The Unconditional Blog

The impartial voice of the industry


Are we about to see another property price bubble?

Posted on: March 14th, 2012 | Filed in Buying / Selling a home, Featured, Media commmentary, REINZ Monthly data

The weekend opinion piece by Bernard Hickey published on the NZ Herald (Bank blows bubbles) and on certainly captured attention with both media platforms receiving extensive comments from engaged readers.

The article proffers the opinion that the actions of the Reserve Bank back in 2003, in deciding to continually cut the Official Cash Rate from 5.75% to 5.0% and the hold it there despite the frothy economy was pivotal in driving the bubble in house prices seen to occur over the ensuing 4 years; during which time period as Bernard states “houses prices almost doubled”.

The fact is that the Stratified median house price in January 2003 was $203,550; just under 5 years later in November 2007 the market peaked with a price of $380,900 an 87% increase.

Bernard then goes on to state that the current activity by the Reserve Bank to hold the OCR at the current rate of 2.5% is “history repeating itself, or more colourfully put – deja vu all over again?” and given the recent rise in property sales, he goes on to forecasts that we are likely to see another property price bubble in the coming years.

To be clear Bernard is not saying that we will see an 87% increase in house prices over the next 5 years, he simply seeks to challenge the assumptions of the Reserve Bank and seek to highlight “worrying early signs” such as the latest report by Barfoot & Thompson for February and the BNZ – REINZ survey both citing “increasingly bubbly sounds” from the property market. The latest data from REINZ for February sales would seem to support this view.

This supposition deserves some deeper analysis of the underlying numbers (which are public data from REINZ) to bring some perspective to the discussion.

The chart below uses the REINZ / Reserve Bank Stratified median house price data and compares the prior 5 years to the start of 2003 against the most recent 5 year period as cited by Bernard, to see if the circumstances leading up to this sense of deja vu are really that similar.

The chart shows the 5 year period of 1998 to 2003 in the blue line with the left hand axis, tracked against the most recent 5 years of Stratified median house prices to February 2012 with the red line on the right hand axis. Matching these 2 separate 5 year periods provides a valid comparison allowing for the very different scales.

What is clear from the chart is that property prices in the run up to the decisions made by the Reserve Bank in 2003 were already on the rise; and had been for over 20 months. In fact based on the point 22 months back on the chart (April 2001) the stratified median house price was $176,775. From then on prices started to rise and by the zero month on the chart representing Feb 2003 they were already up by 17% before the actions of the Reserve Bank.

By comparison the recent 5 year period showed a turning point around 28 months ago (Oct 2009) when prices had been rising and leveled off, from that point in October 2009 right up until this month of February 2012 prices have risen by less than 1%. In fact the rise has been only $575.

The chart below shows the consequential impact as judged by Bernard as to the actions of the Reserve Bank through the 4 years following 2003.

Pretty striking – the question is, will the current market take off to such an extent? Based on the current data is looks less likely I would suggest.

There is no doubt that the heat in the NZ property market at this time is in Auckland and to analyse this region separately can add further insight to this discussion, therefore below is the paired charts for Auckland on the same perspective as the national charts above.

The interpretation I would make from this view of Auckland would be that the trend is mirroring the national perspective with a faster rate of increase, much as was seen in the 1998 to 2006 period. That would seem to support the view that we are likely to see some price increase in Auckland and across the country in the coming 5 years but not of the scale of the 2003 to 2007 period.


Fundamental Economics

In discussing the likelihood of a property price bubble it is critical not to ignore fundamental economics – the laws of supply and demand. On the supply side of the market there are currently constraints with a shortage of listings and inventory of property on the market below long term average as has been detailed in the NZ Property Reports through most of the second half of last year, however this is likely to ease as more listings are coming onto the market as cited by the rise through February. Sadly the parallel data for supply side for the period of 1998 to 2006 is not available. It is only with the advent of the web as the primary means of marketing real estate have we accessed to such data through

On the demand side the rate of sales of property is the best surrogate and the chart below provides a compelling reason to believe that “things are different this time”!

The red line tracks the current 12 month moving average sales of properties over the past 5 years matched to sales of the 5 years leading up to 2003. This is very significant. Currently sales of properties are running at a rate of just over 61,000 per year whereas leading up to 2003 and the actions of the Reserve Bank at the time, they were running at over 100,000 a year, that is a difference of 63%.

The froth in the property market which catapulted the house price bubble from 2003 to 2007 was more likely to have been driven by the highly active demand from buyers anxious to “get onto the property money train” at that time, certainly influenced by low interest rates, but not solely the action in cutting OCR. Property sales had started ramping up well before 2003, in fact sales started to rise in 2001 and kept on rising to peak at over 120,000 per year in 2004.

At this time sales are rising – certainly not as fast nor at such a frothy level. That would seem to be a very compelling part of the picture to better understand the likelihood for another property price bubble – not that likely.


UPDATE (3.30pm 14th March)

This article has been published on as an opinion piece to complement the original opinion piece by Bernard – for this I am very grateful.

