More commentary on this later on, but for now I’m just going to drop in some data.

Former Reserve Bank chair Arthur Grimes commented last week in The Spinoff:

In March 2016, the REINZ Auckland median house price reached $820,000. Four years previously, it was $495,000 – that’s a 66% increase in 4 years. What’s more alarming is that in 2012, many people considered that house prices were already getting out of reach for most people. That was particularly the case for young people and low income earners.

That extraordinary increase – coupled with the already high level in 2012 – was behind my call to a recent Auckland Conversations event that policy-makers should strive to cause a 40% collapse in house prices to bring the median back to around $500,000.

This sounds like a bit of a crazy idea. But the even crazier thing is that it’s happened before.

In the early 1970s, New Zealand experienced a rapid increase in house prices caused by, among other things, a swift run-up in immigration and a shortage of builders and building materials. Between 1971 and 1974 real house prices increased by 60%. This caused alarm, and the government responded by loosening planning controls to allow more flats to be built in cities. Then the 1973 oil shock hit, net migration turned negative, and the economy entered into a prolonged slide. (Thanks Muldoon!)

From 1974 to 1980, house prices fell by around 40% in real terms. By the end of the decade houses were no more valuable than they had been at the start. That’s shown in the following graph, which I’ve compiled from Reserve Bank data on long-run house prices and consumer price inflation.

Real house prices 1962-2015 chart

In principle, the same thing could happen today, given the right confluence of supply and demand shocks. But there’s an important difference between the 1970s and the 2010s: consumer price inflation.

Back then, overall price levels were inflating at double-digit rates. As a result, all that it took to get house prices back in line with wages (and prices for everything else) was for them to stand still for a few years. In dollar terms, house prices actually held constant from 1974 to 1980, while prices for everything else increased around them.

Today, consumer price inflation has dropped to almost zero. This means that getting real house prices back in line with incomes, at least in the short term, will require prices to fall in dollar terms. That is, understandably, a scary prospect for politicians, bankers, and homeowners. But it could happen.

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  1. It will happen. Either the government hits the pressure release valve, despite the angry mob, and it happens slowly over the next 10 years, or they don’t and it pops in their faces, with a different, far angrier mob.

    1. It will happen here, because we have a very slow building rate. All of Auckland’s contemporary cities have construction rates far in excess of ours, so overtime the rents charged elsewhere will fall relative to Auckland. Corporate accounts will look at Auckland pricing, compare it to other cites and say “Where is the value?”.

  2. The difference this time around is the billions coming in from China. We didnt have that before. So it’s anyone’s guess what will happen. But whilst NZ is seen as cheap (global standards) and incredible safe and attractive (4th country in the world) and while anyone can come and buy (no party is coming up with any real hindrance) – all of NZ is for sale to foreigners who want to speculate or live here. Central Auckland is rapidly becoming another Sydney, or worse, Vancouver.

      1. Sydney or Vancouver were both great cities to live in (and still are on the surface).
        However because the foreign dollar (mostly Chinese) has pushed prices in Vancouver through the roof it is no longer affordable for people to live in. What is the point of having a nice “liveable” city if nobody can afford to live there anymore?
        As a result Vancouver is now facing ghost suburbs where most of the property sits vacant meaning less people for shops, cafes, bars etc so they close down and make the city a less pleasant place.
        Ricardo isn’t often right (and is mostly wrong) but on this point about Vancouver and how it relates to Auckland he is absolutely right.

        1. This comment has been deleted as it violates user guideline 6, which states that commenters should provide references to support their assertions.

          More specifically, Geoff stated, without supporting evidence, that “Almost 80% of the CBD population is asian”

          Here is a link to a previous comment in which he claimed that 73% of the CBD population was Asian. Here is another link to a comment in which he claimed that two-thirds of the CBD population was Asian. When queried about these constantly changing figures, he has never provided a source for them.

          Any future unsubstantiated assertions from Geoff will be deleted.

        2. For our benefit, could you define how many generations people need to live in NZ until they are kiwis. Thanks.

          Regarding other nations changing the landscape, yes Britain did that but we are a sovereign nation now, no other nation makes desicion so about our land development.

        3. @conan I’d be curious to see that source too, it certainly wasn’t true in 2013: . It’s 50-60% in Auckland Central West and East ~30% in Harbourside/Grafton etc <20% in the inner west/east, this is fairly similar to most of the city proper (much lower in rural areas) and will include not only Chinese/Koreans/Japanese but also Indians and Pakistanis (who seem to come under 'Asian' for stats purposes contrary to the local idiom).

        4. Hey Geoff you know it isn’t hard to get data on ethnicity, eh? So why just pull figures out of your arse? Sadly your comment reveals that your commitment to prejudice is stronger than your ability with facts.

