The American Storm

Economics is a difficult science to master and some may say it is not a science at all, but more of an idea. When you throw various variables in a pot, more times that not you will find quizzical faces overlooking the brim of the cauldron to see what happens.

The resident economic experts in NZ, plus the related experts with the main trading banks operating in NZ, all made the same call when Covid hit us in 2019. They were unanimous, there was no argument, only certainty that the housing prices in NZ would all be subject to a significant drop and there would in erect, be a property crash. After all, everyone was in lock down, so the Open Homes wouldn’t be happening and no-one can see what they would be buying.

Hind-sight has shown us that all the economic experts were 100% wrong as the prices did not go down thereby showing that the economists were correct with the direction, it went in the opposite direction, showing that they had no idea what they are talking about.

In the economists defence, an event like a disease-related lockdown doesn’t happen every day and they may have had to revert to an Economic Journal (1) to find out what has happened to house prices in previous pandemics. The studies would have shown them that there were large declines in house prices, so they were satisfied with that precedent and comfortable with their predictions.

Tariffs

A similar event is happening now with the soon-to-be-seen changes in the United States. The new president, Donald Trump, has campaigned expressing his idea to make America great again. To do this, he does not want the country to be so reliant on others and sees his country as separate from the rest of the world. He has therefore adopted a ‘protectionism’ point of view which includes world-wide trade tariffs to protect American manufacturing.(2)

Trump has touted a 60% tariff on Chinese goods and a 10% charge on all other goods that are imported into the US. The reference (2) from the BBC tells of past respected republican Presidents have gone down this same path and the related boom/crash following this move can be associated to a large degree on the implementation of tariffs. There is conjecture on this point but it is a significant variable that cannot be ignored.

What we do know is that the US put up Tariff’s by 20% in the 1930’s to raise money to get them out of the depression at that time. It has been shown that this action has directly had the effect of pro-longing the depression between the two world wars.(3)

So, what has all this got to do with us down here in the land of the long white cloud?

Well, if the US do impose Tariff’s, NZ will put up their hand and ask for an exclusion, however this didn’t work with the last Trump administration where tariff’s were imposed on Steel and Aluminium. If the tariffs are over-riding and include everything we export to the US, then our exporters will need to trim their prices if we are to compete with other international exporters plus the local industries in the US. With less money for the exporters, this could lead to lay-offs and increase our already growing unemployment rate. In turn, a higher unemployment rate will put pressure on house prices as affordability will be lower, which will most likely be shown in the first home buyer market.

Global markets

At the time of writing this blog, the new Trump policies have not been formed and it is too early to say what they will do. With the US being the second biggest importer of our meat, when meat is our largest export product, we would be foolish to stay entirely positive and sit back when it is likely that this particular industry is going to take a hit.

In saying this, if Trump goes ahead with his talk of a 60% tariff on imports from China, China will likely pay back the US with similar tariff’s against them (4). Other countries will follow suit against the US as they have in the past when America has increased tariffs.

The good news is that what will follow is Trade Minister’s from all around the world will be looking around them to build other trade relationships outside the US. The heat will be on our Trade Minister (Todd McClay), Foreign Minister (Winston Peters) and Bede Correy (Chief Executive of Foreign Affairs & Trade) to get out there and start performing.

Although the US is a very large country, if we can forge trade relationships around the world, this will reduce the risk of being so dependant on the US for our exports. Along with this, our largest trading Partner is China and with many of their imported products being overly expensive now with their self-induced tariffs against the US, China may look to their existing partners to satisfy their needs. We may become that much cheaper overnight and orders could start flowing in. This will off-set unemployment and our country may even benefit from this US move.

How will this affect the NZ Housing market

Inflation in the US is around the 2.4% mark (5), on its way down and nearly at the pre-covid level.

The NZ Inflation rate has taken a similar path which has in turn led to lower mortgage interest rates which is starting to spark up the NZ Housing prices.

However the inflation figures in the US may not remain here as Trump is expected to undergo mass deportation of their neighbours back to Mexico and overstayers from other countries. A significant number of these people are working in the construction industry under the table and if they disappear there could be a shortage of workers. In addition to this, if regular US citizens are employed the labour rate will increase and so will the cost of housing (6).

Looking back at what I mentioned earlier about tariffs and the corresponding increase of US manufacturing which can now compete, again with the increased labour cost on regular goods, this will put further pressure on inflation. With prices increasing all over the place, we all know the best way to stem inflation or at least slow down this runaway train is to take money out of the citizens pockets by increasing interest rates. This will lead to another housing crash.

Trump proposes to counter this risk in the US by freeing up federal land and slashing building regulations to reduce costs and increase building construction. There is an argument that states there will be a lot of available empty housing once millions of people are deported and the extra supply will push the house pricing back down again.

NZ Housing market

After and the current continuation to battle the restrictions to the construction industry due to the introduction of the RMA, the NZ Govt is looking at following a similar vein to Trump by introducing self-certification in the building industry (7).

The Building and Housing Construction Minister, Chris Penk, has stated the following about the state of the housing market and has created his solution, calling them the Two Pillars:

“The first is that qualified building professionals, such as plumbers, drainlayers and builders, will be able to self-certify their own work, for low-risk builds, without the need for an inspection. This brings them in line with electricians and gasfitters who can already do this and is something the industry has been calling for, for years.

“The second pillar is that businesses with a proven track-record – for example, group homebuilders who build hundreds of near identical homes a year – will be able to go through a more streamlined consent process.”

The cash-strapped Council’s are not going to like it and there will be more Coronation-like’ houses appearing, but at least the investors and first home buyers will be happy.

Summary

It will be an interesting first year for NZ as we start to pull out of the doldrums and move back into a growth phase. With the new American government determined to enact change, this may result in short term financial gains to pay back their huge international debt, but may create long-term periods of scratching their heads thinking ‘why the hell did we do that!’

Protectionism has had various success and failures around the globe since the Industrial era, however there is a reason why there has been a movement over the last few hundred years to free -trade agreements world wide. This is because every country is not fully resourced and various products can always be made better and cheaper elsewhere.

Whatever happens, the effects are not likely to affect us straight away and no matter what the papers tell you, in-house we see that the green shoots are definitely sprouting and the property train is once again, starting to pull out of the station.

References

The American Storm

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