JUNO Spring 2020

I read a great article about the international housing market called ‘Housing Bubble about to Burst, Market About to Crash’.

It went into detail about how unaffordable housing is in Australia, Canada, the United Kingdom, and New Zealand.

It said the ‘median multiple’, which is the median cost of a home, divided by average household income, had doubled over the previous decade.

The conclusion of the report – that the housing market was about to crash – would have been frightening for us here in New Zealand, were it not for one small detail.

The article was written in 2010.

Hey, the market didn’t crash

We know now that the New Zealand housing market didn’t crash in 2010 – nor at the tail-end of each of the previous property booms, going back to 1980. That was despite repeated predictions that it would.

But, surely things have changed since that article was written?

Right now, we’re in the middle of one of the most significant global events in modern history. People are understandably worried that, despite the history of the market, Covid-19 has changed the landscape and there are scary times ahead for property.

Perhaps. But then, people said the same thing about the Global Financial Crisis (GFC). That was an event that wiped hundreds of billions of dollars off share values around the world and caused property markets to collapse in many other nations.

But how did it affect us here in New Zealand? During the GFC, median house prices bottomed out at 8.6 per cent below the market peak, stayed there for about a year, then quickly recovered. Inconvenient – but hardly a crisis.

It’s too early to tell if the same thing will happen in the wake of the Covid-19 crisis – but the early indicators are encouraging.

Figures from property data company Valocity tell us that most regions experienced a small loss in property values during lockdown but that predictions of price carnage have failed to materialise.

What’s the property cycle?

If you follow my commentary, you’ll know that I’m a strong believer in something called ‘the property cycle’.

There are differing views on what form the cycle takes – but there’s a general consensus that each cycle lasts between 10 and 12 years and, in very broad terms, house prices double over that time.

This is despite the fact that Kiwi economic conditions, since 1980, have fluctuated wildly. Let’s take a look.

The 1986 doubling

The first doubling of house prices peaked somewhere around 1986. It capped off a decade of volatile change which was mostly dominated by the ‘Muldoon reforms’, but finished with the even more far-reaching ‘Rogernomics’ economic reforms of the fourth Labour government.

Inflation was running at around 18 per cent, mortgage interest rates were up over 20 per cent, and around 17,000 people left the country – many of them to Australia.

The 1996 doubling

By around 1996, houses prices had broadly doubled again. The National government which had been in power since 1990 had largely continued the previous government’s reforms but had also reformed the state housing market.

These reforms brought in market rentals and sold off a big portion of the state housing portfolio.

Inflation had plummeted to just 4 per cent and floating mortgage interest rates, while high by today’s standards, were down to around 12% per cent.

Migration was still negative, and a net 10,000 people left the country.

The 2006 doubling

By 2006 – a year that brought yet another decade of doubling house prices – the Clark Labour government had reversed the housing reforms of the previous government.

It abolished market rents but kept the ‘accommodation supplement’ which was introduced by National to offset the higher cost of renting.

It also presided over inflation of around 4 per cent and floating mortgage interest rates of around 10 per cent.

Net migration for 2006 was now running at a gain. Over 10,000 additional people came into New Zealand.

The 2016 doubling

By 2016, house prices had broadly doubled again.

Under John Key’s National government, floating mortgage interest rates were down to an historical low of around 5 per cent, inflation was down to an historical low of 1.6 per cent, migration was running at a net gain of over 70,000.

The debate had shifted to the cost of housing and a shortage of homes purported to be over 100,000.

There are no common factors

My point? If you’re looking for a common set of factors underlying each boom, you won’t find them.

The economic environments during the peak of each of the past four cycles couldn’t be more different.

The only thing that unites them is the cycle itself, and the doubling of house prices roughly every 10 years.

There are lots of theories about why this is the case, and why the New Zealand market acts differently to most other housing markets in the western world – but for me, it’s enough that it does.

Should we ignore the risks?

So, should we simply ignore reports which alert us to the risks in the market? Not at all!

These reports are correct in seeing that house prices in New Zealand are getting further and further out of step with household incomes. We should all be concerned about that growing gap.

But it’s just sensationalism to assume these conditions will inevitably lead to a market crash based on a one-size-fits all approach to international house prices. I believe it’s not supported by the evidence, or the history of the Kiwi market.

Meanwhile – for those awaiting the much-touted property market collapse – don’t hold your breath.

Ashley Church has been a regular commentator on property matters for over 20 years and now writes on behalf of OneRoof

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