I was delivering a webinar last week and the host asked me how long the current housing bubble would last. It’s an interesting question because in normal circumstances one might think that if an asset rises in price by an average 28% nationwide in a ten-month period there must surely be a bubble.
But a bubble is where something soars in price without any underlying change in its fundamentals. People simply buy and push up the price because they believe others will buy and push up the price. Bitcoin for instance. For New Zealand housing, however, there are a multitude of reasons helping to explain why prices have soared and why as we see some likely falls in a few of the next six months, the declines will be limited while the underlying trend in prices will remain up at a far slower pace than recently.
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Buying a house costs money, and apart from the dollar amount the biggest cost is interest payments. Those costs were slashed to record lows by the Reserve Bank in 2019 and again in March last year. Reduced interest rates make buying a home to occupy or rent cheaper and that naturally increases demand. It is what the Reserve Bank expects and has wanted to happen to help bolster our economy through the global pandemic.
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Kiwis believe that when the borders properly open up next year there will be a wave of returning expats. That is probably not going to happen given the strong growth outlooks in many other countries, but anticipation of such a flow nonetheless has encouraged many people here to buy before these expats do.
Last year the Reserve Bank removed Loan to Value Ratio rules (LVRs) to help drive house prices higher, and with minimum deposits slashed more people found they could get finance – and so they did. Interestingly, anticipation of the LVRs returning at a more stringent level for investors is a key reason why house prices nationwide soared a fairly ridiculous 5.3% in February then 2.7% in March. Investors were jumping in to beat the return of LVRs.
During lockdown many young people built up their savings as their wages kept arriving but ability to spend was severely curtailed. For some, the end of lockdown would have left them with a newly large deposit which they could use to buy a house. For more, the lesson of enforced spending restraint during lockdown would have shown them a route toward building a deposit which they subsequently pursued (kept spending low) and in recent months have built up enough savings to make a purchase – or at least try.
Closure of the borders and uncertainty about when they will open again has encouraged people to divert the spending, they planned doing on overseas travel towards other things such as spas, electric bikes, home renovations, and house purchases.
In the early months of the pandemic, we also saw a strong boost to New Zealand’s population as travellers visiting our country decided to stay and see the pandemic out here. They shifted from three nights in an Airbnb property to six or 12 months, thus taking out of the housing stock some properties which otherwise people had expected to flood the market.
Finally, no one in New Zealand believes anything other than that there is a housing shortage. There is certainly a shortage in Auckland resulting from insufficient construction from 2005. There has been a general shortage of affordable accommodation growing since the mid-1990s due to new houses being of larger size than before.
And there is definitely a shortage of social housing as rising rents have forced many people onto the streets or into inappropriate and unsuitable squashed accommodation. Hence the numbers now being housed in a temporarily newly available part of our housing stock – motels. Eventually the shortages will disappear – but that is a story for the future.
The upshot is that for there are very strong fundamental economic reasons why house prices have soared – and equally strong reasons why price growth will now radically slow. All the factors causing the surge are either fading, have faded, or are set to start fading. But the biggest one, record low interest rates, will likely remain in play driving buyer behaviour until late-2022.
- Tony Alexander is an economics commentator and former chief economist for BNZ. Additional commentary from him can be found at www.tonyalexander.nz