          At the last census the six city centre mesh blocks report Asian people as follows:
          54.5% 59.4% 34.8% 31.5% 50.8% and 36.3%

          Oh and Swanson?: 6.1% and Swanson South 3.6%

          And, more importantly; who cares what the race people are, seriously? What is wrong with you?

      2. Vancouver is a wonderful city to visit, but has become seriously unaffordable. Having just (literally last week) turned the opportunity to live there due to the extraordinarily high cost of living. I figure I would need about a 100% pay rise (quite seriously) to have approximately the same standard of living. Given I live a few hours drive from Vancouver I can visit whenever suits without the severe loss of lifestyle of living there.

        1. Exactly my thoughts about Auckland right now, difference being that here shite is being sold as gold.

      3. Clearly, the entire Brexit revolt, Donald Trump and the rise of UKIP has sailed right over your head. Basically, local poor, working poor and precariat classes are in almost open revolt all across the west at unchecked immigration policies that they feel threatens their cultural identity, and drives down wages at the same time as it forces up the cost of housing and puts pressure on infrastructure (schools, hospitals etc) that local populations feel they’ve long earned the right to access through the social contract by what they see as freeloading foreigners.

        1. There are so many things wrong with this comment.

          1. Trump is drawing support from relatively wealthy voters who are less concerned about economic insecurity than they are about maintaining America’s traditional racial hierarchy. I know less about UKIP, but survey evidence seems to suggest many are motivated by racist attitudes.

          2. The empirical literature shows that increased immigration has, at most, a small negative impact on wages. Some studies actually find small positive effects. In any case, there are no developed countries with “unchecked immigration policies” – every country has some control over who can come, or at least where they can come from.

          3. There is evidence of a link between migration and house prices, but the effect goes in both directions. This isn’t a pure cost to the NZ economy, as it benefits existing home-owners while disadvantaging people who don’t own property. In any case, the best way to address this is to build more homes.

          4. In New Zealand in particular, everyone is descended from an immigrant, relatively recently. If you’re Pakeha, all of your ancestors arrived within the last 200 years. Part of New Zealand’s social contract is to welcome in new arrivals, recognising that we ourselves have only recently arrived.

        2. This is the wrong place for a detailed discussion of this issue. This is a site about promoting PT. Suffice to say though i would bet everyone here (me included) thinks Brexit is a disaster, and thought the remain campaign would win. Also, the reprise to anyone who doesn’t agree with the particular world view of outward looking, globally mobile urban liberal intelligencia is clearly a racist is simply middle class snobbery.

        3. UKIP voters were surveyed, and 28% of them *described themselves* as holding “racist views”. Your attempt to browbeat me for describing self-admitted racists as racists is the worst kind of political correctness.

        4. “3. There is evidence of a link between migration and house prices….. the answer is to build more homes”. On a pure housing basis, or silo, that maybe the case. In reality, we need to reduce immigration immediately as our roading, public transport, public hospital waiting lists, schools etc… cannot cope and are not. Now is a good time to slow down the “open door” immigration policy which is allowing many unskilled immigrants into our country/city. After all, it is ratepayers and taxpayers who are paying the costs of them descending en-mass on Auckland, not the immigrants.

          A good way to instantly make an impact on the housing crisis is reduce immigration, even only if for a couple of years to reduce pressure and secondly, stop non-resident, non NZ Citizens from purchasing our housing stock for investment purposes. Come to think of that, only New Zealand First has policy around this. Labour are slowly coming around to it and Greens are similar to National in wanting to flood more immigrants into our city/country at a time the city cannot cope.

        5. “In reality, we need to reduce immigration immediately as our roading, public transport, public hospital waiting lists, schools etc… cannot cope and are not.”

          If some previous generation had said the same thing, you wouldn’t live here.

          “After all, it is ratepayers and taxpayers who are paying the costs of them descending en-mass on Auckland, not the immigrants.”

          Immigrants pay taxes and rates. In fact, they’ll probably be paying for your superannuation someday.

        6. “Come to think of that, only New Zealand First has policy around this”

          Jon – As we’ve said before, if you’re making comments like this then you also need to disclose that you were a NZ First candidate at the last election

        7. “If some previous generation had said the same thing, you wouldn’t live here.”

          And you know what? It probably would have been the right thing for those historical generations to have refused admission to my ancestors.

          In fact, if Maori had somehow worked some sort of trade-without-settlement deal, they might have ended up in a much better position today, free of the colonialist influence. They didn’t, they suffered, and modern obesity/health/smoking rates are indications that accepting immigration may be harmful to the existing “indigenous” (I use that in a way that allows current NZers to use it too) population.

