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BusinessOctober 26, 2017

Kiwi house prices are 65 times their 1970 levels – but is it really a bubble?

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House prices are how high now? Maria Slade takes a look behind an alarming graph and finds NZ’s housing ‘bubble’ may be overblown.

Canadian commentator and investment adviser Hilliard McBeth alarmed the Twittersphere this week when he posted a graph showing New Zealand house prices 65 times higher than they were in 1970. This compares with Australian prices at 45 times their 1970 level, and Canada at 25 times.

McBeth is the author of the 2015 book When the Bubble Bursts: Surviving the Canadian Real Estate Crash, in which he argues Canada is in the midst of a housing bubble that’s set to pop at any moment. The New Zealand figure makes the Australian and Canadian situations look tame, McBeth claims. But before McBeth triggers mass panic among Kiwi homeowners, the numbers bear a little closer scrutiny.

They are compiled by the Bank for International Settlements (BIS), an organisation owned by 60-member central banks from around the world including our own Reserve Bank and among its functions are fostering international collaboration and carrying out research. BIS itself says that the House Price Index is an imperfect series – it’s based on a variety of sources using different methodologies, and although every effort is made to harmonise the information “the discrepancies in the compilation methods are quite large and may hamper the usability of the data set”, it says. In short, it may not be comparing apples with apples.


Secondly, 1970 was 47 years ago and it’s a largely futile exercise to compare the housing market of those more modest times with today’s conditions. New Zealand did not have a competitive banking market then and it was difficult to get a mortgage. For many young families starting out the only organisation that would give them a loan was the government-owned State Advances Corporation and in addition, they did not expect their first home to have four bedrooms, two bathrooms (master with ensuite and walk-in wardrobe), and a double internal access garage – people lived in three-bedroomed, uninsulated dwellings half the size of today’s McMansions.

McBeth says Canadian property prices have tripled since 2000, and it is true New Zealand has seen similar house price inflation. However, there are significant structural reasons for why the Kiwi property market has gone bonkers in that period, the slowdown during the Global Financial Crisis (GFC) notwithstanding. For a long time banks and finance companies would lend anybody almost anything they wanted; it’s not that many years since they were prepared to write 100 per cent mortgages, and the Reserve Bank only began to impose loan-to-value ratio (LVR) restrictions in 2013. Meanwhile interest rates have been at their lowest in 60 years, the country has seen record immigration, and somewhere along the line following the GFC people forgot to build houses, resulting in a serious supply shortage.

All of these conditions have fuelled rising house prices, and we’re yet to see a significant sea change. The LVR restrictions appear to have had a cooling effect in Auckland especially, and supply is gradually starting to improve – in the 12 months to August, 30,736 new dwellings were consented, up 3.7 per cent on the year before, and August was the best month for consents since June 2004. But Auckland Council says while the city needs an additional 13,000 homes a year currently just 7,000 are being built.

With such unmet demand for houses it’s hard to see any bubbles bursting soon. New Zealand property commentators don’t have a crystal ball, but neither does Hilliard McBeth, particularly one with a clear line of sight from Alberta to Auckland.

Maria Slade is the author of Buyer Beware: A New Zealand Home Buyer’s Guide, published by Penguin Random House.

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