Opinion: A recent article published in Australia highlighted the risks to the property market there in the wake of Covid-19. The article suggests that the likelihood of a collapse (or otherwise) depends on three things – employment, population growth and consumer confidence – then goes on to outline some very compelling reasons why each of these things will determine whether the market goes up or down.
Over the past few weeks we’ve seen similar articles here, with banks and some economists outlining all of the reasons that we should be worried, backed up by what appears to be sound data.
But have you ever stopped to question whether employment, population growth and consumer confidence really influence the market? It’s a serious question. We accept that these ‘pillars’ are fundamental to the performance of the property market – an approach which is built on the premise that a given set of circumstances will influence market behaviour in a highly predictable way. But is this view backed up by the evidence?
The answer is no, it isn’t – and you don’t need to go back in time very far to see the folly of this approach. Over the past 15 years we’ve developed this form of measurement to a fine art – quoting employment, population growth and confidence as unquestionable pillars of the market, but also adding other ‘causes’ such as foreign buyers, ghost homes, property investors, and tax treatment to the list of reasons why the market does what it does.
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You don’t hear much about those latter causes anymore because the evidence ultimately proved that they didn’t actually influence the market at all and we now quietly just ignore them. But what about employment and population growth? How much impact do they really have on the property market?
Let’s have a look.
We now have a fairly significant bank of property market figures tracking trends back to the 1970s which show that we’ve had four boom cycles since the 1980s in which median house prices, across the country, broadly doubled every ten to twelve years.
The first of these peaked somewhere around 1986, capping off a decade of volatile change which was mostly dominated by the Muldoon economic reforms but finished with the even more far reaching ‘Rogernomics’ economic reforms of the fourth Labour Government.
By the mid 1980s unemployment was running at around 4.2 percent, inflation was at around 18 percent, mortgage interest rates were up over 20 percent 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 – but for completely different reasons. The National Government, which had been in power since 1990 had largely continued the previous government's reforms but had also reformed state housing, bringing in market rentals and selling off a big portion of the state housing portfolio.
During that decade unemployment had climbed as high as 11.4 percent (1992), inflation had plummeted to just 4 percent and floating mortgage interest rates had almost halved to around 12 percent (high by our standards but low relative to a decade earlier). Migration was still negative with a net 10,000 people leaving the country.
By 2006 housing policy had changed again. The Clark 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.
It also presided over unemployment of just 3.9 percent (from a decade high of 7.8 percent in 1998), inflation of around 4 percent and floating mortgage interest rates of around 10 percent. Net migration for 2006 was now running at a gain of over 10,000 additional people. House prices doubled again.
By 2016 – you guessed it - house prices had broadly doubled again. Under the Key National Government unemployment was at 5.1 percent, floating mortgage interest rates were down to an historical low of around 5 percent, inflation was down to an historical low of 1.6 percent, 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? If you’re looking for a common set of factors underlying each boom you won’t find them in the data that we traditionally measure. The economic environments which prevailed during the peak of each of the past 4 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 decade.
- Ashley Church is a property commentator for OneRoof.co.nz. Email him at [email protected]
