- Commentary about property has swung full tilt from fears of doom and gloom to fears of boom and bust.
- Over-correcting is no different to slamming on the brakes while towing the swaying caravan - the worst thing to do.
- The best way to handle the market is to take the foot off the accelerator and allow things to stabilise.
Have you ever been driving a car while towing a caravan or trailer and as you accelerate you start to get the speed wobbles, swinging uncontrollably from side to side? Or remember back to your childhood days when you were on your skateboard and you started wobbling as you picked up speed?
What do you do in this situation?
The natural thing to do is to start over-correcting the steering and to slam on the brakes.
But this is exactly what you shouldn’t do.
Why? Because this reactive over correction will at best cause you to jack knife, and at worst a serious crash.
Handling the wobbles
So what do you need to do? Let me come back to that in a minute, because the rapid rises in asset prices and values across everything from shares to precious metals, crypto and property prices have been creating similar vehicle momentum challenges for governments and investors.
Since the onset of the pandemic, after an initial drawback, asset values went through the roof. Why? Because global economic responses to the COVID crisis have created the perfect storm for increases in investment assets of all descriptions.
Massive government stimulus packages, the central banks’ printing of money (disguised as quantitative easing aka ‘QE’) and drops in interest rates to historic lows means there is lots of money sloshing around, and money has never been so cheap to borrow.
It also means that the worst place to leave your money is in the bank, as savings rates that are at or just over zero result in you losing money when inflation is taken into account. And to top things off, lockdown downtimes and working from home have resulted in everyone having much more time to start doing something with all of their extra cash.
The result – every man, woman, child and their dog are ‘investing’ (or more likely speculating and gambling) by throwing their hard-earned savings and borrowings at the next best shiny thing. And they are piling in as mainstream and social media promote the instant overnight rags to riches stories. This has created a tsunami of speculation fuelled ‘FOMO’ or the Fear Of Missing Out.
In the space of just six months, media commentators swung full tilt from fears of doom and gloom to fears of boom and bust. Home and property values are a perfect case in point.
And there are calls for the government to start stepping in to dampen demand through a mixture of macro-prudential measures, such as tightening bank lending policies or potential tax changes, due to fears of housing price growth raising that old chestnut of housing affordability, particularly for first home buyers. And we’ve already seen this start to take place.
But this hasty reactive over-correction is no different to slamming on the brakes while towing the swaying caravan – this is the worst thing to do.
And let’s not forget that first home buyers represent about 10 to 15 percent of the market while over 50 percent of our household wealth lies in the values of our homes, particularly for the mass of baby boomers and generation X’ers that are nearing retirement, where increasing home prices may be the difference between being able to stop work and living comfortably in their golden years.
Keep calm and carry on
So does the government make hasty changes to satisfy the few at the expense of the many?
Perhaps there is a better alternative. Let’s return to the swaying car towing a trailer analogy.
What’s the best thing to do when you’ve got the speed wobbles? It’s counterintuitive and contrarian, but all we know is that the best way to handle this scary situation is just to take your foot off the accelerator and allow things to stabilise. In other words, to do nothing and allow the car and trailer to correct themselves.
And from where I sit, that is exactly what we should be doing in the housing market. Because what many are missing is that we are experiencing a short-term period of price exuberance that is flowing from pent-up demand created by COVID along with a very limited supply of properties for sale.
The resulting scarcity, increased demand and access to credit, the limited supply and media-fuelled FOMO have pushed up prices for quality properties sharply, to overcompensate for 12 months of not being able to do much.
But like every coiled spring that has been released suddenly, it will over react short term and then return to equilibrium. The current activity in property is no different. Stimulus packages are already starting to abate and a natural increase in the number of properties for sale occurring as rental moratoriums and home loan holidays end, alongside increased confidence enticing more property owners to list their homes for sale.
So just like the swaying car and caravan, the best thing to do in housing may be to do nothing – just take the foot off the accelerator and let nature and market forces take their course. Conversely any hasty over correction by braking or over steering through macro-prudential interventions or tax treatments may result in an unwanted downturn and other unforeseen consequences.
JOMO, not FOMO
And property buyers need to start doing the same – shifting their mindsets from the current FOMO faux pas to ‘JOMO’ – the Joy Of Missing Out, because having the patience to sit out now may create better opportunities in the near future. Warren Buffet’s old adage that you need to be fearful when others are greedy and greedy when others are fearful rings true here. And even more relevant is the Buffet truism that wealth is the transfer of money from the impatient to the patient.
But unfortunately, we live in a world where adopting long term patience and doing nothing is perceived as being weak and unfashionable – so my challenge to you and our governments, is do we have the courage and resilience to ignore the over emphasised noise of the vocal squeaky wheels and allow nature to take its course?