The Unconditional Blog

The impartial voice of the industry


A New Zealand housing bubble?

Posted on: December 6th, 2011 | Filed in Featured, International, Money Matters

The question has been posed today in the media that NZ properties are overvalued by 25% – according to a report from the Economist entitled “House of Horrors“. It should be pointed out that this report was reported by a couple of weeks ago.

The Ecomomist’s report is certainly worth reading, as well is the data which lies behind the report for it shows that the headline of a 25% overvaluation for NZ property is hard to identify. The full table of data is presented here. It should be noted that The Economist cites Statistics NZ as the source of the data for the report.

The report states that “Based on the average of the two measures (analysis of value to rents & value to income), home prices are overvalued by about 25% or more in Australia, Belgium, Canada, France, New Zealand, Britain, the Netherlands, Spain and Sweden“.

The specific data for NZ shows that when assessed on the value to rents NZ is 66% overvalued, whilst when assessed on value to income NZ property is just 4% overvalued. Australia by comparison is 38% overvalued when assessed to income and 53% overvalued to rents.

The UK is judged to be 20% overvalued when assessed to income and 28% overvalued to rents, with the US 22% undervalued when assessed to income and 8% undervalued to rents.

The chart also highlights that NZ property is showing a 0.1% increase in price as compared to last year and a 4% fall since 2007. Whilst the countries cited in the headline such as Belgium, Canada and France have seen year on year increases of over 3% up to 7.7% and increases since 2007 of between 6% and 22%.

The Economist provides as part of the data report an excellent interactive chart. This has given me the opportunity to analysing some great comparatives of both property prices and value comparatives which I have detailed below.

Comparing property prices on an index basis since 2000 shows the relative position for NZ matched to Australia and the US. All three countries enjoyed rapid growth through the first 6 years of the decade before the US started its spiral down, over the past 4 years NZ has flatlined whilst Australia has forged ahead.

The analysis of property prices based on real terms rather than actual price as in the index chart is very illuminating – this chart which shows NZ and Australia highlights the fact that the current property prices in real terms are back to where they were in the Q2 of 2005 – over 6 years ago – such is the inflation impact on property prices.  By comparison Australian property prices in real terms are 20% up as compared to Q2 of 2005.



The Economist report made comparison of valuation to both income and rental and these next 2 charts present the data for NZ and Australia against these two measures. Based on income NZ Property prices are now around 17% overvalued compared to the status in 2000, by comparison Australia is 42% overvalued. NZ and Australia were tracking on a comparable basis up until the last 2 years when NZ has fallen as a ratio of price to income.




The comparison of property prices to rents for NZ and Australia shows a chart where the two markets are exactly aligned comparing Q1 2000 with the current data – both are showing a 60% appreciation of prices to rents over the period, with both markets tracking in line through the period.



As a final analysis it is interesting to compare NZ with two markets that has fared the worst in the property crash of the last decade – the US and Ireland. In this chart showing property prices in real terms the NZ property prices in real terms are up just over 50% in the 11 years, by comparison both Ireland and the US have seen the bubble followed by the crash which in both cases shows that property prices in real terms are back to 2000 levels – a lost decade for these property markets.




Article Discussion

  1. JohnB says:

    Thanks for hunting that one out, great analysis on your part, pity the Economist has not got the smarts to do it on their own data.
    An extra point: The comparison of rents to property values assumes rents are right and that values are too high. A simpleton could point out that prices may be right and rents are too low.

    The reality is that property is a contestable market in NZ and rents are also subject to competition, so maybe both rents and prices are appropriate for the market? ie my belief is that rents are low due to oversupply and prices are about right due to construction costs. Hence competition rules, and analysis based on some arbitrary “rule” about ratios is just not believable

  2. John

    Thanks – a very valid point and whilst I cannot provide any data to back it up I would add that the prevailing view that the historical attitude of investors to seek capital gain from rental properties rather than yield in the past may have lead to this situation where rents have been allowed to stagnate, creating a kind of artificial subsidisation of rents.

  3. These ‘over valued’ statements and articles amuse me because how can something be over valued if there are willing buyers? I believe it should be reported as affordability issue as opposed to being ‘over valued’. Perhaps our incomes are too low to put another spin on it.

  4. I would agree with the first two posts above in that it is more a case of rents being too low. Rents will increase as investors look towards long term holding of property rather than short to medium term capital gains.

    Rents will also increase due to the lack of new construction and increasing population, especially in Auckland.

    With regard to NZ the Economist has been proved wrong – remember all the scaremongering in the media based around their previous articles in 2008 and 2009? House prices in Auckland City are now at record levels – they were wrong.

    TV1 News will have an item on tonight’s edition about the Economist article featuring Tony Alexander and others from the industry.

  5. John says:

    It would have been nice to have included Australia in the last chart.

    Regarding the comment by Ross, The cha-ching of record prices sound great, however everything is somehow linked to a natural cycle or evolutionary process even economies, let us not forget even the largest trees in the world will eventually slow to a sustainable or at least minimal growth. it just the way it is.

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