The long kiss goodnight

The Australian housing bubble debate appears to have hit a stalemate, where the dominant view is that home prices will stagnate for an extended period as incomes catch-up (i.e. declining in real terms).

It’s a reasonable view with precedent. For example, after the late-1980s house price boom and the strong run-up in house prices between 1998 and 2004, Sydney’s home prices stagnated for an extended period, declining in real terms (see below charts).

It’s also a scenario currently being played out in New Zealand – a country with essentially the same banking system as Australia’s, solid population growth, as well as housing markets with similarly restrictive urban planning policies.

A recent article published in New Zealand’s provides an interesting insight into New Zealand’s slow melting housing market:

House prices have now stagnated for more than four years, their longest period since the 1988-1993 plateau.

And it’s not over yet.

On an inflation-adjusted basis, this current period also represents the biggest decline in real house prices in almost 30 years.

Capital gains for most of the market have evaporated. Capital losses are a real prospect.

CPI inflation has risen to over 5.3% per annum in the latest quarter, and we are entering a period where housing debt is being inflated away. Savers are paying the price, but borrowers may also be risking their equity.

For the 51 month period from April 2007, median house prices in New Zealand rose just 3.2% from NZ$349,000 to NZ$360,000.

Over this same period, the CPI index rose from 1010 to 1157, up 14.6% over these 17 quarters.

On this basis, real inflation-adjusted house prices have fallen 11.4%, the second largest fall since records began in 1963, a period of 48 years.

We are probably in the middle of this period of nominal house price stagnation. We also seem to be entering a period of high inflation. The combination will drive real house prices down…

For most markets in New Zealand, housing is no longer a hedge against inflation. In fact it hasn’t been since mid 2007. Although there is no way to know how long the current stagnation will last, public policy seems to be shifting to accept – even encourage – a shift away from ‘investing in real estate’. The current trends may well last as long as, or even longer than, the ten year stretches 40 years ago. We could be less than half-way through the cycle.

For a longer-term perspective on the New Zealand housing market, consider the below chart of real house price growth since 1979:

Both the rise and fall of real house prices in New Zealand over the past decade has been spectacular relative to the past 30 years.

Even though recent price falls have been moderate in nominal terms (circa 5%) across New Zealand’s larger cities:

In real terms, the price falls have been far more pervasive (circa 10% to 15%):

The melting of New Zealand’s housing market has occurred amidst recent deleveraging by households:

Sluggish home loan approvals:

And collapsing home sales:

And yet, the Reserve Bank of New Zealand’s ability to collapse variable mortgage interest rates to near 50-year lows – an option also open to the Reserve Bank of Australia (if the proverbial hits the fan) – appears to have cushioned the blow to New Zealand’s households from declining wealth, rising unemployment, and sluggish income growth, in turn helping to support home values:

However, with New Zealand’s homes still severely overvalued relative to incomes, nominal prices would need to stagnate for many years yet in order to restore home values to an affordable level:

At this stage, continued stagnation looks to be the status quo for New Zealand, with the number of listings remaining low, suggesting relative balance between vendor supply and (depressed) buyer demand:

Obviously, no one knows what the future holds for New Zealand’s housing market. China’s economy could correct, sending New Zealand’s terms-of-trade, currency and exports plummeting, all the while causing ructions to externally funded economies, whacking consumer confidence and increasing unemployment. On the other hand, in the absense of any significant external shock, continued stagnation of house prices – the long ‘slow melt’ scenario – is possible.

The other great risk, that negatively geared investors get fed up with losing money and bolt for the door en masse, hasn’t yet happened in New Zealand, though it remains a danger. Crucially, as you can see in the charts above, the New Zealand market has managed a slow melt through a period when interest rates only fell.

For the Australian housing market,  significant house price falls are possible – particularly if China’s economy experiences a hard landing or the commodities boom persists long enough for interest rate pressures too get higher than they are today. Still, a prolonged period of house price stagnation in the absence of these shocks is equally possible.

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Unconventional Economist
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  1. Robert Sherlock

    Japan spent the last few decades slowly deflating. But I think the main difference is that Japan went out and purchased real assets with the equity of their property bubble, example Australia’s number 1 exporter “Mitsui”

    Australians did not get their equity and purchase back their resources instead either purchased consumer items (Cars, pools, patios) or purchased more housing.

    • “.. or more housing”

      I wouldn’t say they purchased more housing, they just paid higher prices (and incurred greater mortgages) for the same housing stock.

  2. Its interesting that New zealand did not enter negative growth but Australia at the moment is?

  3. we are much deeper into “properties”. This is too much emotional for a slow deflation in Australia. Not to mention: much bigger debt and much larger economic slump in front of us.
    We might already be in a recession – two quarters of negative growth

  4. The question that I am mulling over at the moment is what does a responsible saver do in the event that the RBA starts slashing rates to prop up an ailing housing market? In this situation, with rates going to shit and inflation going up, where do you put the money from your savings/TD accounts?

