these changes never operate in isolation. Other things are always altering and a 5% wage rise this year may cause a lift in buying of lipstick whereas next year it causes people to use more hot water.
How we think about things and behave alters over time and a key influence in the housing market is how we think other people are thinking. If we believe other people are going to buy houses, we will be inclined to buy houses as well. We know that extra house-buying pushes up prices and we humans generally like to make money and we especially like to avoid missing out on something.
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This fear of missing out – FOMO – is something I explicitly measure in my monthly survey of real estate agents throughout the country. Back in October last year 70% of agents said that buyers were displaying FOMO. Now, in my latest survey run just this week only 4% say there is FOMO.
Almost none of us feel in a hurry to buy property, even if we need to make a purchase for family reasons. We feel time is on our side in the same way we thought it was not only seven months ago. As each month has gone by this year we have felt more justified in sitting on our hands not making a purchase because prices have fallen. Now, we feel clever for not buying and as any gambler knows, you let winning dice keep rolling.
Tony Alexander: “If we believe other people are going to buy houses, we will be inclined to buy houses as well.” Photo / Fiona Goodall
To justify continuing to stand back from the market as prices edge lower yet get more attractive, we are going to actively look for reasons not to make a purchase. Some people for the rest of this year will choose to focus on the brain drain and read stories of Kiwis leaving the country. Just this week a media article noted so many people are leaving it is hard to get a seat on an airplane leaving the country. I think the desire to take a holiday and slow return of airline capacity explains the shortage. But people will choose to read the article as saying thousands are leaving each week and that justifies not making a needed property purchase.
Some people will choose to focus on growing talk of a property over-supply. Such excess stock may appear eventually in some parts of the country. But Auckland is on the cusp of having its population rate of growth switch from two years of negative to positive and a lot of the dwellings for which consents have been issued will not in fact be built.
Still, over-supply talk will encourage some people to not make a purchase. Others may fixate on rising interest rates, some on unfounded rumours of a wave of mortgagee sales.
What will end up happening? The stack of buyers wanting/needing to make a purchase will grow and grow until one day the group psychology shifts. The queued buyers will pile back into the market at the same time. I don’t know when that will happen – maybe 2024. But before then those buyers focussed less on trying to pick the bottom of the price cycle and more on getting a property which exactly matches their needs will have negotiated with a compliant vendor and made a purchase to best suit them and their families for a generation.
But countercyclical buying when prices are falling is psychologically challenging to do. That’s why there aren’t many Warren Buffets.
- Tony Alexander is an independent economics commentator. Additional commentary from him can be found at www.tonyalexander.nz