A comment has just been posted by “Basil Brush III”

“How about adjusting those wonderful graphs for the relative inflation rates of each period. I would bet Alistair Helm cannot do that and make the same statement”

Well I love a challenge so for Basil Brush III here is the key chart adjusted for inflation over the period – looks to me like the argument is even stronger that we are not likely to see a bubble!

Article Discussion

  1. cam says:

    Why does bernard cry wolf so much, it wasnt long ago he was crying a 30% crash, which ddint eventuate, now he nervously prodicts a boom, certainly we shouldnt be taken this temperamental
    economist seriously.
    The sales are just coming back to normal after a seriuosly low level for many years, and the real estate agents are just blowing hot air . This is where where we shold be. Auckland is a little heated and short supply as of the christchurch exodus. Thats it…..everywhere else is still pretty flat.
    My my bernard your getting ahead of yourself.
    How does a guy like this mange to get himself allover the press. A person like olly newland may have more experience being through many boom and busts. My opinion is do the opposite of bernard and you will be fine…
    Sometime or another you will have to take a risk to get ahead, its all about good timing , a risk and education from experienced players .

  2. Cam

    I think I should step in to in someways defend Bernard and respond to your comments.

    Bernard by his own admission would not call himself an economist – he is a financial journalist, this profile piece from the Sunday Star Times provides a useful CV of Bernard.

    I would challenge the view that expertise comes from experience – expertise comes from a combination of intellect, research, understanding and analysis. You don’t need to personally live through boom and bust times to be an expert – take the expertise of Ben Bernanke, probably the most widely respected academic on the great depression and certainly the expert in steering the US Reserve Bank through the worst of the GFC and avoiding the Great Depression 2.0 – he didn’t live through that era.

  3. betty boop says:

    Another property bubble? What makes you think we’re not still in one? That’s the thing about bubbles, they’re not apparent until years, sometimes decades, later when inflation adjusted prices have deflated significantly. (Since 1988 the NZ dollar has lost 50% of its purchasing power and the population has risen by 30%, yet houses have more than tripled in price in many places) If you look at a chart of prices over the past century instead of the last five years you’d have a better idea of where we are. Whatever the causes of the big rise in property prices may be, a shift in attitude towards houses has taken place, from essential commodity to “property is an investment because it always goes up”, as if that’s a good thing.

    The reason why there’s so much emotion about this taboo subject is because NZers aren’t rich and are wedded to the idea that, as well as somewhere to live, property is a good investment, as this has been the only way most people have been able to feel financially secure in recent years, thanks in large part to neo-con policies pushed by both major parties that have led to a failed stock market, chronic job instability, low pay and a widening gap between the have more minority and the have less majority.

    Kiwis have low savings rates due to low pay (about $25K-$40K median in most suburbs and taxed quite heavily) and low productivity, as well as an aggressive advertising industry that exhorts people to spend and buy on credit. What is saved is often used to pay off debts, utility bills and/or a mortgage that was created by the bank during times of rising optimism and greed. If people had to put down a 30+% deposit on a house, prices wouldn’t have risen quickly and may, in fact, have dropped. It would also compel the unimaginative and conservative forces within the building and property development industry to figure out how to make a market by building attractive, prefabricated, modular Scandinavan-style homes and apartments that suit our climate, make use of our abundant timber supplies that cost not much more than $50K on a piece of land about the same price (= 3x median gross income). We’d be a happier society because there would be more people with a stake in their community, fewer people enslaved by debt to Australian-owned banks and we’d be able to save more and possibly work less and spend more time doing life-enriching things. We’re only around for a short time and I don’t believe the purpose of life is to pay off a big mortgage, which an awful lot of people spend much of their lives trying to do. There’s reason to be optimistic for those who want to own a house because affordable kit-set houses on affordable land are coming, but it will require a change in attitudes, which will take time. Encouragingly, some people are beginning to question things. The re-callibration of the world’s economic system that is currently taking place will force change upon us and will force most of us in the West to take stock and re-examine our priorities, whether we like it or not.

  4. betty boop

    Many thanks for your contribution to the debate. I would agree with your opening remark that the definition of a bubble has to be seen in context and that is best seen after the event rather than in the midst of the event.

    It would be good to have the benefit of such rich data – my source (whilst not the only) is the Real Estate Institute which holds comprehensive data back to 1992 – the Reserve Bank goes back further at a national level but not any more granular.

    The whole relationship between NZ’ers and property / investment and debt is a complex issue and surprisingly we are not alone – have a read of this recent academic paper on the potential to forecast bubbles in the US and Norwegian property markets – the same fundamentals you state are at work in many other countries.

    As to affordable housing and cheaper modular housing – the logic and economics are irrefutable – however the structure / scale of NZ means we don’t build estate on spec of pre-fab houses because we don’t have secured demand against which banks will lend developers so our building industry is structured and incentivised to meet the demands of custom construction.

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