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Today, we'll look why consumer confidence has slumped so sharply when we still have record low unemployment and we'll look ahead to see what it might mean for interest rates
And then we'll do some speculating about house prices.
Just how much could they fall and how long before we see prices back at their levels of a couple of months ago.
The answer is frightening for property investors and not that encouraging for first home buyers.
Story 1
But firstly we delve a bit deeper into why we've seen such a stunning drop in consumer confidence in March.
Westpac's McDermott Miller survey for the March quarter found confidence slumped to a 10 year low and now pessimists outnumber optimists.
This really is remarkable. Unemployment is at a record low of 3.4%.
Consumer spending is still reasonably strong and we're seeing an unprecedented boom in dairy prices. House prices are only slightly below their peaks from November last year and remain almost double what they were 6 years ago.
The last time we were this grumpy was in 1998 when we had over 200,000 people unemployed and we were in a sharp recession triggered by the Asian crisis and a drought.
Now we've just come out of the longest period of economic growth we've had since the 1950s.
So why are we so grumpy now?
Well this simple answer is we're moaning about higher prices and higher interest rates.
The difference this time around is we're so much more indebted than we ever have been.
Since 1999 household debt has ballooned from around NZ$70 billion or NZ$50,000 per person to around NZ$160 billion or NZ$100,000 per household.
We used that debt to boost house prices and to go on a 7 year long spending spree. We spent around NZ$1.14 for every dollar we earnt. House prices rose 80%.
So now we care an awful lot more about debt, about interest rates and about the value of our homes. Most importantly, we care about disposable income.
And lately the news has been bad for all of those things.
Higher petrol and food prices are hurting. So are higher interest rates.
But the thing that is really depressing us is the end of the housing boom. The median house price is down 4% since November and is falling fast.
So our disposable income is under intense pressure and our main store of wealth is being eroded in front of our eyes.
And the prospects for an improvement?
Not much I'm afraid. Interest rates are unlikely to fall this year and may even rise higher if the global credit market turmoil continues. Petrol prices will likely hit NZ$2 a litre soon, thanks partly to high oil prices and thanks to higher taxes.
And house prices have further to fall. More on that now
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The key question for home owners and property investors now is when can they expect capital gains again?
The simple answer is a long time, perhaps even a decade.
Here's our prediction. We expect house prices will fall 30% from their peak in the next two years. High interest rates and low migration will force sellers to drop their prices to the point where it becomes affordable enough again for regular first home buyers to return to the market.
Currently it costs more than 80% of the median take home pay to afford the mortgage on a median house. That needs to drop to 40% for housing to become affordable. Given our wages are rising only slowly, then it's going to take a long time for our ability to service the mortgage on a home to catch up with current house prices.
So if prices fall 30% in the next couple of years, we expect it would take another 8 to 10 years for prices to grind their way higher to get back to the NZ$352,000 peak we saw in November last year.
So anyone who bought at the peak who expects capital gains will have to assume another decade of waiting.
This is more pessimistic than many analysts, who are forcasting a year or two of prices falling before things getting back in the swing of things by 2010. Our bet is don't expect capital gains until 2018 at the earliest.
On that cheery note...
I'm Bernard Hickey from interest.co.nz with the Daily Briefing. We'll see you on Thursday.
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