        8. Sanctuary you lost your bet. I don’t think Brexit is a disaster at all. They people of the UK were asked and the majority said ‘get us out’. Nothing wrong with that. The disaster is if they don’t now leave. Democracy only works if people accept the results. The minority either accepts they have lost or democracy dies. The disaster is a bunch of wankers protesting that they dont want to leave. It’s like they are saying their opinion counts for more than other people’s.

          As for the merits of the European Union well I can’t see many. It is a free trade AREA which means strong tariff barriers to everyone else. How much damage has that done the rest of the world? Africa cant get produce in, we cant get enough in and Australia was totally shafted. I simply can’t understand how any New Zealander could think remaining would have been a good result. And free movement of people? It is free for those inside the barriers and none for those outside no matter how talented. FFS who would do that to their own country?

  3. One important side effect of the inflation of the 1974-1980 period was while house prices may have stay the same in real terms they still increased in nominal terms. The debt supporting them was still the same in nominal terms leading to a essentially a huge windfall for the owners. My parents bought their first house for $5000 in 1974 and sold it for $55,000 in 1984. The debt had gone from $4500 to about $4000 in that time (with some repayment of the principle). So they ended up with $50,000 real dollars at the end.

    1. You got it Conan…. and yet everytime first home buyers make a comment about how expensive houses are the baby boomers hit back with a sob story about how high interest rates were….. what they don’t mention of course is that inflation and wage growth was also high so that it was all relative. Basically inflation ate away at their mortgages…
      Perhaps we should try to have a bit of inflation…. 5% pa might work well without risking dangerous levels…

      1. “the baby boomers hit back ” What? Every single one of them?
        Let’s make them into “the other” eh? Something we can despise and revile. It’s been done before.

        1. Perhaps you don’t remember being reviled and blamed when you were young. You should try reading anything written about millenials and the housing crisis as if you were a millennial some time.

    2. And what could your parents actually buy with that $50K windfall in 1984? [Besides spend it by trading up to a bigger/newer/more expensive house].

      Probably that $50K gave them the same purchasing power as about the same as say $14K in 1974 dollars?

      In fact the RBNZ inflation calculator shows it would be worth between $11 & $14k back in 1974 – pre-rabid inflation.

      [Exact amount of purchasing parity you had depends on which inflation indicator you use, Transport was the one with the most inflation over that period 1974-84], hence the $11K bottom line figure, other inflation indicators had less inflation so would give better purchasing power in 1974 dollars]..

      So your parents “10 times” return, is more like 3 times at best.

      And don’t forget to factor in all those [high] interest payments they forked over to the bank for 10 years to make that “$50K”..

      All up those things probably makes that “10 times return” down to at best 1.5 times..

      Would that “return” have beat investing the same amount of money in the NZ stock market over those years?
      Most probably not., depending exactly when they bought the shares in 1974 and when in 1984 they sold them [and what mix of shares they owned].
      If you invested in the stock market for that long you would not have paid tax on the “capital” gains either.
      And don’t forget there used to be stamp duty on house transactions – again when you sold your house would control how much if any stamp duty you paid.

      So housing may seem to be a sure-fire way to make money in all markets, but timing as they say, is everything – when buying and selling.

      1. Greg I haven’t made any claims about rates of return. However they paid for the deposit with capitalised child benefit so any calculation on rates of return would be complicated by that as essentially it’s a return on nothing which is impossible to calculate. I’m sure interest rates were high at that time no doubt.

        Since you ask we moved to Wellington and they bought a house that cost $85,000 as you’d expect in a larger city.

        1. You did say “So they ended up with $50,000 real dollars at the end.”.

          Which is a way of saying “they made some money on the deal”.

          And they did, but as I point out its not 10 times the original investment it may appear.

          Because of the rampant inflation over that time, taxes and duties and generally harder than now access to mortgages its not quit apples to apples comparisons with now.

          And of course, a key thing to know is that in those days, mortgages weren’t given out like they are now – you had to go cap in hand to your bank, with at least 33% or more deposit.

          Almost invariably get refused, and so end up using a building society or 2nd or 3rd tier lenders at really high interest rates to get on or move up the property ladder.

          You did say there was no opportunity cost because it was free money via a capitalised family benefit. Technically yes, but the captialisiation comes at a cost of not having those family benefit cheques every other week. To help pay for things growing kids needed back then. So it wasn’t an opportunity cost free decision even if it was “free” money.

          But I’d agree that capitalising like that did allow the locking in of the then family benefit rate at “todays value” – which after the rampant inflation had eaten it away for over 10 years after that made it a pale shadow of its former self in terms of what it could buy.

        2. Without labouring the point real was as compared to nominal. They were real 1984 dollars.

          The money they borrowed came from the housing corporation, there was no cap in hand to the bank. Private enterprise built the house. It’s a model we could revisit today

    1. Don’t know much about the specifics, but Seattle’s got a lot in common with Auckland in terms of geography and its somewhat peripheral position relative to the overall west coast economy.

