The six factors that will determine another house price boom in NZ

Auckland house prices peaked in late-2016 and since then have fallen by, on average, about 2 percent. In the regions prices largely are still rising but eventually, just as affordability factors helped cause Auckland to flatten, so too will the regions eventually plateau. This process will probably happen over the coming year. Then what?

History shows us that there is a tendency for housing markets to move in cycles, usually with Auckland and the regions moving at the same time. The last cycle was unusual with Auckland leading by three years but we think the normal pattern will be evident next time. When might that next time be? Experience suggests to us that markets will start rising again in three or four years.

The trouble with this analysis, however, is that since the Global Financial Crisis of 2008-09, cyclical analysis around the world has failed virtually on every occasion to accurately predict house price movements, inflation, interest rates, and, therefore, the economic cycle’s ups and downs. Cycles aren’t what they used to be and it would take a PhD thesis or two to adequately examine why that is the case.

So let’s try a different tack. Is it likely that the special conditions which combined to drive prices up in New Zealand in recent years will eventually reappear? Specifically, will these six things happen again?

Will interest rates newly plummet? At the start of 2008 two-year fixed home lending rates sat near 10 percent. They fell to 6.5 percent in 2009, then 5.5 percent in 2012 and now sit below 4.3 percent. Will they fall to 3.5 percent or 2.5 percent? In the next few months, falls to below 4 percent are quite possible given the slowdown in the Australian economy, which will have some impact on inflation and interest rates here as they eventually cut interest rates further in 2019. But the big structural falls in interest rates which have transferred into structural shifts in house prices have happened. For your guide, a just released paper by the Reserve Bank of Australia concludes that every 1 percent cut in interest rates over there boosts average Aussie house prices by 17 percent!

Will net migration again rapidly turn from a net annual flow of -10,000 to a gain of a net 64,000 as happened between 2012 and 2016? That is very unlikely. The latest flow sits just below 50,000 and is only slowly falling. A fresh surge seems very unlikely, not least because a surge seems usually to reflect a big shift in the trans-Tasman flow and that flow is no longer into or headed for big negative territory – last seen as -40,000 in 2012. Unfortunately, lack of data due to the removal of departure cards at airports mean we will never again know what the Tasman flow actually is.

Will we again start from a position of house construction being the worst since the 1960s as happened in 2011? Maybe some decade down the track this will happen again, associated with another global crisis – in which case house prices will probably plummet for a while. But in the next few years such a scenario seems extremely unlikely with all efforts being made to address house shortages in our major cities – shortages which will probably persist for years if not worsen in Auckland and Wellington.

Will we again see the big loosening of lending rules which happened in the 1980s? No. The world is moving to more restrictions on bank lending. Rule loosening was not really a factor these past ten years and instead we have seen the creation of loan to value ratios (LVRs) and eventually the Reserve Bank will impose debt to income rules (DTIs).

Will we again see a large fall in the unemployment rate such as happened from 6.7 percent to 4.0 percent between 2012 and 2018? Definitely one day yes, once the next major downturn has been and ended. But not in the next few years, with a wide range of factors underpinning New Zealand growth.

And will we again see whole new cohorts of investors appear – foreigners and baby boomers preparing for retirement and adjusting to low interest rates by investing in property? No. Foreigners are now substantially shut out; baby boomers will become net property sellers soon.

Given the already low interest rate levels, the global trend towards tighter lending rules, already low unemployment, still high net immigration, and above average levels of house construction, it would be very unreasonable to expect that the next housing cycle – whenever it comes – will produce the gains seen in this most recent one. And that is extremely interesting because it means the dissuasive effects of a capital gains tax or extended brightline test on property investment may be much, much smaller than proponents hope. Investors are probably adjusting to a housing investment model built more and more around positive cash flow and good rental yields rather than short, medium, or even long-term capital gain. That means higher rents.

- Tony Alexander is Chief Economist at Bank of New Zealand