Economist's Often Wrong – Economist Says

Posted by Ed McKnight on 19/03/20
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Why You Should Take Economist Predictions With A Grain of Salt

Economists often get it wrong.

There's good reason to think that the current claims suggesting a decrease in house prices could be incorrect.

That might sound ironic being an economist myself. But, let's look at the facts.

Economists spend a lot of time forecasting the future. But, when you look back at previous predictions, especially in uncertain times, we often get it wrong.

In January 2009, Stuff quoted Westpac economist Dominick Stephens. The article read that he "expects the decline in housing prices to continue through 2009."

"He's picking it could be 2012 before they regain their 2007 value. `Prices are too high relative to rents and incomes,' ... 'I'd sell now. Prices are still over-valued.''

Later that year the median New Zealand house price made a complete recovery and set a new record high of $475,000 that November.

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Property owners should, therefore, be wary of any forecasts that predict large and long term declines in the New Zealand property market.

Looking at the other side of the coin, there are many reasons to be positive about the property market.

The Reserve Bank's cut to the Official Cash Rate from 1.0% to 0.25% will make borrowing cheaper and more affordable.

That will be welcome news both for first home buyers and property investors.

These lower interest rates increase the yield property investors can achieve through their portfolios, given that their most considerable expense – mortgage repayments – will shortly go down.

That makes property a more attractive asset to invest in since term deposit rates are also likely to decrease from the OCR cut, and alternative investments, like shares, are currently in flux.

In addition to this, both the Reserve Bank Governor and Deputy Governor are 'jawboning' – publicly encouraging the banks to lend.

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There are two reasons why the banks are likely to follow this advice.

Firstly, the new capital requirement rules, which were going to make it harder for banks to lend, have been postponed.

Secondly, since the global financial crisis, the banks have tightened up their balance sheets and are in an excellent position to lend.

Let's not shy away from the hard stuff. Some sectors of the Kiwi economy will do it tough and are already doing it tough. But, there's more than one reason to believe that the economic impacts of Coronavirus mightn't fully extend to the property market.

But, then again look at my original statement – I'm an economist. I may get it wrong.