By Alistair Helm*
The weekend opinion piece by Bernard Hickey published on the NZ Herald (Bank blows bubbles) and on interest.co.nz 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.
This situation deserves some analysis of the underlying numbers which are public data from REINZ to bring some perspective.
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 past 5 years 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 equating to $176,775 in April 2001 prices started to rise and by the zero month of 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, since then to Feb 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 it 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 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.
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 is constraints 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 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 realestate.co.nz.
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 they started to rise in 2001 and kept on rising to peak at over 120,000 sales per year in 2004.
At this time sales are rising – certainly not as fast nor at 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.