Blowing Bubbles: Debate about a housing bubble is scaremongering
OPINION: There has been a great deal of hand wringing lately about New Zealand being in a housing bubble. There have been shrill cries from the pages of the business press and finger wagging by the usual economists warning us to be careful we don't get splattered when it pops.
The thing with bubbles is that we only realise it is a bubble when it actually pops – the global financial crisis is a case in point. The latest concerns are partly driven from recent memory of the global financial crisis. Current house price inflation can't be ignored – but is it really a bubble?
If you examine Quotable Value and Reserve Bank data from 1980 to the present, recent rises in house prices appear spectacular. But house price inflation of this scale is not new to New Zealand – in fact, house price inflation today is less than it has been at some times in the past.
In total there have been six occasions in New Zealand when house price inflation has peaked above 15 per cent – it reached 37.1 per cent in 1982; 21.7 per cent in 1987; 24.1 per cent in 2003; and also breached 15 per cent in 1985, 1994 and 2005. Investors today are probably taking comfort from the fact that, since 1980, there have only been four occasions when house price inflation was negative – 1991, 1998, 2000 and the most severe correction in 2008 when it reached a low of -9.1 per cent.
So, the rapid inflation of price we are currently experiencing is not unprecedented. The issue we really need to come to grips with is the cause. Owning a home is something to which the New Zealand public is wedded. This need to own houses as the investment of choice is partially responsible for the price we find ourselves paying – especially in Auckland – and this has been enabled by banks.
The origin of our recent house price inflation can be laid at the feet of banking reform in the 1980s and the willingness of banks to lend money. Prior to the 1990s most New Zealanders had mortgage financing from the Housing Corporation and generally it was not possible to have more than one Housing Corporation mortgage – certainly not one to buy a second or third property as an investment.
As the new millennium dawned people who had been burned by the stock market in 1987, and had not really 'got over it' invested in property and relied on capital gains to see them right. In 2010, after recovering from the finance company debacles and the global financial crisis, they again turned to investment in residential property with a vengeance. Low interest rates made debt even cheaper.
So, we have a natural tendency to buy houses. Into that mix we also need to look at the actions of the intermediaries – the real estate agents. Although many of the house sales are by tender or auction, both of these are not quite the 'open' market that pure economics would have us believe. The 'buyer enquiry over' prices mentioned in many tenders and the subtle and, at times, not-so-subtle goading of bidders at auction by the agent – which is their job – must have an influence on the price paid.
Added to the problem of intermediaries is the latest aid to house purchases – homes.co.nz and their TradeMe lookalike. These two sites suggest low, medium and high prices for any given property, which adds pressure on the purchaser 'to make the right bid'.
But all desirable cities suffer from high priced housing. In New Zealand, our two major cities of Auckland and Wellington are constrained by land issues. That, combined with an increasing population, is why some people are wringing their hands.
So, yes, we are in a period of house price inflation, but we have been here before and will be again. While this period of rising house prices will come to an end, the current debate about bubbles is scaremongering because a rapid deflation of prices is something no one can really predict.
* Dr Andrew Cardow is a senior lecturer in the School of Management and Dr William Wilson is a senior lecturer in the School of Economics and Finance at Massey University. They have co-authored a number of academic papers that analyse New Zealand financial history and government policy.