Is there a property bubble brewing?
Thursday, February 2nd 2012, 7:41AM 
2 Comments
For all those property bears out there I have some disconcerting news. The property market is starting to stir and it’s only going to go one way – up.
I was asked if there is a property bubble happening at the moment. To answer the question you have to think about how a bubble is formed.
First you have to have the ingredients then it is a matter of blowing some air into them to create the bubbles. They start as little things but can grow exponentially.
Right now the housing market is perky. Most of the ingredients are there and some air has started blowing. One of the key ingredients is money. Money is cheap. It’s as cheap as it ever will be.
Judging by the reaction to last week’s official cash rate announcement and news that the US Federal Reserve doesn’t expect to hike its cash rate until 2014 we won’t see the cost of money increase quickly any time soon. In fact in the past week and a half ANZ National, ASB and The Co-operative Bank have all cut home loan rates.
The other thing to remember is that banks have become more conservative and wary since the global financial crisis. When it hit they limited the amount they would lend on a house to 80% of it value because they didn’t want to risk losing money if the market turned down some more. Banks have now eased this requirement and will often lend up to 90-95% of a house’s value.
This tells me that they believe values will start increasing.
Then there is the supply and demand equation. This week’s housing consent figures were the lowest in 46 years. We aren’t building enough houses fast enough to house our growing population.
The other sign that things are happening is the news about rents in central Auckland. They are increasing, and have reportedly gone up by more than 20%, and there is tight competition from prospective tenants.
History tells us that the first place a housing bubble starts is central Auckland then it moves outwards into the suburbs.
It’s a little like dropping a pebble (or rock) into a pool of water and watching the circle of waves move out. Over time these waves reach the provincial centres like Rotorua and house process increase.
We hear all this news that houses in New Zealand are unaffordable. One thing that I am sure about is that they are not likely to suddenly become more affordable (unless of course our incomes suddenly rise rapidly).
We have been through the bottom of the housing market cycle and the only way is up.
If there is a positive in this it is simple. Rising house prices make us feel wealthier and we spend more money. That helps economic growth.
Rodney Dickens responds
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Comments from our readers
On 2 February 2012 at 4:38 pm Mario said:
totally agree - throw in rising building costs , builders about to be in tight supply and immigration about to turn back positive and a perfect storm is indeed brewing ! Best time to get in - yesterday ! On 9 February 2012 at 11:50 am PhilBest said:
Urban land prices affect:
- productivity growth (and hence income growth)
- workforce cost pressures (and this affects international competitiveness as well as the first point)
- household discretionary income after housing and transport costs
- investment in PRODUCTIVE capital (reduced)
THEREFORE:it is IMPOSSIBLE for an economy to sustain urban land prices inflated above a historical norm indefinitely.
There is an iron correlation between land prices and the incomes generated by the persons using that land; this principle has been understood by economists with half a brain ever since Adam Smith and David Ricardo.
Median multiples (house prices versus incomes) are a logical crude indicator of this relationship. There is simply no housing market in history where median multiples have gone up by more than 100% without dropping MOST of the way back at SOME stage, whether 2 years later or 20 years later. Ireland took 2 years, Japan took 20.
It is extraordinary that no matter how much ridicule is poked at stupid Californians or Irish or whoever over THEIR absurd house price bubble manias (while they lasted), the same ridicule-poking people in the world's remaining unburst housing bubble markets remain self-convinced that "we are different".
For a healthy dose of reality, follow "DrHousingBubble" blog and read up a bit on their archives. You will find exactly the same spruiking going on in 2007, 2008, 2009,2010, and 2011 in California - "we've reached bottom" - "immigration is high" - "there is a shortage of housing" - etc. Sorry, a massive imbalance between the regional income and the cost of servicing urban land price related debt, requires painful correction to normality. This swamps all the other allegedly important factors.
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