RSS Feed

Bernard Hickey: Is NZ in a Housing Bubble?

Wednesday, June 18, 2014

Despite being broadly favourable, the International Monetary Fund's latest country report warns of the real risk of New Zealand house prices overshooting.  With it being an election year and house prices being the centre of our political storm, it is perhaps unsurprising that words had been put into the IMF's mouth and what started as 'price overshooting' is now being largely reported as a 'housing bubble'.  

Is the housing bubble being diagnosed by realists or scaremongers?  In this three-part blog series, we ask selected industry experts to weigh in by asking them

1. What are the warning signs of a growing house bubble? 

2. Do you believe New Zealand (and in particular, Auckland) to be experiencing a housing bubble?  

Bernard Hickey
Bernard Hickey - Publisher, Hive News 

The IMF has warned that New Zealand is in the top five in the world for house price inflation and on its measures of house prices relative to incomes and rents.

Most conventional measures of 'bubbles' look at the growth of prices relative to history and the returns on those assets relative to other assets and incomes. By those measures, New Zealand's house prices are overvalued by anything from 30% to 80%. 

However, this over-valuation is not new, although it has gotten significantly worse over the last 18 months.

Another measure of affordability or over-valuation is to look at 'serviceability' of the debt linked to those assets. By that measure New Zealand's house prices are not over-valued at current interest rates and with current levels of unemployment.

Here's some useful charts to illustrate the article. The bottom two charts are best.

House prices in Auckland are now so disconnected from underlying values such as rents and incomes that it's worth asking that question again.

The answer depends on your view of the future, including a bunch of economic and political variables that are very uncertain.

It's very easy to paint a picture of the future that says these prices are not at 'bubble' levels and are therefore not likely to burst or fall sharply, or that there is a bubble 

Firstly, the influx of 'hedge city' buying from wealthy individuals in emerging markets has only just started. The amount of lending inside China has risen US$15 trillion in the last six years, which is more lending than was done  in the last 150 years of the US banking system. At the moment most of that money is stuck in China, but the new leader Xi Jingping is determined to relax the capital controls that currently stops all but a trickle of that money from flooding out into other property markets.

Secondly, the current forecasts are that the Auckland Unitary Plan will allow the building of only half the number of houses needed to cope with an expected rise in its population to 2 million by 2031. NIMBY home owners in the leafy central suburbs of Mt Eden, Remuera, Epsom, St Heliers and Ponsonby have gutted the parts of the Unitary Plan that would have allowed more intensive development of homes in central isthmus of Auckland, where land prices have tripled over the last decade. 

Thirdly, the prospects of a Labour/Green/NZ First Government have faded in recent months, reducing the chances a capital gains tax and limits on foreign buying might take some of the heat out of the market. 

Fourthly, there has been a structural shift lower in inflation and interest rates over the last six years in the wake of the Global Financial Crisis. Many argue that increased globalisation of services, massive over-investment in production capacity in Asia and Europe, along with aging populations in Europe, China and the United States will keep downward pressure on goods and services prices. Low and falling interest rates tend to inflate asset prices, particularly when central banks globally are still printing money and promising to keep interest rates at zero or near-zero for years to come.

Fifthly, the Auckland housing market could be seen as 'To Big To Fail'. The value of the Auckland market is now worth over NZ$400 billion, which is almost double the value of New Zealand's entire GDP. It underpins New Zealand's banking system and both the Government and the Reserve Bank have proved in recent times (late 2008/2009) they will act to support those banks by guaranteeing bonds and extending short term loans to the banks.

However, it is also possible to argue that Auckland's house prices are significantly over-valued and could fall (as they did in late 2008 and early 2009) if there was a sharp rise in interest rates and higher unemployment. Here are some factors that could drive house price lower.

Firstly, the current Government is determined to increase housing supply in Auckland and has warned the council that continued house price inflation endangers the economy more broadly. The central Government now has the power to take over consenting from the Council and is determined to lower the multiples of house prices to income in Auckland to around four times incomes from the current level of over seven times income.

Secondly, the Reserve Bank is increasingly concerned about the risks to the banking system from an over-valued housing market and is trying to battle the issue of low interest rates causing rising asset prices that could make financial systems unstable. It has already imposed its high LVR speed limit, which may remain in place into next year. It has other tools it has yet to use, including a counter-cyclical capital buffer that would force banks to hold more capital, and has left open the option of limiting mortgage to income multiples, as the Bank of England is likely to do. The Reserve Bank is also planning to force banks to recognise landlords with more than 5 properties as small corporates for capital adequacy purposes, which would increase the likely interest rates for those loans. The Reserve Bank has delayed this change until December from July, but is still planning to go ahead with the change.

