Revealed: The surprising odds of homeowners losing money

ANALYSIS: Over the last few years, the Reserve Bank has been warning New Zealanders not to bet on rising house prices.

Many property investors would disagree because house prices have grown an average 6.4% per year over the long-term.

But if you pick any six-month period in the last 32 years, you’ll find that in Auckland house prices went up only 76% of the time (and by up I mean by at least $1). That means they dropped 23% of the time.

In Wellington City, house prices went up only 77% of the time (and down 21%).

Things were even less certain in the South Island. In Christchurch, house prices went up 74% of the time and in Dunedin just 68% of the time. That makes Dunedin one of New Zealand’s unluckier cities when it comes to house price growth.

So price growth isn’t a sure bet in the short-term. There’s a decent chance properties drop in value.

But the odds of losing money on property depend on how long you hold on to it. As with most investments, the longer you hold, the higher the chance it goes up in value.

Economists often use models to calculate the chance of something happening. One common approach is using a Monte Carlo simulation.

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Here’s what that means in simple terms. You take what’s happened in the past. Then, you re-run scenarios lots of times to understand what could happen again in the future.

My model shows that if you bought a property in any random year, there’s a 70% chance your house increases in value over the next 12 months. But that also means 30% of the time it drops in value.

Hold on to that property for two years, the chance of making money goes up to 75%. Hold it for a year longer and the likelihood is 79%.

After 10 years, the chances of making at least $1 from house price growth rises to 92%. That means that the chance of your house value going down is just 8%.

But as the Reserve Bank says, house price growth is not a sure bet. Even after 20 years, there is still a 2% chance (or one in 50) that the value of your house has dropped. It’s highly unlikely, but still possible.

You might wonder if this ever happens in real life. The answer is yes, it does. House prices in Gisborne went down and were flat between 2007 and 2017. So, if you bought a house just before the market crash, you were in the unlucky 8% whose house value didn’t rise over 10 years.

Of course, economists and forecasters can’t predict the future. This type of number crunching infers what might happen in the future based on what’s happened in the past. History might not be the best predictor of what could happen in the future.

But, the point of this number crunching is to understand the likelihood of something bad happening. In this case, buying a house and your property not increasing in value.

This gives you a better idea of what could happen to house prices. It’s more realistic than looking at a standard average and thinking that house prices go up every year by 6.4%. They don’t.

As the Reserve Bank says, house price increases aren’t a sure bet. But the longer you hold, the better the odds.

- Ed McKnight is the resident economist at property investment company Opes Partners