  4. Lets get some dates correct, please. From November 1972 to November 1975, we had a Labour government, led by Kirk & Rowling. This would
    be the worst government we have had in my time, and I’m 68. They were the ones who turned us from a creditor nation to a debtor nation, not to mention the mess they made of the oil shock problem.
    I tried to buy my first home during their term, but had no chance of a mortgage, because I was a single, childless male. I got pushed to the sideline
    while Auckland house prices more than doubled. When I finally was able to get a mortgage, it was thanks to Rob Muldoon, who had to sort out the
    mess Kirk & Rowling left behind.

      1. If you were a single FEMALE with CHILD(REN) … you got the DPB.
        Which qualified as a stable source of income and would allow you to get a mortgage.

        As (for example), when my parents divorced and before it was finalised my father got a second mortgage on the house and took the money, and my mother paid it off while on the benefit.

        1. No sorry – in January 1981 when I applid for a mortgage with the BNZ I was told that the bank’s policy was that it did not lend $$$ to unmarried women to buy houses. My father had to countersign the loan, and we had to pretend that a coupleof my brothers were going to live in the house to be closer to University. I had a good deposit and was earning more than enough to service the mortgage.

    1. Grumpy Smurf, yes the Kirk and Rowling Government spent too much. but as well as the first oil shock they had to deal with losing our largest export customer when the UK slithered into the EEC. Far from addressing that Muldoon ignored it and paid farmers to produce things that couldn’t be sold. He ‘invested’ the wealth of a generation into big projects that were almost all worthless. The Marsden point power station that was never lit, the Ethanol Petrol plant that wasted Maui making petrol at a higher price than it could be imported for, power lines on the main trunk railway line that were almost not turned on as it was so expensive and diesel so cheap, a high dam at Clyde in an earthquake zone that generates almost the same output the lower dam could have. Maybe you got a house but Muldoon’s was easily the worst government in my lifetime, perhaps in our whole history.

    2. Muldoon was easily the worst PM in NZ history. The man was a bully and left the country in a total mess.
      His stated aim in his career was “to leave the country no worse than I found it”. Despite being a pathetically puny objective – he failed!

      1. +1 In his first week as PM he said that the team working on Robbie’s Rail should find other work and that there was no need for employers to make deductions for the contributory superannuation scheme. Both of these actions have had a severe negative impact on NZ’s wealth. From the man who wished to leave the country no worse!

    3. “my employer paid me less than the married folks doing the same job”
      Complete rubbish! I was a public servant back then and it was all done on grading; one’s marital status was never a factor.

    4. If you define “sort out” as “double down on failed economic policies long after it’s clear they’ve failed, plus cause needless social division through things like the Springboks tour”, then yes, Muldoon did sort out the mess. The man tried to fix inflation by freezing prices and wages, “invested” billions we didn’t have in dubious infrastructure ventures, and refused to touch import licensing and subsidies for unprofitable farmers.

      To be fair, the problems he inherited were a long time in the making. The 1966 collapse in the wool price should have been a leading indicator that the future was going to be harder for NZ – that was on Holyoake’s watch.

    1. Some of the people arguing for a tighter immigration policy are probably small-minded racists. Others aren’t. I’ve never presumed to know what’s really inside people’s heads.

      The primary problem with immigration and the housing market is that net migration to New Zealand is extremely volatile. More NZers stay here, and more immigrants come here, when our macroeconomic performance is good relative to Australia, and vice versa. This isn’t a wonderful state of affairs, but as a practical matter it’s hard to see how we could limit volatility. Perhaps we could limit the height of the peaks, but I’ve never seen a practical explanation of how that would happen and how you’d avoid negative unintended consequences (e.g. constraining business growth).

      My argument has *always* been that volatile net migration increases the importance of responsive/timely housing development, especially in Auckland. That’s a good idea regardless of what happens with migration, and so it makes sense to focus on solutions in that area.

      1. The spin we are fed is that most are returning New Zealanders and when you look at the gross arrivals that is true. But the net gain of around 60,000 isn’t mostly New Zealanders, beacause those you can’t turn away are partly cancelled by those leaving. The issue is people under the ‘essential skills’ category and ‘entrepreneur’ category. That means people who found an employer would couldn’t be bothered training someone and people with a bag full of cash (and just guess what they invest that in- residential houses anyone?). As for NZ facing a dip in immigration in the future well that will help house prices. Surely the point is that this is the fastest way to stop run away prices in Auckland. Otherwise we will face a decline in future as everyone priced out of the house market leaves.

        The issue is how do we actually get the government to act? They have no incentive to do anything as most of the new arrivals are probably going to vote National. It is hard to see many identifying with a Labour ideology and they definitely wont be voting NZ First. It really is an easy way for National to get more terms.

