What goes up will come down!

I well remember Professor Philpot at Lincoln University lecturing us on this very point ... "what goes up will come down" – and down, it will. Just ask any dairy farmer who saw his payout crash to half after an $8 payout.

For New Zealand the simplest economic formula applies around supply and demand, with the housing market demand way exceeding supply for housing - we have about 60,000 extra people arriving and we are building about 20,000 houses. So, as demand exceeds supply – prices rise.

We saw that when the dairy payout reached $8. Demand for product exceeded supply. Demand reduced, supply remained constant and down went the price. Yes, I have "rabbitted" on about all this before, but we apparently need to hear things about 10 times before we actually get the message and start adjusting our thinking and maybe take action. One only has to 'google' economics to find many pundits are telling us we are at the peak and the decline is only a matter of time.

New Zealand's economy has gone through many boom and poor times - about five in my life time. Auckland is so busy building you have to wait three weeks to get a truck load of concrete. One builder has bought his own concrete truck so he can get the concrete now. My builder friend tells me the industry is frenetic and most people in the industry are so busy and stressed it is frightening. Some have to take "stress" breaks.

Farming has had mixed fortunes with very good returns over most sectors except dairy and we have already covered that off.

These economic models of the world now make it much harder for economists to get their predictions right. China has taken on huge amounts of internal debt to build structures and infrastructure. Japan has printed heaps of money and their economy has been stalled for years. The risk here is that an international shock could also affect our "flying" real estate economy.

The purpose of this 'Philosophy' is just to remind people that right now caution is the best approach. The clock is ticking. Interest rates are low and may go down further. Property is booming, confidence is at an all time high, but it will not last.

My advice is to take a measured approach, be realistic about your expectations, have some cash in reserve, and realise (again) what has gone up will come down.

Footnote :
There is some noise from Auckland about there being a 'cycle on a cycle'. That this has gone on for seven years and another seven years will follow! I will be very interested to see.

Disclaimer – These are the opinions of Don Fraser of Fraser Farm Finance. Any decisions made should not be based on this article alone and appropriate professional assistance should be sought. Don Fraser is the Principal of Fraser Farm Finance and a consultant to the Farming Industry. Contact him on 0800 777 675 or 021 777 675 A disclosure document is available on request.


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