There is no bubble if incomes from those who can afford it keeps pace with demand if supply stays low

There is no bubble if incomes from those who can afford it keeps pace with demand if supply stays low

By Eugene Sparrow*

So here we go again.

We are hearing repeated cries that the New Zealand housing market is in a bubble that’s about to burst, that houses are grossly unaffordable in Auckland and Christchurch, that land values are escalating out of control and costs of construction are unbelievably high.

There have been calls for the Government to address these issues, but I am convinced that although we have an ongoing housing shortage, the housing bubble is a myth.

I’ve listened to numerous clients, bankers, fellow accountants, valuation experts and other professionals debate the bubble theory from both sides and conclude – as an adviser, a homeowner, and a long time property investor - that it is flawed.

Housing supply has been an issue in New Zealand ever since European settlement and was one of the key drivers for the development of the first Labour Government’s state housing policy in the 1930s.

The New Zealand building sector has traditionally been slow to respond to rising demand for housing, so the initial market response has been to push up the prices of existing stock.

Commentators agree that housing supply did not keep up with demand in the 2000s.

Some of the excess demand pressure eased following the global financial crisis in 2007/08, as households focused on reducing debt.

At the same time, the supply of new housing has also slowed.

Developers lost access to mezzanine finance following the collapse of the finance companies, and many developers opted to land bank, anticipating that prices would recover.

So here we go again – the current undersupply will result in further pricing pressure while we build and subdivide to bridge the supply gap.

The unaffordability of New Zealand houses is another key argument put forward to support the bubble theory.

The problem with this claim is that the traditional method of calculating housing affordability (as a multiple of the average wage) is outdated.

It should really be used only in conjunction with other ways of weighing up whether people can afford their mortgage or rent. For example, there are a lot more DINKS (double income no kids), SINKS (single income no kids) MINGLES (middle-aged singles) and one-person households than when the average wage first began being used as an affordability measure.

We also have more sophisticated income structures, where wages are often supplemented by other profit streams from businesses such as dividends and interest received from companies and family trusts.

These all have the effect of increasing average disposable income from what it has historically been.

Certainly, there are times when prices decline in some areas and people lose money on their homes and/or property investments.

But these are relatively minor market corrections to an overall upwards trend.

The Government should focus on important issues rather than tinkering or introducing measures that may destabilise confidence in the housing market.

Real estate is not an investment bubble – it remains the Kiwi dream.


Eugene Sparrow is an Auckland partner at accounting firm Grant Thornton. You can contact him here » This article was originally published in GT's Business Advisor here.

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I suppose if you define "affordable" as just simple ability to repay mortgage, then any price is "affordable"....even if you have to eat bread and drink water only . Just to ensure that you pay your loan to the bank first...

I hope Grant Thornton are horrified one of their Partners is loudly stating there is no housing bubble or affordability issues in New Zealand.  Why anyone in his position would make this a pet issue is already questionable but to go on and make statements that are either 1) intellectually weak or 2) intellectually dishonest goes to the markets perception of the calibre of people employed by Grant Thorton.  I had already perceived them as a lower tier accounting firm - now I'm certain of it.

Here is a link to the Untary Plan: 
If you actually read it you will note that most of the gossip and Herald articles about it are complete rubbish. Your "... can be 15 metre multilevel buildings across 40% of Auckland suburbs" is nowhere in the Unitary Plan. 
Most projects will be harder to consent under the UP. MU and many commercial zones are losing density (Like the CBD and Newmarket).

Eugene is completely out of touch with reality. Hardly surprising that he can't relate to housing affordibility - he earns six figures as a partner at a mid-tier accounting firm.
As "a fellow accountant" who earns about the average wage, with a student loan and a baby on the way, I don't have any sophisticated income structures to pay a mortgage. Even if I did, I would divest of these income producing assets to be able to afford a house. 
If the gist of the article is "don't have kids to afford a house" then I suspect home ownership isn't for me.

Couple of things to remember.
1.   The 'bubble' varies.  Crazy price rises in Central Auckland.  Completely different picture only 20 kilometers away.  And variations of the picture across the entire country. 
2.   Prices to buy are rising.  But rents are not rising much at all.  Which torpedoes the idea of a supply shortage.

I think that the fact rents aren't rising just means that there are a whole lot of cruzzy landlords out there making a killing with untaxed, and unrealised, capital gains.
If the rent on a $600K dwelling is say 5% - $600/week - and the CAPITAL GAIN is say 20% - $2400/week - another $50/week rental income is peanuts.
Not all land lords want the taxable revenue - much more straightforward to get the untaxed capital gain. (not without risk though!)

Not the way I see it James.  Been a landlord and been a tenant and seen hundreds of letting situations.  Landlords are thinking and asking a price very finely, as tenants are calculating on a number of factors when they make a choice.  Balancing off very fine factors to arrive at a price.
Rent levels are set by a market too I believe.  There are very few properties that will stand out of that bunch, and have low rents because the landlord is relaxed.