      2. First thing they could be more careful with the student visas they issue since it has been suggested that a very large number of so called students are actually here as low-skilled, low-paid workers who intend to stay on once their visa expires (illegally if needs be).
        They could raise the amount of funds needed for special investor visas (these could go up and down as needed). They could also make it an actual requirement to you know actually invest in business rather than just buy a house and take it off the market.

        Basically if someone is looking to come here that isn’t skilled in something we need, here as a genuine student, or as a genuine investor then we should be turning the tap off. You can also stop new immigrants bringing in their elderly parents who make use of tax/rate payer funded infrastructure and other benefits without having paid a single cent of income related tax (only GST – here’s looking at the 75 year old Chinese who can’t speak a word of English that moved here a year ago and ride around for free on our buses and take trips out to Waiheke on the taxpayers expense…)
        You can’t control numbers of Kiwis coming and going – and nor should you – that is their right and is just something that we have to deal with.
        For every immigrant moving to NZ approximately 2/3 settle in Auckland. Since there are typically 2-3 in each family type situation on average that means that is thousands of houses EVERY. SINGLE. YEAR. in Auckland that are being sucked up when we aren’t building enough even for natural increase/internal migration.

        1. As everyone is aware it takes time to build houses. At the current deficit of 40,000+ it will take decades to build them all. Why would immigration falling be a problem? There is going to be demand for housing for a long time to come based purely on the deficit already faced.

          And you say there isnt a cost to immigration? Government has to pay for the bulk infrastructure, which means a direct subsidy by those already here to pay for those who just arrived. The paltry $1b offered by the government would suggest we simply cant afford for 60,000 to arrive year on year.

    2. Oh, and as a corollary NZ’s past experience suggests that net migration will go negative at some point in the next 5-10 years, with flow-on effects to house prices, regardless of what we do with immigration policy.

      1. I think it’s funny people focus on controlling immigration (very difficult) compared to 1) capital/lending controls and 2) policies to increase supply. The latter two policies seem much easier to implement …

  5. It is the uncertainty that bugs me. Do I buy now and risk house prices falling later, or do I wait and risk house prices rising even more! I don’t think investing in your first home should be so risky and uncertain.

  6. House prices are a symptom of the world we live in, where people are so concerned with their own bit, that they forget that we are all human, and the financial institutions, that control the economy and keep us living so close to the edge that we have no time to worry about more than self conservation. The decision to own a house (home) should not be based on whether it will gain or lose value, it should be based on the fact that you can live there, and you family can live there, a dream which is fast slipping away from many, especially the younger population. The market has become dominated by investors, and investing is inherently evil, as it is about nothing more than feathering one’s own nest, often at the expense of others. Those buying a property to live in need to be given some advantages, be it through lower mortgage interest rates, or government aid with a deposit, or even that you are physically present to buy a property. There are a million solutions. Most of them are us.

    1. “investing is inherently evil, as it is about nothing more than feathering one’s own nest”

      If it wasn’t for investing, we’d all be still sitting in mud huts. Accumulation of savings and deploying them in a risky venture, with the hope of reward for bearing that risk, drives progress and increases in technology. Self interest is rational. But our governing bodies should arrange affairs so that incentives don’t drive us all to one perverse outcome (i.e. as they are now). The retiree who lives off income from term deposits is as much an investor as a property buyer – lest we forget – and he has seen his income decline over the past decade. Everyday people who are being forced into riskier ventures to sustain their lifestyle are just as much the victim.

    2. I am of the assumption that by the time I retire there will be no significant or meaningful social support for me. So on this basis I must invest so that I actually have a future where I am able to retire.

  7. To expand on my problems trying to get a mortgage in 1972 to 1975, the Labour government of the day largely knocked the banks and insurance companies out of the mortgage market. Any spare funds they had, they had to lodge with the Reserve Bank overnight and this
    drastically reduced the funds they had available to lend on mortgages.
    The only other source of mortgages in those days was the Housing Corporation (or whatever it was called then) and they did not lend to single childless people – you had to be engaged or married, with or without children, to get a mortgage from them. It was quite legal to discriminate
    on the grounds of marital status in those days – even my employer paid me less than the married folks doing the same job. They had responsibilities – I didn’t ! This was before the days of the DPB.
    When I was finally able to get a mortgage, in 1976, it was at 8.5 % – it topped out in 1985 at 21 %. The good old days !

    1. So you had a mortgage on property 1/4 the price, that you were paying 3.5 times my interest rate on. While you were in the highest interest rate period ever, and I am in the lowest? Woe is you.

    2. Does anyone remember the concept that a house is a place to live, not an investment?

      Which means that price drops aren’t bad if the relativity between one house and another is maintained.

      So a large drop in house prices isn’t as much of an issue for people who have houses as a place to live (quaint concept as that may be).

