If you follow my commentary you’ll know that I’m a strong believer in something called "the property cycle". There are differing views on what form the cycle takes, but there’s a general consensus that each one lasts between 10 and 12 years and, in very broad terms, leads to a doubling in house prices over that period.
It’s a belief backed up by some fairly compelling data that tracks Kiwi property trends since the early 1980s and shows that we’ve had four "boom" cycles since that time.
Not everyone agrees. Some economists have suggested we shouldn’t expect another property boom anytime soon.
Their arguments are logical:
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- Low interest rates, which have driven big increases in house prices, are unlikely to go much lower
- Historically high rates of immigration are now tracking downwards, putting less pressure on the housing market; and
- The country's housing shortage will be addressed in the next few years, also taking pressure off house prices.
Other arguments against another boom include tighter bank lending rules and Reserve Bank rationing measures and the removal of foreign property investors from the New Zealand market and are no longer influencing house prices.
Throw in the fact that the gap between median household income and median house prices has been steadily widening since the 1980s and you start to get a sense of why some might believe that the days of property booms are over.
But are they? The logical extension of the arguments above is that a unique set of circumstances led to our history of boom cycles and that the changes outlined mean that pattern will now draw to an end. It’s worth taking a closer look to see what was going on during each cycle to see whether that position carries weight.
The first doubling of house prices peaked somewhere around 1986 — capping off a decade of volatile change which was mostly dominated by the "Muldoon reforms" but finished with the even more far reaching ‘Rogernomics’ reforms initiated by the Labour Government.
Inflation was running at around 18 per cent, mortgage interest rates were up over 20 per cent and net immigration showed a negative outflow of around 17,000 people — many of them to Australia.
By around 1996 houses prices had broadly doubled again. The National Government, which had been in power since 1990 had largely continued the previous government's reforms but had also reformed the state housing market, bringing in market rentals and selling off a big portion of the state housing portfolio.
Inflation had plummeted to just 4 per cent and floating mortgage interest rates, while high by today’s standards, were down to around 12 per cent. Migration was still negative with a net 10,000 people leaving the country.
By 2006 — a year punctuating yet another decade of doubling house prices — the Clarke Labour Government had reversed the housing reforms of the previous government, abolishing market rents but retaining the "accommodation supplement", which had been introduced by National to offset the higher cost of renting.
They also presided over inflation of around 4 per cent and floating mortgage interest rates of around 10 per cent. Net migration for 2006 was now running at a gain of over 10,000 additional people.
By 2016 house prices had broadly doubled again. Under the Key National Government, floating mortgage interest rates were down to an historical low of around 5 per cent, inflation was down to an historical low of 1.6 per cent, migration was running at a net gain of over 70,000, and the debate had moved to the cost of housing and a shortage of homes purported to be over 100,000.
My point? That those looking for a common set of factors underlying each boom won’t find them. The economic environments which prevailed during the peak of each of the past four cycles couldn’t be more different — and the only thing which unites them is the cycle itself, and a doubling of house prices roughly every 10 years.
That economic change is coming is a given. That it will bring an end to the pattern of property cycles of recent decades is far from a foregone conclusion.
- Ashley Church is the former CEO of the Property Institute of New Zealand and the Auckland Property Investors Association. He has been a regular media commentator on property matters for over 20 years and now writes on behalf of OneRoof.
