Tony Alexander Market Update February 2020

The Fundamental Shift in NZ House Prices

Hello everyone and welcome to this first monthly column from myself, looking at the overall state of the NZ economy, developments, prospects, and challenges in the housing market, and broader trends affecting consumer demand – including insurance.

I’ve been analysing and writing about the NZ economy since returning here from a two-year stint in Sydney back in the mid-1980s – just four months before the 1987 sharemarket crash. I like to think that length of “service” gives me some insight into why things are happening now and where we might be headed. And in my commentary, I’ve found myself in the post-GFC period emphasising more and more the long-term shifts in our operating environments and less and less the flipflopping factors influencing short-term monetary policy decisions.

In that light, let me start this first column by putting developments in the housing market you’ve all been dealing with one way or the other in recent years into a long-term context. And I’ll start with the middle of 2006.

Back then house prices peaked in the United States after a huge run-up initiated in the mid-1990s by President Clinton and agencies under his control effectively forcing banks to take on riskier and riskier mortgage lending. As well discussed in the movie “The Big Short”, lending standards collapsed and the eventual revelation of a massive over-supply of houses and unviable borrowers sent prices down.

Over 2008 as falling house prices were revealed to be causing viability problems for financial institutions in the United States and elsewhere, we eventually saw the seizing up of the world’s financial system late in the year following the collapse of Lehman Brothers investment bank.

Many people panicked, and the best version of that in New Zealand came in October 2008 when one non-economist predicted that our house prices would fall by 40%. I noted that forecast and the way it would accentuate the panic in New Zealand and decided enough is enough. Times were bad and set to get worse, but the economic fundamentals did not justify such a dire prediction. So, I jumped solidly into the housing commentary space and have remained there ever since.

My forecast back then was that because of our recession already underway from the start of 2008 (mortgage rates were nearly 11%), and because of the global downturn, our average house prices would fall between 10% and 15%. In the end, on average, they fell 11% nationwide and 13% in Auckland absolute peak to absolute monthly trough.

Why did I not think prices would collapse?

1. We did not enter our recession and the GFC with over-production of houses as happened in the United States, Ireland, Spain, Portugal etc. We entered with a worsening shortage concentrated in Auckland.

2. We did not enter recession with very bad bank lending to people who could never realistically service their debts – as happened offshore. Bad bank lending in New Zealand was concentrated in the immediate post-deregulation period from 1984-87 and after that banks lent on houses in a relatively vanilla manner here. Risky customers went to the finance companies.

3. There were some big offsetting/balancing/insulating factors in play. These included back then a 30-cent fall in the Kiwi dollar, cut in the official cash rate from 8.25% to 2.5%, and improved net migration inflows as Kiwis stopped heading offshore.

Why did some people strongly believe that prices would collapse? This is where it gets complicated, but if you can grasp what follows you’ll hopefully be able to put a lot of recent and prospective housing market commentary into perspective.

1. People did not understand why prices rose so strongly over the 1990s and 2000s. Lack of understanding led automatically to a view that a thing unable to be explained will probably not last.

2. Many people felt they were being disadvantaged by soaring house prices. The media concentrated their attention on these disaffected groups. Seeing people feeling “hurt” many others felt that the forces of good would eventually work in favour of these people (the typical movie plotline) and that meant house prices would eventually fall and these people could live happily ever after.

3. We Kiwis value hard work and benefitting from such work – a good Protestant work ethic some used to say. There is an underlying feeling in many sections of society that building wealth and status through sitting on an asset as it rapidly rises in price is somehow immoral. This feeling leads to a hope that those supposedly lazy folks will eventually get their comeuppance.

When the GFC came along many sections of society simply could not help themselves from predicting big price falls. It fit their lack of knowledge, desired plotline and value set.

But whenever you hear hefty use of words like “should”, and see media concentration on the “havenots”, proper analysis has probably gone out the window. That is what happened during the GFC and for many years after. And that is what produced the scenario of Auckland house prices doubling from 2012- 16 with the rest of the country then following to varying degrees.

In 2007 many people did not buy houses because interest rates were so high. Over 2008 into 2010 they did not buy because the economy was weak, the GFC was underway, and there were widespread predictions of better buying ahead. A large stack of delayed buyers built up waiting for the crash which never came. Over 2011-12 they capitulated and started catching up – all at once.

In 2011 I wrote a piece listing reasons why Auckland house prices would rise strongly, but most interested people would have seen the late-2012 version entitled “19 Reasons Why Auckland House Prices Will Rise”. The list explains the sharp jump in prices and in case you are interested, here is a link to a file containing the list.

But let’s step back here and look at the even longer-term picture. Here are some key reasons why I have never paid attention to surveys such as the annual one from Demographia, which concentrate on housing affordability couched in terms of price versus income now compared with some decades back. The world has changed – drastically. Such comparisons give zero insight into what is driving housing markets and where they are headed.

• Up until the 1970s only one income – usually the man’s – supported a mortgage and ability to bid at an auction. Entry of women into the workforce meant two incomes could now back a mortgage and that got factored into auction bids and average house prices.

• Mortgage rates sat above 20% in the mid-late 1980s. There was a structural decline from 1992 when inflation settled near 2%. Another structural decline occurred post-GFC. And a third decline happened just last year when globally we learned that in spite of already low interest rates and some hefty money printing offshore, inflation refused to lift. Lower mortgage rates have improved serviceability and led to higher price bidding by buyers. But low fixed interest rates (bonds, term deposits) have also encouraged investors to seek assets like equities and property – thus pushing their yields also down via their prices permanently moving higher versus earnings/rental streams.

• Credit availability to NZ borrowers was poor up until financial deregulation. It is now much, much easier for borrowers to access funds – though fluctuations in lending criteria have occurred many times.

• Average dwellings built these days are nearer 200 square metres in size versus near 120 square metres pre-1980s. Toilets are on the inside and there is often more than one of them. Walls and ceilings are insulated, earthquake and product testing standards are higher and so on. The average 1.6% addition to the housing stock each year is vastly different from the old days.

• Construction costs are much higher – for materials, inspections, consenting fees, development fees etc. • Land is less readily available and public transport system have not kept up with urban growth.

• Net migration flows for New Zealand have shifted from annual exits to gains averaging 29,000 the past decade. No-one speaks of “brain drain” any longer. Our population growth rate is much higher than expected.

• Builders are in short supply with many people having left the sector post-GFC and plenty of other jobs young people can do without the risk of banging their thumb or being electrocuted.

• For three decades Kiwis have been told to save for retirement because superannuation may be slashed. We have responded by building up housing assets. • Foreign buyers entered our market and soaked up stock from the 1990s.

• Airbnb has taken housing stock away from owner-occupancy and long-term rental availability into the tourism sector.

• The population is aging and international data shows more houses per person are required the older the population average age. More older people are divorcing – and wanting their own house to live in rather than go flatting.

• The world’s population is urbanising away from the regions in fits and starts, placing pressure on big cities in particular.

I could go on. The upshot is this. There has been a permanent repricing of New Zealand’s housing stock for a long, long list of reasons. The repricing has nothing to do with greed or US-like irresponsible lending.

Where do we go from here and what have been the most recent developments and driving forces in our housing markets around New Zealand? You’ll have to keep reading over coming months to learn that.

Email me at to subscribe to my free weekly “Tony’s View” for easy to understand discussion of wider developments in the NZ economy, plus more on housing markets.

By Tony Alexander