      1. Hence why I’m not fused about a crash. I’m just riled that so many boomers fall to see the damage they are doing the economy by refusing to address that it is impossible for most young people to buy a house.

        1. I’m not sure taking it out on boomers does our generation a lot of favours, every generation goes through economic challenges and benefits. My grandparents generation had the war, but were also able to buy coastal baches and cribs back when they were dirt cheap, and also benefitted from Muldoons super at 80 % of the median wage. The boomers had to fund the pension at 80 %, along with a number of Muldoon’s other follies and also lived through a period of heavy inflation, on the flip side they a benefiting from high house prices just as they want to cash up for their retirement.

          I do agree though that the current situation is particularly hard on the younger generation (who knows what we might benefit from in the future, probably at the expense of our children!), I also agree if you are specifically targeting those boomers who resist intensification, which of course is not all boomers.

        2. I’m not saying it is all boomers by any stretch of my words. I am saying that the people who do this are almost entirely boomers who have heaps of expensive property already and are happy to pull the ladder up behind them.

          To ignore that this is a problem created almost entirely by a subset of one generation, having a grossly disproportionate impact on another generation with the least wealth, least political power, and least historic input to the existing situation is fundamentally wrong.

  8. Whenever someone says they expect the market to crash, I ask the same simple question, “Why would someone sell their house for less money than they paid for it?”. I believe that even with the supply side of things corrected, the best that will be achieved is a flattening of property values. As mentioned inflation is very low, so the time it will take for the values to correct is in terms of decades.
    For house prices to drop significantly, in absolute dollar terms, look to cities like Detroit for the long term and Calgary for the short term. Prices drop because the bottom fell out of their industries (manufacturing/automotive and oil respectively) leading to previously well paid and now unemployed people being unable to pay mortgages, people leaving due to no local work, and others getting out of the market before the value of their property exceeds their mortgage. Essentially as I see it, a call for a reduction of 40% is really asking for the bottom to completely fall out of the economy.

      1. One difference is that in the US, if your house was worth less than the mortgage, you could hand them the keys and walk away. Here, the mortgage debt sticks with you. That means that the dynamics could be quite different.

      2. That’s entirely the point of my post, a 40% decrease in house prices means that bad things have happened. Essentially saying I’m waiting for a crash is house prices is saying I am waiting for a city in crisis, which is not a place you probably want to be.

    1. Auckland is more diversified than Detroit or Calgary but the likes of Ireland and Spain are reminders that massive growth in private debt and rampant speculation can cause the wheels to fall off. Trouble could easily set in if the cost of borrowed money rises, unemployment increases, and foreign investment falls away in quick succession.

      1. Spain and Ireland both lack the buffer of having an independent currency and monetary policy so are not directly comparable too.

      2. I don’t think that we want to be in the situation of Spain or Ireland either, so the 40% drop in house prices is not something that I think we actually want because of what it means to the rest of the economy.
        Does anyone know of a time when there was a 40% drop in house prices, with really low inflation numbers, that wasn’t somewhere going through bad economic times?

    2. The systemic risk to the AKL property market is a turn around in emigration numbers. A jump in departures, especially by the young, is what caused the 70s drop. However, the 70s situation itself is very unlikely to repeat in my view for a couple of reasons.

      First, AKL and NZ, is no longer a miserable upright backwater like it was then, ie the mindnumbing dullness push factor just isn’t there. Then anyone with any get up and go, got up and went.

      Second, air travel had just become within reach for ordinary people, this quite literally opened a flood gate. If anything a reverse pattern now exists, with millions of kiwis abroad able to return at any moment; global shocks or even hiccups are likely to stimulate return of these people and their families. I certainly see net figures shifting around a lot, but turning negative for years; no.

      1. Imagine a small glut of supply a downturn in immigration and some tightening of capital coming out of China. Or imagine any situation where interest rates double.

        We’d crash pretty Flippin quick. Bubbles always pop.

    3. Why do you need to sell it at all?

      My house (I own) cost me X$. It generates n utils for me daily; that number is actually dropping as it gets older (well, it drops without maintenance, let’s say that given y$ in maintenance, n is constant)

      How much my house costs is irrelevant to me. Whether it’s worth $1bn on paper or $1, it generates n utils. My likelihood to sell is actually based on the probability of getting a larger n for a given $, which is actually lower in high cost environments (every additional util costs a lot more) than it is in low.

      Crashing house prices actually means I could afford a house that generates 2n utils on my current salary. In fact, I want house prices to crash 90%. I don’t mind losing that value as it means I can pick up a currently $5m house on my salary 🙂

  9. In 2012 I published a book on how to subdivide a quarter acre properties. One chapter was an analysis of the 1995 and 2003. The biggest driver of property prices was immigration. The data once graphed it was obvious that there was a one to one relationship. Not too sure why the obvious is ignored?

