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Beware of false dawnsOlly Newland's Column, 19 April 2009
Like a hungry man falling on a morsel of food, some commentators and interest groups are in full cry over the (very slight) improvement in the property market. Houses are selling again, albeit at lower figures, and the mood is far more up-beat now than it was a few months ago. The main driver of this resurgence is, of course, lower interest rates. Any market improvement is good, but I fear this may be a false dawn. Buyers might be rushing in too early. In their enthusiasm to re-live the 'good old days' they may be falling into a bigger trap than before. There are two reasons why it would pay for buyers to be wary: (1) Lower interest rates bring out not only buyers but sellers as well. Sellers, who have been hanging on by their fingertips up until now, are well aware the market has picked up -- and so are listing their properties at a fast clip. This could well swamp the relatively few buyers out there and cause another dip in house prices. Indeed, the statistics reveal that most sellers are taking a loss if they bought within the last 2-3 years. (2) People have short memories. Only a year ago interest rates were on the rise and picked to go higher. Home owners and investors were crumbling under the weight of double-digit rates. Then along came the the 'Great Recession' and now interest rates are heading towards zero.
Question: Will this last? In a year or two interest rates will very likely rise again and we could have the beginnings of yet another crisis.
Today's home buyers should ask themselves one simple question: And here's another point: House prices are still falling. Interest rates could well reach historical lows, even 0%, but buyers will resist borrowing of they think the capital they invest into a home will be eroded by prices continuing to fall. A few more months of these sort of statistics could bring the slowly stirring market back to a grinding halt. Bankers Much criticism and blame has been directed at the banking industry which, there can be no doubt, helped get us into the present mess. I have to say there is a lot of truth in this. With my own two eyes I have seen how the banks have screwed their customers and are still screwing them -- and getting away with it. Let me give you an example. Last week I had some clients who came to see me about their failing business and the role their bank (in this case Westpac) was playing in it. The blunder they had made was to use their home as security for a business loan. They had borrowed 90% of the value of their home to fund their business.
The trouble was, despite the security, that the bank treated the loan as a business loan -- and accordingly charged them business rates.
Guess what the rate was? They have no choice but to sell their home to relieve the pressure. They will be now be renting and adding one more bitter ex-home owner to the steadily growing list. My task is to go to their bank and see if a better deal can be organised, that allows them to keep their home but provides a some flexibility as well. Meanwhile the banks loudly trumpet their cheap home loans. Be not fooled. This is merely a PR exercise. At the same, out of sight of the public beneath the gaze of publicity, they are hammering home usurious interest rates on business loans, overdrafts and other facilities (not to mention fees). It often appears that the list of fees each month exceeds the transactions for the same period! There will be little hope for recovery until Dr Bollard and the politicians come to grips with the fact that a low interest regime must benefit everyone, that is home owners as well as businesses. And don't forget we the people have guaranteed the banks through the Government. The banks have conveniently forgotten that fact and shown no gratitude. They would have all gone under by now if it had not been for that. But that's gratitude for you. In my view 'Reckless Lending' should be punishable every bit as much as 'Reckless Trading' is under the Companies Act. Watch: John Clarke's satriical view of banks You Tube Confusion in the ranks It seems that the pointy heads in the Reserve Bank can't their message straight. Only a year ago Dr Bollard was boxing us all about the ears because we did not save enough. We were being profligate. Interest rates must rise to encourage savings and dampen demand etc etc. Now what is the message? We must spend to keep industry alive. Interest rates are down to discourage savings. We are sabotaging the national effort by not spending. 'Don't pull down the shutters' said Dr Bollard. You can just see it. Up and down the country people are wandering from room to to room, cheque book in one hand, pen in other, tormenting themselves whether they should or should not buy that new fridge or dishwasher. If they don't spend, and instead save, they will be securing their future. But if they save, and don't spend, 5,000 Fisher and Paykel workers will tossed into the street tomorrow and it will be all over. The confusion in the people's minds is only be exceeded by that in the offices of the Reserve Bank. The Capitalist system has had a nervous breakdown and has now to be to be revived with some changes. Like it or not, at present we are living in deflationary times. The thinking goes: Why buy today when it will be cheaper tomorrow? The opposite of deflation is inflation. The capitalist system relies on creeping -- not excessive -- inflation. Maybe 2%-3% per year to encourage people to spend early, understanding that things become more expensive later. Those in power must take the necessary steps to pump a little inflation back into the market. The trouble is, can it be controlled?
Olly Newland
FEEDBACK: Do you agree or disagree with Olly? Get the benefit of Olly's experience: Visit Olly's website www.ollynewland.co.nz for details of his Personal Mentoring Programme and consulting services.
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