COMMENT: Last week, former Prime Minister John Key announced that the property boom was over. I rate Key as one of our best ever PMs, but the statement, which he made wearing his hat as chairman of ANZ, was a very bold call.
Why? Because it defies history. I’ve been observing, and commentating on, the Kiwi property market for a long time and – despite the barbs and arrows of critics - have become more, rather than less, convinced that the market adheres to broad cycles in which it behaves in loosely predictable ways despite other things which might be going on in the local and global economy.
In other words, over the decades the market has repeatedly shaken off Government and Reserve Bank attempts to control it and has also (largely) ignored global shocks such as the GFC, the Asian Financial Crisis and the dotcom bust.
My own view, developed over decades, is that the only thing which has any sustainable impact on house prices is the cost of money. For this reason, the current moves to increase mortgage interest rates will have a dampening effect on house price growth – but even these will only slow it rather than stop it altogether. If I’m right, we’re in for another five or six years of house price growth in Auckland – although most parts of the rest of the country may flatten off for two or three years because the broad cycle tells us that those areas are generally two or three years behind Auckland and are due for their cyclic flattening.
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So who will be right? Me? Or Key and a host of others predicting that the boom is over and that house prices are about to taper off or even start going down?
Normally I’d say “time will tell” – but, as it happens, an event taking place on TV3 at 7pm this Sunday will provide a very good guide as to where the market is currently at. The Block NZ, which has now been running since 2012, has become a remarkably accurate metaphor for what’s going on in the Auckland market and the auction prices achieved on each season of the show just happen to closely parallel my own regularly articulated views on what the market would be expected to be doing at any particular point in time.
For example, at the 2012 Block Auction, which took place around a year after the last Auckland property boom started, the average sale price for Block properties was $856,250 and the average auction profit was $58,000 per property. By 2016, the average sale price had reach $1,445,520 and the average profit was $245,250.
If you’re familiar with some of my earlier market predictions you’ll know that, by 2016, I was suggesting that the Auckland market would flatten off in 2017, and if we look at what happened on The Block that year can see that this is exactly what happened. The average sale price dropped to $1,265,750 and the average profit per property plummeted to $16,250. I remember watching that episode and feeling for the contestants, who couldn’t understand how things had gone so horribly wrong after the profits achieved by colleagues just a year earlier.
Ashley Church: “If demand is high, prices will soar. If the boom is over, the properties will sell for something close to the reserve.” Photo / Ted Baghurst
So what should we expect on Sunday evening? While I can’t predict the actual prices each property will achieve, I would certainly expect the average profit to be well up, probably exceeding the previous record of $245,250 per property. The only caveat to this would be around the reserve set by the show’s producers. If these are high, they eat into the contestants profit even if high sale prices are achieved. But assuming these are reasonable, expect to see some very happy contestants.
Conversely, if Key and others are right and the market has peaked, look for much smaller average profits for the competing teams. This is because the reserve price is established by making an assessment of current market value whereas the actual sale price is determined by the strength of the competition between those bidding. If demand is high, prices will soar. If the boom is over, the properties will sell for something close to the reserve.
So, is the boom really over? I’ll be glued to my TV, on Sunday, for an early indicator.
- Ashley Church is a property commentator for OneRoof.co.nz. Email him at [email protected]
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