NZ House Market Characteristics

Material for this article comes from a recent article by Westpac. It highlights some of the characteristics of the NZ housing market, and looks at some of the NZ-specific peculiarities of our housing market. In summary, features of NZ house prices include:

  • inflation adjusted house prices show strong cycles, with a large cycle every seven to eight years on average;
  • house prices are far more volatile than the general price level;
  • "booms" tend to be short and sharp; whereas
  • "busts" tend to be mild and longer lasting.

A Strong Cycle

There is a large cycle every seven to eight years, on average, in inflation-adjusted house prices in NZ. From a previous cycle high, there is a minor peak around two years later and a big peak after eight years. This doesn't mean that you are guaranteed a big housing boom every eight years, but it is what has happened, on average, over the past 35 years. Partly this reflects the net migration cycle which averages between five and eight years, the broad economic cycle, and peculiarities in the housing market discussed below (particularly the short-term fixed supply of houses).

House Prices Volatile

House prices are far more volatile than the general price level. This is because the housing market is partly driven by sentiment (occasionally getting swept up in speculative mania), the underlying driving forces are themselves volatile, and because the supply of housing is slow to change.

A Boom-bust Nature

Not only are house prices highly variable, but they can flick from bust to boom and back again very quickly. Examples are the booms in 1974, 1982, 1997 (and 2004?) when house price inflation accelerated away very suddenly and, a year or so later, fell back just as rapidly.

Booms tend to be short and sharp (two to three years on the up) with prices accelerating sharply. You get big price swings on the upside as the supply of new houses is relatively fixed in the short run, so it takes time for increased supply to close a demand gap. If demand increases for whatever reason (e.g., a migration pulse, lower interest rates), supply cannot adjust quickly due to lags in getting consents approved, and construction finished (which can be prolonged even further in strong upswings, such as at present, when skilled labour is hard to come by). If demand is greater than supply, the gap is closed by rising prices. This can generate its own momentum and speculation.

"Busts" in NZ, by comparison, are mild and longer lasting. House prices tend not to decline, although they have been much more likely to do so in a low inflation environment (for example, the mild annual declines in house prices in 1991, 1998 and 2000). Prices tend not to decline because people don't like to sell into a falling market, keeping their houses off the market. This means that what we refer to as a "bust" is actually several years of fairly static prices.

Averages Hide a Lot

Most commentaries on the housing market tend to deal with average or median prices. But averages can hide more than they reveal. Housing is really a quite large number of overlapping sub markets. And the variability of prices in different regions or segments of the market is far greater than the average or median. So, if you hear talk of "the market" potentially falling 5 percent next year, the reality is that parts of the market will fall far more and others not at all. As a sideline, Westpac notes that the current house price cycle has been a nationwide happening, whereas the past couple of cycles have been centred on Auckland.

NZ-specific Peculiarities

Westpac lists what it sees as being particular characteristics of the NZ market that make us different from many other countries in the world. They are:

  • By world standards, NZers hold a very large proportion of their assets in housing (Westpac says that part of the reason for this is because of the tax advantages that result from investing in properties).
  • Historically we have had very high home-ownership rates, but this has been slipping. A number of factors are likely at play including affordability, the introduction of student loans (meaning it takes individuals longer to establish enough money to save for a deposit on a house), and the changed attitudes of Generation X who tend to have higher expenditure on big ticket items, travel and entertainment than previous generations.
  • The increase in renter households (for more information on rental trends, see the previous article). This raises the prospect, Westpac says, of a high (and potentially permanent) pool of renters. This, in turn, means that "the zeal for investment property is unlikely to diminish".
  • Finally, NZers have a high proportion of borrowing on fixed rate. Two-thirds of lending for housing is on a fixed rate, compared with about a third in Australia. This means that changes in interest rates take a bit longer to have their full impact in NZ.

Previous PageTable Of ContentsNext Page

Contact for Enquiries

The Ministry of Agriculture and Forestry
Pastoral House
25 The Terrace
PO Box 2526, Wellington

Tel: 0800 00 83 33
Fax: +64 4 894 0720
Contact this person

 
Print this page Print this page




WebSite survey