Gareth Morgan says why he thinks falling property prices are a good thing
Interviewer: Gareth, I hear you’re pretty delighted that house prices are falling and continuing to fall.
Morgan: I’m absolutely thrilled, actually, and let’s hope they fall quite a bit further, because we’ve had two decades of New Zealanders thinking the only way to get rich is to buy houses.
How dumb is that? I mean they’re nothing but speculators, sponsored by the Reserve Bank, telling the commercial banks to lend on housing before they lend on anything else and sponsored by some tax breaks. So the whole thing’s been driven by stupid policy and the result is that we’ve over invested in housing by a ridiculous amount, to the detriment of all the other industries that employ people and generate income. So it has to change.
Most economists will tell you that. It’s just a matter of when and we’ve been in that process now since 2007, the house prices are adjusting, absolutely, and I’ve got a fairly famous graph now that shows how much more to go. We’re about half way, a bit over perhaps, and I sort of feel it’s probably better to get it over with now we’re so far into the process, let’s not draw it out anymore, let’s just dump the things down another 15 percent probably, and then we can get on.
What we’re trying to do is get a clear message to mums and dads out there — “Don’t invest in property to make money. Invest in property to have a house — whatever level of house you want — it’s up to you, but don’t invest in it to make money”. And once you get that message stamped on their foreheads, then we’ll start allocating the capital in this country correctly so we’ll start generating incomes and jobs and we’ll start climbing back up that OCED ladder. So bring it on, I say, just drop them.
Interviewer: So if house prices do continue to drop and maybe go down another 15 percent, is that just good because it will allow a whole new generation of people to own homes?
Morgan: Well there’s that, because more and more people are getting locked out of the housing market, obviously the younger ones, and I don’t think that’s good, because the younger ones are the dynamos of the current day and the future. And what happens is they just leave the country. So you start hollowing out, and you’ve got a bunch of bloody old pensioners, playing one-up-manship against each other on household speculation. I mean what the hell is that? I think the benefits far outweigh the costs, and the costs will be people in that market up to their necks and beyond with debt who will get cleaned up, but too bad, it’s the countries’ income that matters far more than that.
Interviewer: So if I had a rental property, and I was going to sell it up, what would I invest in instead?
Morgan: Let’s just start on the rental properties first. I think if you can have a rental property that’s yielding you something like 7-9 percent on the value of the property once you take your rent and take off all your expenses, then stay in that market.
That’s a good asset to have. But if your net rent, after all your costs, is only earning you 2-4 percent, then you’re a speculator, and I would like to see that carpet pulled out from under your feet. Absolutely I would.
So it’s not a downer on property, it’s a downer on the pricing of the asset. It’s been nothing but a speculative boom.
The rules of investment are if you want to make money you concentrate your investment. Well we all know that, and we have been concentrating that in housing.
But it’s just gone beyond a joke, it’s ridiculous. And the number of land agents has gone down by 30 percent, well I would like to see it down 60 percent, which would be the natural rate.
But you can concentrate in other assets too, like factories or farms, or whatever they are. But it’s all about yield, we are in a new era now. Yield matters. Investing for capital gain is extremely high risk in this environment.
And the reason is because globally credit is not a free lunch anymore. Banks aren’t ringing you up trying to get you to double your mortgage. The banks are trying to stay alive.
The world has changed totally on that. So it’s great news what’s happened.
