COMMENT: If I look back over my various OneRoof articles over the past few years, it’s apparent that a sizeable proportion of them are about the possibility of a housing market crash – or, more accurately, me responding to claims that a crash is imminent by reassuring readers that it isn’t. It’s also worth noting that my public commentary on this topic precedes my time writing for OneRoof and actually goes back around 15 years – so the fact that there has been no crash since I first started countering such claims should give you some confidence that the basis of my argument is reasonably sound.
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In the interests of full disclosure, however, I should add that there is no universally agreed definition of what a housing market crash would actually look like. When media organisations use that term, they can mean anything from a slowdown in house price inflation, where house prices are still actually going up, to a dramatic drop in the value of Kiwi homes, such as was proposed in 2014 when ex Reserve Bank board member Arthur Grimes proposed deliberately crashing house prices by 40%.
For this reason I use my own definition, which is to describe a crash as any drop of 20% or more in the median sale price of homes in a given area which continues for more than six months.
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Three things to note about my definition. Firstly I’ve picked sale price over value because valuing homes has become an increasingly subjective exercise in an environment in which everyone seems to have a view on what a property is worth. The only accurate indication of real worth is what a home actually sells for, thus my definition. Secondly, I’ve used the term “in any area” because it’s entirely possible for a crash (if one ever happens) to be localised to a region, city, town, or even suburb. The New Zealand property market is actually many markets and, although they’ve all gone generally upward over the past 40 years, they’ve done so at different times and at different rates of growth. Thirdly, I’ve added the caveat that, to be a crash, house prices would need to stay down for more than six months. This is because a one-off event (such as the closure of a large factory) could momentarily shake confidence in a Kiwi community enough to depress house prices for a few weeks or months – but (in my view) that reduction would need to be sustained to qualify it as a crash.
Ashley Church: "There is no universally agreed definition of what a housing market crash would actually look like." Photo / Ted Baghurst
No doubt some will reject this definition because it doesn’t suit their ideology or the narrative underpinning their agenda – but I think most people will accept it as a reasonable basis upon which to define a crash if one should ever happen, again.
I use the word again because a crash meeting that very definition actually happened in the early 1970s. Between 1971 and 1974 we experienced our first property boom and saw house prices more than double in many parts of the country. Then, as now, there were a variety of theories around what caused this dramatic increase - rapid immigration, a shortage of builders and building materials being among the purported culprits.
But it’s what happened after that that is particularly interesting. Between 1975 and 1980 these gains were reversed as house prices fell (crashed) by around 38% - meaning that house prices, at the end of the decade, were more or less the same as the were at the beginning of the 1970s – and, it’s with this history in the back of my mind that I always assert that, while highly unlikely, another crash is not impossible.
So could it happen again? No one really knows. Whenever I’ve commented on the likelihood of a housing market crash it’s always been against the backdrop of what’s happening in the market at any given point in time – and whenever I’ve done that over the past 15 years it’s always been glaringly obvious that the factors which would cause the market to crash simply weren’t present. Indeed, if the property market were to be represented by a clock in which 6pm represented an imminent crash and noon means that there’s no chance of a crash – we’re currently at about 12.05.
But that doesn’t mean that this will always be the case and there may be a time, in the future, when the market is much weaker than it is right now and when the possibility of house prices crashing is much greater.
But even then, such a crash wouldn’t fix the imagined problems of the market. As was the case in the late 1970s and early 1980s, house prices would eventually recover and the whole cycle would start all over again.
- Ashley Church is a property commentator for OneRoof.co.nz. Email him at [email protected]