Thirdly, a change of Government is still possible and would likely lead to a capital gains tax and limits on foreign buying of properties. It could also lead to a state house building programme of 100,000 houses over the next 10 years, which could add supply to offset more demand. 

Fourthly, the Reserve Bank is currently forecasting an increase in mortgage interest rates to over 8% by early 2016, which would put more leveraged property investors and owners under more pressure.

There's the arguments in favour of a bubble bursting or not bursting. Take your pick.

Stay tuned for the next instalment of this series as we put the same questions to NZPIF Executive Officer, Andrew King, for his comments.  

Recent Posts


negotiation bond form maintenance meth contamination skill shortage market rent CoreLogic bond letting fee initio sale and purchase clnz CCC smoke alarm HHGA legal property value rental wof meth housing affordability gluckman report minor dwelling unitary plan education DTI p lab auckland council management wins wealth creation income house prices Market report data security business HHS asbestos Guest blog water bill mindset Sponsored post ird debt enforcement damage banking letting trespass warm up new zealand cgt tax rta reform holiday house Question and answer winz Gluckman heating Investor story covid-19 Holler lvr building tenant TCIT finance rent Editor's Choice tenancy issues interest rates buyer's agent election 2017 khh watercare subdivision privacy productivity relationship shower dome government insurance Property (Relationships) Act airbnb Jeff Bezos nzpif How to ring-fencing speculator auckland sublease equity structure worksafe rental market trust development Investment tip fixed-term tenancy investor advice renovation reserve bank beginner investor RTAA 2019 ocr first home buying Tribunal case study financial advisers act termination personal growth capital gain parry v inglis recycling equity off the plan ventilation sale and purchas tenancy services boarding house property cycle mortgage Standards New Zealand landlord Must knows Q&A tenancy tribunal twg report interest only ask an expert Level 4 Kris Pedersen Mortgages and Insurance investment strategy Landlording rent arrears heater warren buffett positive cash flow inspection insulation buying rules HSWA partners robert kiyosaki property property maintenance LIM extractor fan Case study housing bubble RBNZ Must know television buying bad tenant short-term rental cat cash-flow trademe property management market rent increase rta anz return scotney williams principal and interest


Introducing Our Partners
Principal Sponsor - Kris Pedersen Mortgages & Insurance logo Gold Sponsor - Barfoot & Thompson logo Gold Sponsor - CoreLogic logo Property Apprentice logo Keith Hay Homes logo The Insulation Warehouse logo The Renovation Team logo The New Zealand Property Investors' Federation logo
09 360 2376

The Tenancy Practice Service and TPS Credit Control work closely with the Auckland Property Investors' Association. Our vision of bringing helpful resources, documents and high quality services to Auckland Property Investors and Property Managers is shared by APIA, so its a partnership that works well. 

The Auckland Property Investors' Association is a great organisation for those who want access to advice and information from a range of industry experts and partners. 

Mathieu Holt- Managing Director, The Tenancy Practice Service & TPS Credit Control
Through the Association I found the channels and methods to fund the purchase of property I never dreamed about. Grant Brown

All round it has been one of those things Neil and I felt was really worthwhile belonging to. We have learned so much it has just built our confidence in what we are doing.

Janice Bieleski
I read two articles in the monthly magazine that saved me over $5,000. That is my membership fee for the next 26 years and I am sure I will learn a whole lot more! John Duncan
Fantastic organisation. The networking opportunities are brilliant and provide us with information and opportunities that cannot be obtained anywhere else. We learn something new at every meeting and we've been in this game for nearly 20 years. Pauline and Gyanen Kumar

I find the information obtained from various APIA meetings very useful in guiding my own property investment and rental management.  I also enjoy the networking opportunities with like-minded investors.  I am inspired by other investors’ success and find the more experiences and knowledge that I share with others, the more confident I become.  

Thanks to all APIA event organizers and administrators for your brilliant work. 

Stella Shao

I like talking to people and learning from their experience because it gives me the confidence to invest well. I think it is a knowledge thing. I now know I am doing things the right way.

Stephen Weatherall

My APIA membership has become a total success.

Every time I attend a monthly or regional meeting I come away with so many useful and positive tips that have added value to my property investments and management.

Not only that, the website is a great place for practical advice and useful information. It has now evolved into an important resource for my business.

Talk about value for money! The discounts I have been getting at Bunnings when I present my APIA membership card have more than paid for my annual subscription!

Tim Duffett, Plan A Investments Limited