    1. Interesting. Did you account for where the money came from, or just the people?

      I believe unless we turn off the inflows of low-interest foreign funding (mostly via our Aussie banks), building more supply is just blowing up the balloon with gusto.

    2. The New Zealand guide on how to subdivide a 1/4 acre property : my experience of residential subdivision in New Zealand. Available from Auckland Libraries.

  10. The problem for the city is that development might dry up if developers think that they they will lose money. We don’t want a city of abandoned projects. How to manage the downside of the bubble?

      1. And indeed a downtown would be the perfect time for a public house building programme. The government missed a trick not doing this during the GFC.

        1. +1 Conan. If the government had of provided job security to builders during the GFC, thousands wouldn’t have left for overseas and would have been able to build lots of houses during the lull. It would have also maintained a better base to grow construction numbers further now when we need even more houses built.

        2. House building and major infrastructure. Keynes had it right.

          During the GFC, what NZ should have done is
          -> Accelerate infrastructure (road, rail, pipes, houses)
          -> Pump money into the police, NZDF etc. to create job and upskilling opportunities

          Then when the economy recovered, it could turn off the stimulus tap

        3. Yeah, good luck to whoever proposes slashing an enlarged and entrenched police/army/public sector just when the economy starts to boom. You’d be left with a bloated public sector for ever.

        4. I’m not in favour of putting people on the permanent government payroll as a stimulus measure in recession. However, EC’s correct to say that temporary stimulus measures, such as letting out more contracts to build houses or infrastructure, time-limited tax rebates, or lower interest rates, are usually unwound when the economy recovers.

          The problem with using infrastructure / housing investment as a stimulus measure is that there’s usually a time lag for starting new projects – you need to do design, consenting, etc. Even if funding is available immediately, there’s a lag of 6-12 months before anyone’s building anything. But that’s a technical issue that can be solved by planning ahead.

        5. Well Nick as prosperity rises so does security and as such fewer police are required.
          However, even if you were right, a larger police/army generates greater public utility (perhaps not the same ROI as a smaller force) and as such it is still a better alternative than destruction via stagnation

          Peter – your point is both wrong and right because it fails to recognise that governments have the power to set deadlines, requirements etc. Yes, *given current policy settings* it would take 6-12 months, but a government truly willing to set things right could change the laws at the stroke of a pen and have the foundations dug tomorrow.

          Study human history. There are some incredibly rapid developments when people removed their own man-made restrictions. One of my favourites is the taxis that took the troops to the front in 1914.

        6. “a government truly willing to set things right could change the laws at the stroke of a pen and have the foundations dug tomorrow”

          Err, no. I’ve worked on business cases for a number of infrastructure projects, and they are inherently time-consuming exercises. Some of that is arguably discretionary box-ticking stuff, but a lot of it is essential to successfully delivering a project. Option development and assessment, detailed design, costings, negotiations with potential suppliers, etc. If you skip those steps, you’re just going to waste money building things that don’t work. The same factors apply to private developments – ask a subdivision company or apartment developer.

          The only way to deal with this, in practice, is to have a set of plans and consents sitting around on the drawing board and ready to build on short notice. Which can be done if you plan ahead.

        7. A government sponsored apprenticeship scheme would be much better and leave the country with less of a burden.

          Basically, subsidise private companies to take on apprentices. If we see that as a training cost rather than a wage subsidising cost, it is just the same as underwriting University or Polytech education. It could also be expanded to grad manager programmes.

          NZ needs far more builders, QSs, electricians and plumbers than it does BA grads. There are far more people who would rather do that kind of work than do a degree with dubious job prospects at the end.

          It worked in the past and I cant see much has changed.

        8. Like I said Peter, if there’s a will there’s a way. Here’s what happened in WW2:

          I’m not saying it would be that abrupt, but you’d be surprised what could be done even today. First of all, the government can simply remove the need for consents (parliament is sovereign). Second, it can simply build off existing plans. Third, it doesn’t need to undertake options analysis etc. because it’s willing to waste some money (efficiency) to get a final product completed (effectiveness).

          We aren’t talking about small alterations to existing policy settings. We are saying a government willing to change those settings to achieve a particular goal. It can be hard to understand exactly what a government can do if it sets its mind to it, because we’ve grown up in such a constrained environment. Look at history for analogies.

          If Kennedy could get the US on the Moon in less than 10 years, we can build a few thousand houses in one year. If the P-51 could go from initial concept design to prototype in six months, we can build a few thousand houses in one year. It just takes political will.

        9. “Basically, subsidise private companies to take on apprentices. If we see that as a training cost rather than a wage subsidising cost, it is just the same as underwriting University or Polytech education. It could also be expanded to grad manager programmes.”

