Leon Chen
May 9, 2019
Regardless of the economic environment, New Zealand property prices tend to double every 10 to 12 years. Just as economies have cycles, so too does the real estate market, known as the "property cycle." While opinions differ on the form of this cycle, the general consensus is that each cycle lasts 10 to 12 years, and broadly speaking, property prices double in each cycle.
One viewpoint is supported by very compelling data that tracks New Zealand's property market trends since the early 1980s, showing the four "boom" cycles that have occurred since then.
However, a recent article by a credible and respected economist suggests that we should not expect the housing market to boom again in the short term.
His argument is logical: low interest rates can drive up house prices significantly, but current interest rates are already very low and unlikely to fall much lower. Furthermore, historically high immigration rates have been gradually decreasing in recent years, reducing pressure on the housing market supply, and the housing shortage may gradually ease in the coming years, alleviating pressure on house prices.
He also indicated that the tightening of credit policies by banks and the Reserve Bank's rationing measures mean that mortgage lending is unlikely to expand as dramatically as we have seen in recent years, and foreign real estate investors are now prohibited from entering the market and no longer have an impact on house prices.
Furthermore, the gap between median household income and median house price has been steadily widening since the 1980s, which makes it clear why some people may think the housing boom is over.
But is that really the case? The logical extension of the above argument is that a series of unique market environments and policies have led to our boom cycles. When the above situation occurs, it also means that the cycle will come to an end. Therefore, it is necessary to observe more carefully what happened in each cycle and see what exactly had an impact on it.
The first doubling of house prices peaked around 1986, ending a decade of turmoil primarily driven by the "Mooldoon Reforms," but ending with the more far-reaching "Rogers Economics" reforms of the fourth Labor government. At that time, inflation was around 18%, mortgage rates had risen by over 20%, and net migration had decreased by approximately 17,000 people, many of whom had moved to Australia. By around 1996, house prices had doubled again.
The government that has been in power since 1990 has largely continued the reforms of previous administrations, but has also reformed the state-owned housing market—introducing market rents and selling off a large portion of the state-owned housing portfolio. Inflation has plummeted to 4%, and floating mortgage rates, while high by today's standards, have fallen to around 12%.
By 2006, house prices had doubled again, and the Clark Labor government reversed the previous government's housing reforms, eliminating market rents but retaining the "housing allowance" introduced by the National Party to offset rising rents. Inflation during this period was 4%, and variable mortgage rates were around 10%. Net immigration increased by over 10,000 in 2006.
By 2016, house prices had doubled again. Crucially, under government leadership, floating mortgage rates fell to a historic low of around 5%, inflation to a historic low of 1.6%, net immigration increased by over 70,000, and public attention shifted to housing costs and a shortage of 100,000 homes. Those looking for common factors behind every boom will find none. The economic environment in each of the past four cycles has been very different; the only thing connecting them is the cycle itself and the fact that house prices roughly double every 10 years.
However, economic transformation is inevitable. It may end the real estate cycle pattern of the past few decades, which is an unavoidable fact. How the real estate market will change next remains to be seen.