When it comes to house prices, we still seem to think what has come down must go back up. 

New Zealanders have spent most of this century assuming house prices eventually go up. That belief survived the global financial crisis and it seems to have survived the post-pandemic crash. 

ASB’s most recent housing confidence survey found a net 20% of people thought it was a good time to buy a house, above the long-run average of about 12%. A net 19% thought house prices would rise in the coming year, just below the 25% average.

One person who doesn’t think any of that is former finance minister Bill English. In early 2024, he told a conference of finance professionals to expect 15 years of flat house prices. “Get used to it. It’s gonna be that way,” he said. 

Two years later, we ought to be getting used to it. Prices were down another 0.6% in the year ended May, according to the Real Estate Institute’s house price index.

But will it be that way for another 13 years? Potentially, yes. 

Our original sin

To understand where we are today, we need to go back to the 1990s when housing in New Zealand was very affordable. The median price of a home was just 2.8 times the average income, compared to the still “severely unaffordable” 7.2 times today.

So, what happened in the 1990s? Cities such as Auckland started to restrict their urban boundaries to prevent sprawl, but failed to permit denser housing within the city limits to compensate for the restricted land supply. This was our original sin.

Buyers now had to outbid each other for a scarce set of places to build houses. This occurred just in time for an explosion in both the number of people needing homes and the amount of money available for them to borrow. 

Banks were freshly deregulated and able to lend more freely. Interest rates were beginning a steady decline which would last decades and enable home-buyers to take on increasingly large mortgages. This allowed home prices to rocket ahead of incomes.

Also around this time, New Zealand adopted a skills-based immigration policy which started a flow of economic migrants who needed places to live. Restrictive urban planning rules made it difficult to provide this housing, pushing prices even higher.

House prices rose 270% between 1999 and the start of the Covid pandemic, an annual growth rate just shy of 7%, while wages climbed just 86% or 3.2% a year. 

And then, everybody lost their minds. Interest rates dropped to zero and home-buying mania gripped the nation. Prices jumped another 50% as news reports described buyers crying at auctions when their best offer, already equal to a fifth of their working life, fell short.

At this point, the housing market had stopped being expensive and had become entirely detached from reality; the crash was inevitable. When interest rates rose, prices quickly dropped, on average, 17% and have stayed put ever since.

Unsustainable super cycle

Now we can ask, what happens next? There are good reasons to think we will not repeat this housing supercycle. Firstly, house prices are still very high. 

The Reserve Bank tracks the sustainability of the housing market by asking three broad questions: how much debt can buyers service, and would they be better off renting? Does buying a rental property still generate a positive return? And is enough new housing being built to meet demand?

Based on those questions, the central bank believes market prices are just barely justified by their underlying economics. Prices are “around the top” of the sustainable range and the risk of correction is “not particularly elevated”. 

Which suggests the risk is still somewhat elevated. RBNZ goes on to say prices would continue to decline if mortgage rates moved higher. Even after the crash, property prices are still maxed out.

Secondly, the decades of falling interest rates are over. Interest rates are being forced higher by various country’s Covid-19 debts, rapid investment in AI and defence, de-globalised supply chains, and fresh memories of inflation.

The interest rate on a 10-year NZ government bond dropped as low as 0.5% during 2020 but has stabilised at about 4.5% in recent years. The era of ultra-cheap money is over, at least for now.

The great reformation

But even if interest rates did plunge, there is a third reason it shouldn’t ignite the housing market: New Zealand has largely fixed its original sin. We have become an international exemplar of housing reform.

Peter Nunns, an economist who now works at the Infrastructure Commission, wrote in 2019 the housing market had been distorted by restrictive rules such as limiting subdivisions and requiring off-street car parks. 

Most of these rules are now gone. Developers can replace an old three-bedroom villa near a bus route with a number of townhouses, as well as build new suburbs on the city fringe.

Councils are now required to permit dense housing near transit routes and ensure cities have enough development capacity to meet decades of future demand. Plus, they will soon be paid a cash reward from the central government for consenting homes.

This should make it easier for the economy to respond to extra housing demand by building more homes, rather than just inflating the prices of existing ones.

It’s hard to say whether Bill English’s prediction will ultimately prove correct – 15 years is a very long time – but it does seem like a more affordable future is just over the horizon.