ANALYSIS: During the week someone asked me why the NZ dollar is so high against the Australian dollar and not sitting in the low-80 cent range which they recall from earlier years. At around 91.5 cents at the moment our currency certainly seems to be on the strong side. But it depends on your frame of reference.
For those of us who have been around actively looking at these types of things since the currency was floated in March 1985 it is true that we have seen some low levels such as 73 cents in 2011, 76 cents in 2000, and 71 cents in 1992. The exchange rate in fact averaged 82 cents from 1985 through to 2013.
But since then it has averaged just over 93 cents with a peak very briefly above parity early in 2020. Which frame of reference is most relevant? The latter I would suggest and the same applies in other areas as well.
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Recently the one-year fixed mortgage rate commonly offered by lenders sat around 7.4%. This helped cause recession in the New Zealand economy and widespread pain for many people. But for those of us who bought our first houses in the 1980s the idea of a mortgage rate below 10% was a fantasy.
But back then and up until the very early 1990s house prices averaged three times income whereas now the ratio is typically 7-9. Thinking about the 1980s and 1990s is not relevant to interpreting the true impact of interest rate levels these days.
Why has the average house price to income changed so much? Many reasons are present including falling inflation from 1992 bringing lower interest which allowed people to bid more for houses at auctions etc. The lower borrowing costs have been factored into house prices.
Construction costs are much higher than they used to be with extra costs imposed by councils, tighter and much more expensive health and safety requirements, and more highly specified houses than in the past. That is, things like inside toilets and more than one of them, extra insulation, extra seismic strengthening and so on.
Independent economist Tony Alexander: "Thinking about the 1980s and 1990s is not relevant to interpreting the true impact of interest rate levels these days." Photo / Fiona Goodall
No new cities like Dunedin, Christchurch, Wellington and Auckland have been created in the past three decades. People keep trying to cram into the same old locations and that has pushed land prices up sharply.
Housing has also become a retirement investment asset encouraged by an ability of investors to borrow and gear up their investment which is not available for other assets like shares. A whole industry has sprung up aimed at educating people about residential property investment and helping people to build a portfolio. This industry did not exist in any noticeable way before the 1990s.
The migration rules were changed in the late-1980s and that has brought a lot more foreigners into the country for whom extra houses have been needed. Increased demand without the same increase in supply has helped push prices higher.
People are also living longer than before and that means fewer older houses being naturally placed on the market for purchase than before.
Looking forward, is it likely that the ratio of house prices to income having climbed from three to eight or so now goes to 12? No. The structural decline in interest rates to reflect lower inflation and higher debt has ended. The government is imposing policies allowing greater housing density (townhouses) and forcing councils to make more development land available. House construction now runs at higher average annual levels than before.
But as noted above, a permanent pullback to a ratio of three is not going to happen.
- Tony Alexander is an independent economics commentator. Additional commentary from him can be found at www.tonyalexander.nz
