OPINION: Over the past 40 years we’ve seen four property cycles in New Zealand. These cycles are broadly a decade in length and are more or less characterised by a doubling in house prices over each of those periods. There are exceptions to this, of course – but in general this is a useful and reliable guide to the behaviour of the housing market.
The cycles are made up of two distinct periods: one of roughly three to four years in length when the market is flat or even depressed and another of about six to seven years when the market is strong and house prices are rising.
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A less well recognised, but equally real aspect of these cycles is the change in the nature of the mainstream commentary which accompanies each phase. When the market is flat – as the Auckland market was between 2016 and 2019 – much of the opinion was around whether or not the market was going to crash. Understandably this type of commentary is at its most pronounced just after a boom, but it can last a surprisingly long time. The second – and shortest – phase is at the beginning of an upswing in prices and takes the form of fascination at the prices being achieved relative to the Rating Valuations conducted by councils. Exactly why this largely unrelated measure has become the basis upon which house price increases should be compared is an equally fascinating story, but one for another day.
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The third phase of commentary takes place when house prices are rising and takes the form of hand-wringing, chest beating and anguish coupled with proposed solutions – which are almost always calling for some form of government or Reserve Bank intervention. Wise governments ignore this nonsense and let the market follow its largely predictable course. Less wise governments (and Reserve Banks) attempt to interfere in the market in the belief that they can somehow influence it - even though 40 years of history tells us that they can’t.
Sadly, these attempts at intervention almost always have an unintended consequence which ends up causing a perverse outcome somewhere else in the market. The best recent example of this would be the Loan-to-Value restrictions, which were introduced in 2014, by the Reserve Bank, to bring down house prices. They ended up having absolutely no affect on house prices but effectively closed many first home buyers out of the market for six years.
I mention all of this because I see that the calls for government intervention are ramping up again. Over the past few days we’ve seen the Reserve Bank warn that it might dust off its failed LVR tool and embark on another round of crushing the dreams of first home buyers. Yet another commentator has declared that “low interest rates are killing the home ownership dream”. What nonsense!
The reality is that we are currently in the most benign home-buying environment in almost 20 years. Yes, there’s competition for homes and some are going for crazy prices, and yes, there are investors in the market buying up some of the properties which might otherwise be bought by first home buyers. Both of these things are features of the cycle and they require perseverance on the part of first home buyers. But for those who push on to overcome that first hurdle – your early property owning years will be a lot better for you than they were for your parents. Despite house prices having increased exponentially over the past 40 years, the actual percentage of the average household income that is required to service a mortgage on a house purchased at for the current median price is actually lower now than it was for your parents or grandparents generation – around 37 percent of household income now compared to around 52 percent in the 1980s.
Buying your own home is one of the smartest things you’ll ever do and your biggest enemy in that endeavour isn’t an investor or house price inflation, it’s procrastination.
I know it’s hard and I know it’s frustrating, but so are most things worth doing. I encourage you to ignore the prophets of doom and believe in yourself. And let me know when you get that elusive property. I’d love to hear.
- Ashley Church is a property commentator for OneRoof.co.nz. Email him at [email protected]
