5 September 2017

'Jacindamania' affects house prices

Elections always spark a measure of excitement (or angst) in financial markets and the upcoming vote on September 23 is no exception.

As the race between National and Labour heats up, the Property Institute of New Zealand has cited a new report from research firm, Valocity, that provides “proof of a suspected link between New Zealand elections and a ‘cooling’ of the property market”.

The report found that immediately prior to the previous two NZ elections in 2011 and 2014, property sales volumes dropped significantly – almost by 25% in the case of the latter.

Similar trends appear to be at play this time around.

“In the 12 months between July 2016 and July 2017, sales volumes across the country are down by 55.4% (4,229 properties) and the majority of that drop has taken place since the election date was announced in February this year,” the Valocity study says.

Post-election, property sales volumes tend to trend up to usual levels, the Property Institute says.

Election uncertainty has caused volatility  in New Zealand's real estate and financial markets

Election uncertainty has caused volatility in New Zealand's real estate and financial markets

It’s not just the property market that’s being affected. The NZ dollar is down 4.5 per cent (against the US dollar) since August this year.

Viraj Patel, a foreign exchange strategist at global bank ING, noted that neither of the two most likely outcomes – a NZ First coalition with either Labour or National – would support the status quo.

“Given the heightened political uncertainty and the prospect of significant policy changes by the next government, our base case for the NZ Dollar is to trade with a negative bias ahead of the elections,” Patel said.

The trigger-happy nature of currency markets was evident, too, in the wake of the shock poll result that showed Labour ahead of National for the first time in almost a decade.

According to a Stuff news report at the time, “the NZ dollar dropped about a third of a cent against the US dollar after the latest political poll showed the National party had slipped behind Labour.”

The NZ Dollar has dropped ahead of the election

The NZ Dollar has dropped ahead of the election

Stock markets, too, often move in time with the political swings and roundabouts of elections. A 2007 academic study of share market volatility around election time in 27 developed countries found pre- and post-vote jitters for share market investors were common all around the world. 

The ‘Stock Market Volatility around National Elections’ study found that: “... despite many efforts to accurately predict election outcomes, investors are still surprised by the ultimate distribution of votes. Stock prices react strongly in response to this surprise, and temporarily elevated levels of volatility are observed.”

‘Temporarily’ is the key word here. While a change of Government may, over time, result in policy changes – such as new tax rates – making major investment decisions based on the latest Colmar Brunton poll is not advisable.

Another academic report,  the ‘Effects of New Zealand General Elections on Stock Market Returns’, found that stock market returns can even be influenced by which party is in power.

“Nominal returns are found to be 0.048% higher when the National party is in government compared to when the Labour party is in government,” the study says.

While the result might be statistically interesting, the prospect of earning an extra $4.80 on a $10,000 NZ shares portfolio is hardly a compelling investment (or voting) strategy.

Indeed, retirees – and all investors – should ignore the inevitable market fluctuations that may shift the value of their assets this way or that on any given pre-election day.

Prior to the snap vote in the UK earlier this year, Laith Khalaf, senior analyst at Hargreaves Lansdown, told The Independent that elections are, at best, a “distraction” for investors.

“The big risk investors face from an election is that they let it disrupt their financial plans,” Khalaf said.

“In the short term, the market can be driven by political events, but investors should look beyond any noise as politicians hit the campaign trail, and keep focused on their own long term savings goals.”

With a little over two weeks to go in what is shaping up as one of the most entertaining and volatile elections for some time, the market noise will undoubtedly get louder; try not to let it damage your hearing!

The stock market tends to perform marginally better when National is in Government

The stock market tends to perform marginally better when National is in Government

Article written by David Chaplin, Lifetime Retirement Income.

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