    • I second Jason’s question.

      What strategy would you suggest to the FHBer who has a reasonably sized cash deposit who wants to preserve the wealth that they do have?

        • Sally beat me too it..

          On a more serious note, since you said they are a FHOB they are buying the property to live in. I dont see a problem with buying a property to live in as long as you do not leverge to the hilt.

          Buying property to live in = GOOD

          Buying property to Invest and “create wealth” = BAD (in this market)

      • Dont u know…. buy property, prices always go up, buy now or miss out forever, rent money is dead money..

          • …or if the rent you pay is less than the interest you’d be paying the bank for a depreciating asset.

    • If the RBA slashes rates then the Aussie dollar will collapse. Moving into Gold or USD might be a good way to preserve your purchasing power.

    • Sandgroper Sceptic

      I share your frustration! Even with the “high” rates now after taxes and “inflation” you only just earning 0% real return, ie if you are in the 31.5% bracket and achieve 6% nominal on your cash in bank after tax and inflation of 4% (I think it is higher) then you are earning less than 1%.

      One thing that should go up when rates fall are Aussie government bonds. That is one play to the falling interest rate angle and they should be fairly safe unless we experience an Irish situation where property prices crash, banks fail and the government bails out the banking sector but you would have some warning of that coming down the road towards you.

      If you are going to buy a house then try to keep your LVR at 50% or below. That allows you plenty of buffer space should housing prices really fall.

  5. The other issue re NZ and our banking system is that their banks are our banks and the Aust Gov guarantees the NZ banking system.

  6. Buying property long term to live in is ok. Australia cannot be compared to countries such as Japan or even the States with cities dotted all over the continent.
    Japan has a racist anti immigrant mentality resulting in a chronically falling birthrate. Hence deflating asset values. If property prices even remotely begin to reach the edge of a cliff the governmwent will open the floodgates again as they have always done.

    • I agree with your point about Japan and immigration. However, I don’t agree with your argument that Australia can’t be compared to the US because its population is more spread out. The US population is around 14 times larger than Australia’s and, even though its population is more spread out, the major US cities are much larger than Australia’s. In fact, if Sydney was located in the US, it would only represent the 13th largest metro area in the nation.

    • “Japan has a racist anti immigrant mentality resulting in a chronically falling birthrate”

      Erhh, it is a long bow to draw that the declining birthrate is a consequence of their immigration policies.

      • falling birthrate and immigration, I see no link. I think the combo of both is what he/she meant. The majority of Europe has falling birth rate but is being made up by largely arab/muslim immigration

  7. How many property investors does NZ have…i.e. We have 1.6 million or thereabouts, so that is why flat prices will cause a sharpe crash whent he specualtors run to the gate and bail out.

    But what about NZ? how many landlords do they have that are losing money on their investments

  8. NZ had the convenience of earthquakes (sorry, insenstive of me) to cut interest rates by emergency levels again. I think we need to be in a recognised and accepted GFC II (or Part II of this one) for the RBA to be able to cut similarly.

    We also have more stock on market for sale, while theirs remains around average (maybe they have accepted the market is soft and now is not a good time to sell your home and this is keeping stock down?)

    • I agree RBA rates are much restrictive than what NZ has. With the level of inflation there ,after tax earnings on savings must be in negative territory.

  9. Price falls aren’t possible – they’re a certainty. Predictions of stable prices for a decade ignore the response of negative gearers to unprofitable trading. They need 6% gains to make steerage. I posted on this May 25:

    I know this is unpalatable for homeowners – particularly the heavily mortgaged – but The Great Australian Land Bubble must end. The alternative of continued poisonusly high land prices doesn’t bear thinking about.

    • hey, i read the article you linked (very interesting) but I was wondering where you pulled the 6% gains needed to make negative gearing a viable investment. Ive been looking for a spreadsheet to punch in figures and find out the gains needed to offset the loss’s made on the property but have not been succesfull. Ill probaly just end up building my own one.

  10. Ιs there any historical data available on how average rent moves (in what direction and at what rate) relative to falling house prices?

    What I’m trying to understand is if a positively geared investment property is bound to turn negative and get a sense of how quickly and by how much. Cant find any data for the life of me, it doesnt have to be Australian.


      • i would imagine its probable that it will be between stagnation and crash or a slight combo of both.
        Hard to forecast govt intervention though…

  11. If this is ANYTHING like the States, hold onto your hat. Both Australian and NZ prices are way out of whack vs. income. It’s going back down to normality in the US though still high after a 27% price correction. Anything >6x median income is a disaster in the making. I’m looking to move to Wellington. US$1mm is an awful lot to pay for a 4 bedroom house that’s freezing in winter. I will happily rent and sit this out. Yeah there aren’t enough houses being built…heard that one before in both the US and UK. Didn’t stop the market crashing – and it would have been much worse in the UK if they hadn’t ridden rates to zero. In the end it’s about affordability. If you can’t afford it, you are staying at your parents or your mates or your siblings.