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Bear market: not as cute as it sounds (Image: Tina Tiller)
Bear market: not as cute as it sounds (Image: Tina Tiller)

MoneyJune 15, 2022

Welcome to the bear market

Guest writer
Bear market: not as cute as it sounds (Image: Tina Tiller)
Bear market: not as cute as it sounds (Image: Tina Tiller)

The stock market meltdown has cranked up a notch, while crypto keeps crashing. Here’s what you need to know.

The S&P 500, a key measure of the American stock market, has been flirting with the idea of going into a bear market for weeks now, but on Tuesday (New Zealand time) it finally happened. In addition to the regular markets, the crypto markets are in free fall too, with the sell-off continuing and prices of the big two (Bitcoin and Ethereum) reaching lows we haven’t seen for 18 months.

A what now?

What is a bear market anyway? Essentially it’s when stock prices decline at least 20% from a recent peak. These are relatively rare and quite often they kick off a recession, which is a big scary word for saying the total size of the economy is getting smaller, rather than bigger. The  S&P peaked on January 3 (which is now the “starting point” of this bear market), and the continued drop comes as concerns mount over high inflation, the war in Ukraine, Covid, and the Federal Reserve System (the US central bank) attempting to rein in the US economy with rate hikes.

This may seem far away from New Zealand and our own stock market, but the rest of the global markets tend to follow the world’s biggest economy, which is reflected in the NZX 50 being down by almost 20% since the start of the year, nearing bear territory itself.

What about crypto?

On the crypto side of the (bit)coin, there are a few major catalysts for the recent crash, and they all feed off one another. The first is the continued fall of Bitcoin (BTC) and Ethereum (ETH), which has led to an increasing number of traders getting margin-called – ie being forced to sell off the assets they held as collateral for the loan and essentially being “liquidated”. The last of the big three reasons for the increasing market uncertainty is one of the leading crypto exchanges, Celsius, halting customer withdrawals. 

Bitcoin reached a high of $US68,000 in late 2021 and has steadily fallen since then, with the weekend’s drop of 15% pushing the mainstay of the crypto markets down to $US22,000. Ethereum matched Bitcoin’s drop, reaching a low just over the crunch point of $1,000 – any lower and reports say it would have triggered $400 million worth of forced margin sell-off. 

Why has this happened?

It’s difficult to pinpoint exactly why markets fall like this, but it’s safe to say the crash is compounded by market decline around the world in general. As stock prices go down and investors become fearful, risky assets like crypto are seen to be less desirable, and the price decreases. Investors see the price go down, they sell to de-risk their portfolio and the price drops even more. This vicious cycle is boosted with the forced sell-off of margin-called traders. 

Finally, this sell-off has forced one of the leading crypto exchanges, Celsius, to halt withdrawals. Facing apparent liquidity issues, the network – which has more than 1.7 million customers and reportedly over $US20 billion under its management – simply doesn’t have enough cash on hand to pay the increasing number of customers wanting to convert their crypto assets into cash. The fear index in the crypto markets is super high, and moves like this don’t inspire confidence for existing investors – what if their exchange is next? 

Wherever you look, markets are being pounded right now, and for many this is the first time experiencing a market downturn to this extent. If we zoom out, history shows that the US stock market has always recovered from declines in the past. If you put money in stocks, over 10 years you would have been down only 6% of the time. Crypto has had many bear markets in its brief lifetime as well, albeit with higher swings, but the industry is still young. In 10 years’ time we may just look back on this decline as we look back on 2008 – a financial crisis, but one we bounced back from. 

Keep going!
(Image: Archi Banal)
(Image: Archi Banal)

MoneyJune 13, 2022

How big a pay rise do you need to keep up with the housing market?

Contributing writer
(Image: Archi Banal)
(Image: Archi Banal)

In June 2021 Emma Vitz went viral with her maps showing how much you’d need to earn to afford a median house in your region. A year on, she finds that things have got even worse.

Did your family get a $32,000 pay rise in the last year? Probably not, but that’s what you would have needed to get to make buying a house in New Zealand as affordable (cough) as it was a year ago.

Back then, I published maps showing how much you needed to earn to afford the median house in New Zealand. They were based on the common financial advice to spend no more than 30% of your gross income on housing. I calculated mortgage repayments based on a 20% deposit and a 30 year mortgage with an interest rate of 4%.

Since then, both house prices and interest rates have gone up. So I thought I’d check in with our housing market and see how things have changed from April 2021 to April 2022.

In this period, the median house price across the country went up by 9%, or just over $70,000. For the West Coast, this increase was as high as 32%, while Gisborne, Manawatu and Otago saw small price decreases. The median house price in Auckland and Wellington increased by 4% and 7% respectively, while Canterbury saw a massive 21% increase.

In that time, the Reserve Bank hiked the official cash rate by a total of 1.25% (since April 2022, the RBNZ has increased the OCR again by 0.5%. However, regional data on house prices is available only until April, so I have not incorporated this latest increase into my calculations). Based on this, I raised the interest rate I used in my calculations from 4% in April 2021 to 5.25% in April 2022.

We can combine these factors to see how much of a pay rise your household would have needed to keep up with the housing market.

Across New Zealand as a whole, you needed an increase in household income of almost $32k to keep up. Those in the Tasman region needed a whopping $43k bump in income to match the increases in house prices and interest rates. The Waikato comes in close second with a required pay rise of $40k.

Even regions that experienced a drop in house prices needed a significant pay rise to cope with the increase in interest rates that flow through to the mortgage payment. Households in Gisborne and Manawatu needed a $17k and $13k increase in income respectively, while those in Otago needed a bump of $10k to keep up.

Of course, all of this assumes you were earning enough to pay for a mortgage with 30% of your gross income in April 2021, and that you managed to put together a 20% deposit. These are hurdles most New Zealanders cannot clear.

How much did household incomes actually increase? We can look at the change in median household income by region according to the Household Economic Survey. This data is collected from July to June each year, which means it is not available for 2022 yet. However, comparing the data we do have, which lags behind the housing data, can still be an interesting data point.

From June 2020 to June 2021, the increase in median annual household income across New Zealand was just over $2.5k, a far cry from the $32k necessary to avoid falling behind the housing market.

Households in Gisborne and the Hawke’s Bay had an increase of $14k, which is impressive but nevertheless insufficient to keep pace with the housing market, even with falling property prices in Gisborne. Northland and Southland saw a decrease in the median household income, while households in Auckland made a paltry $404 more than the year before.

(Note that Gisborne and the Hawke’s Bay are grouped together in the income data, as are Tasman, Nelson, Marlborough and the West Coast. It’s likely this obscures some variation in income between the regions).

These numbers show just how difficult it is for those in New Zealand who do not own property to gain a foothold in the market at this point in time. Substantial house price increases, coupled with rising interest rates and sluggish wages, lock many out of the housing market entirely. Larger deposits are required, mortgage applicants are tested by banks at higher interest rates, and wages simply do not keep up.