The world is on edge again. Conflict in the Middle East, oil prices jumping, markets wobbling.
The question I keep getting from buyers and sellers is what does this mean for house prices?
Any uncertainty means it is really hard for people to make decisions on large assets like buying or selling real estate.
The first impact of any Middle East conflict is oil. That is already happening.
Prices have pushed higher on fears of supply disruption, and that flows quickly into the real economy. Fuel costs rise, freight becomes more expensive, food costs increase and building costs increase.
Not many products are untouched by increasing fuel prices.
I believe this could put upward pressure on building materials and supplies. This may dampen the demand for sections slightly and people may hold off plans for building.
When inflation lifts, the Reserve Bank gets concerned, as its mandate is to keep inflation between 1% and 3%. Currently inflation sits right at the top of this range, at around 3%.
That is the real link between a war on the other side of the world and your local housing market. It comes back to interest rates.
Over the past 20 years of house price data there is quite a strong correlation with interest rates.
The effect of increasing or dropping interest rates usually takes around 12 months to appear in the housing stats, to see a difference in housing price data.
You can already see this playing out overseas.
In Australia, prices in Sydney and Melbourne have softened again as higher borrowing costs and uncertainty weigh on buyers.
In the United States, mortgage rates have pushed back up, making it harder for first-home buyers to get into the market.
Uncertainty always shows up first in confidence. Buyers hesitate and sellers hold off. Deals take longer to come together.
But this is where people often get it wrong.
Property is not like the sharemarket. It does not react overnight to global headlines.
It moves slowly and is not as sensitive. You are married to your house and only dating your interest rate.
Why this matters is that long-term most people can ride out increases of interest rates, as housing is a long-term asset.
In New Zealand, the fundamentals have not changed.
We still do not have enough housing supply. We still have population pressure.
And we still have a strong preference for owning property.
Most importantly, our market is driven by interest rates set here, not events in the Middle East.
Global conflict tends to create short-term noise rather than long-term change in housing markets.
That said, there are some real effects to watch.
Confidence will take a hit. The top end of the market usually feels it first.
Auctions become quieter and buyers become more selective. That can take some heat out of prices, at least in the short term.
There is also the construction side. Higher fuel and transport costs push up the price of building.
That can delay projects or make them unviable altogether.
Ironically, that can support existing house prices over time because it limits new supply.
So where does this leave the market?
If the conflict is short lived, this is likely to be a temporary slowdown.
Activity might ease later this year, and the recovery might take a bit longer than expected for most of the New Zealand market — although not for Queenstown.
If it drags on, the bigger risk is persistent inflation and increasing interest rates. That would keep pressure on borrowers and could see the market tracking sideways for a while.
But it is hard to see this conflict in the Middle East causing a major downturn in New Zealand property.
- Hamish Walker is a former National MP and director-salesman of Walker & Co Realty, Queenstown.