          Not quite. Universities and Polytechnics are crown entities, so the crown subsidy of education there is simply one part of the public sector paying another (think the use of benefit dollars to pay for medicine, for example). Private companies are private entities, so government subsidies to them is very clearly the use of public funds to benefit specific private sector bodies.

        10. The Atlantic Wall might have been a massive engineering feat, but it didn’t work. The Nazis spent the equivalent of $200 billion on a project that failed. And the people who successfully breached it spent years planning and organising logistics to ensure that their invasion succeeded. I’m not sure what your point is.

        11. The only way to deal with this, in practice, is to have a set of plans and consents sitting around on the drawing board and ready to build on short notice. Which can be done if you plan ahead.

          You look for increases in sales value relative to movement in costs to determine if a project becomes worthwhile.

          If in a booming there is a cost rising faster than saleable value, then that market will have retarded growth. But likewise in a falling market, if the decreasing cost is falling slower than a decrease in saleable value – same effect and the project is not viable.

        12. Yes, government absolutely could build thousands of houses in 12 months if they decided to do it now.

          Simply pad a bill with all of the powers needed under urgency created from house price disaster and do it. Acquire lands for any consented building not being progressed. Allow themselves to consent their own developments to really pump out new consents. Using your example of D-day, the allies bull enough armaments, rallied enough trips and statehouse the invasion of three continents in under 4 years. I’m sure w can build 20,000 houses.

        13. “The only way to deal with this, in practice, is to have a set of plans and consents sitting around on the drawing board and ready to build on short notice. Which can be done if you plan ahead.” – Peter Nunns
          This works until there is a change in building code or any other standard that might apply. At which time there is often need for redesign, so the previous design efforts are then wasted. Having been involved in the redesign of multiple projects that were ‘shelf ready’ but caught in the change in codes/standards.There can also be changes in the desired outcome of a project that results in changes being required. Not saying it can’t be viable but there are risks associated with this approach.

          “First of all, the government can simply remove the need for consents (parliament is sovereign). Second, it can simply build off existing plans. Third, it doesn’t need to undertake options analysis etc. because it’s willing to waste some money (efficiency) to get a final product completed (effectiveness).”
          1. Removing consents can have other impacts. Developers and individuals generally want to cheap out on things that they can’t see (eg foundations, retaining walls, sewer hookups etc). I have prepared geotechnical reports for many properties with serious issues for clients that have told me at the outset that their architect/structural engineer/project manager/buddy told them that they didn’t need a report and that I was essentially wasting their money but the Council required it so that was why they were paying for it. In one case there was a slope failure between when I was contracted and the report coming out, but the client was certain until that point that it was a waste of their money getting a geotechnical report done. This will be the case for many elements, not just geotechnical. The problems created would make the leaky homes issues look like child’s play in comparison.
          2. Existing plans still require design. As noted there can be considerations such as geotechnical for many properties in Auckland, there are issues around hooking up stormwater and sanitary sewer connections such that they don’t create massive problems for the system. In addition, Auckland is not a fairly flat city so designs also have to take into consideration topography that ‘existing plans’ don’t take into account.
          3. Even with good consultation some designs are not as good as they should be, typically in some elements such as consideration for pedestrians, cyclists, and people with mobility issues. As a result those that are most vulnerable are often the ones most significantly impacted by poor design. And once something has been built there is a reluctance to fix the problems, again particularly when it is ‘only’ for say people with mobility issues.
          In some cases the only way to repair poor design is to start again, the demolition and reconstruction can be significantly more expensive than if a good design was completed in the first case. In addition you are now taking that amenity (house, building, shop, road, bridge etc) out of service for a period of time to repair or rebuild, this is frustrating to users and needlessly so.

  11. If its any consolation, by 2040, all the tens of thousands of baby boomers will be dead, with the last hangers on listening to the Woodstock CD in their rest home beds.
    This will at least make house prices affordable for the children of today’s first home hunters. Whoops! Scrap that idea. With the governments insane policy of boosting
    the NZ economy through immigration at 70,000 p.a. that’s another 1.6 million by 2040 and average Auckland house prices beyond 2 million.

  12. Very interesting article.. Comments are interesting, overall..

    Well it’s now July, 2017 and I have been following a lot of reports over the last couple of years..
    We are seeing things finally adjusting now, even world wide.. EG: Australia/Canada, just to name two glaringly obvious ones..

    My advice to “anyone” in New Zealand at this time, is to sell… Quickly..
    It’s not to late, but it is very very close..

    A realistic drop, which has already started.
    I would predict very comfortably, would be a minimum of 30%..

    A higher dropping amount sadly, would be more realistic in my option of 50%..

    Sell if you are able.. Pay off debt quickly..

    Simply, position yourself better now..

    If I am in anyway able to help.. please email me..

    Kind Regards GWT

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