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In the last week or two there has been a wall of negative noise about the New Zealand residential property market. The market has certainly paused and there are some signs there could be the start of a house price slump.It would depend on the size of any fall, but there is a significant threat to the economy posed by a house price slump. A sizeable fall would hit consumer confidence, hurt home-owners and investors who are highly geared and possibly affect bank lending.
These effects extend well beyond property and into business, jobs and the economy in general. A big fall in house prices may not be very likely, but the impact is not a pretty prospect. There is enough risk for people to consider what they can do to guard against the worst effects of a big fall in house prices.
Much of the recent media noise has focused on whether we have a bubble. I am the first to recognise that housing in New Zealand is grossly (and dangerously) overvalued. By any measure you choose, houses in New Zealand are very, very expensive.
However, whether it is a bubble is more doubtful. One of the common definitions of a bubble is that it ends in a crash. Therefore, we never really know whether there is a bubble until we see how a boom in market prices unwinds. Only in hindsight can we be certain regarding whether or not it was a bubble.
It is possible that house prices gently fall or just flatten off over a long period and so come back to reality without the violent burst definitive of a bubble. On the other hand, it is possible there is a crash both sudden and great, something that resembles Ireland in 2008 at which time Irish house prices fell some 50 per cent.
While an Ireland-like crash is unlikely, it is certain that there will be a fall in house prices at some time: values are too high and markets usually come back to trend eventually.
If you are worried about high house prices, you should make sure that you have some International investments. The economic impact that could go with a market correction of New Zealand house prices is another reminder to have some of your assets outside New Zealand.
Investing offshore gives protection from the various things that could befall New Zealand and which could negatively affect our economy and our exchange rate.
Investing offshore can be done through your KiwiSaver account or by making investments through share brokers and other investment houses. There are several reasons to invest offshore but one is insurance against some adverse New Zealand specific event.
Nobody knows when the New Zealand housing market boom will end, nor the manner of the ending. There is clearly pressure on it at the moment, and for my money, even though New Zealand's overall economy looks good, there is always a case to invest offshore.
Martin Hawes is the Chair of the Summer KiwiSaver Investment Committee. He is an Authorised Financial Adviser and a disclosure statement is available on request and free of charge, or can be found at www.martinhawes.com. This article is of a general nature and is not personalised financial advice.
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