I don't think landlords are making a choice to turn down the extra 50 dollars. It's quite simply a case of the market not supporting higher rents because every man and his dog has decided to be a property developer and there is plenty of supply and a willingness to negotiate if the tenants are worth it. 

So true. Once you get to the cheap sprawl fringe burbs prices are going down:

Thank you Eugene.  I've been saying this exact thing to people on this site for years.  There are a lot of commentators here saying that there is a imminent crash just round the corner and that no one should buy because in a years time they'll be paying half the price.  This is the worst financial advice anyone could possibly give, I saw the same posts during the naughties and sure enough prices doubled.  When the 2008 'correction' came prices in Auckland only dipped about 10% (afterrises of 120%+).  And now the process is repeating itself and considering the implications of the unitary plan it's likely to be bigger rises over the next few years. 
You are very right about the antiquated measure of "as a multiple of the average wage", along with your points you should add:
- People not starting from $0 (savings from OE, money from parents, inheritance, past house), all these factors mean a person doesn't start from $0;
- apartments and flats are not currently included in the average prices statistics; & 
- cost of property/land as a comparison to international cities. 

So there is no bubble when prices rise 20% year on year!
Would we accept other essentials like food rising 20% every year?
For me the issue is not whether a dangerous housing bubble is about to burst but whether as a society we can make housing more affordable for the benefit of the next generation.


If you define "affordable" for the next generation by housing will be 60%~75% less than its present dollar value, yes.  As Nicole Foss says, and (indeed this guy in a funny way, not the one he measn Im sure) in a Depression its what you are willing or able to if you wages are 50% of what they are now and houses are 50% cheaper there is no real change.......
Personally yes I think this bubble will burst and our kids who have not yet bought will be able to do so far cheaper.  However again, look at Ireland and Latvia, how much debt will we be leaving them to pay back? making payments tax a lot higher...
So its how a dangerious bubble is handled, if its can kicked oh bugger for our kids.

Absolutley correct, houses have always gone up and always will. Nothing to worry about at all. Haha. Shame that the article oozes cognitive dissonance from all corners.

Yeah Right.
We await the next bubble burster. If immigration is pricked or overseas investors are spiked, then there only the need for the 60+ group to need to downsize so they will have some spending cash in their retirement. Who are going to buy those houses?
Perhaps our guest has an answer to that one. They always do until it happens.

The Wheelman has just frightened the horses. Over the coming months you will begin to see whether the bagmen were or are the local runners or the overseas runners

Guest is 100% correct , house prices reflect Demand and Supply in what is the only truly free market in NZ .
No other NZ market is as free from state regulation or price rigging by monopolies or oligopolies ,  as houses are .

  • Its a perfect market as espoused by economic threorists , many properties are sold by a meeting of buyers and seller at an open transparent auction .
  • Full information  is avaialbe to buyers re prices, location , costs of funding  etc
  • There are  basically no taxes distorting prices ( transfer duty  or land tax)  
  • There is no intereferance from the Government in the market ( as GREENLABOUR want to do )

Demand  is being driven by cheap funding , migrants with money , and a flock mentality of "must be on the ladder" .
Supply is constrained  by laws , fees and development costs  and a long lead time to more supply ( land stock)

Absolutely correct for the here and the now.
Things change and they surely will.
The more the market winds up its spring the greater the pressure to release.
Overseas owners anywhere are notorious for unwinding investments to try to preserve what they can.

Martin Hawes had a different take on this issue in his latest Sunday Star-Times column

He does say a year or 2....15~20% a year for 2 years?
"if you don't remember history, you are doomed to repeat it." and as one wag said, if you do you are doomed to watch others repeat it.
I wonder what the straw will be...

I think Hawes argument is a lot more convincing than Sparrow's 

Just a matter of interest after reading Martin Hawes article. Question for those investors out there 


For Auckland, what is considered good return for a investment property, 4%, 5%,6%??? better return for apartment?


The point I give Sparrow is that with thin supply and a polarised RE market there are more people with means to purchase the few desirable properties available..therefore in Auckland and Christchurch the prices continue to go up. Looking at average loan stats..this is not all based on easy credit, (domestically at least).
You really need a breakdown on this market segment and what will affect them to determine if and when the prices will adjust in the forseable future. I suspect such an event will affect everything and everyone.
Call in the NSA for the data...we are part of five eyes after all....

Whilst I disagree with the premise of the article - that there isn't really a problem - I think he makes a good point about some of the limitations of the median multiple measure.
Having acknowledges its limitations, however, I think it still is a good measure and yardstick for housing affordability, and it would be wrong to exaggerate those limitations. 

A bubble happens when sale prices are out of sinc with yeilds. It's when people buy properties based on projected capital gains, driving up prices to positions that have nothing to do with real, natural values.
Are we in a bubble? Look at the sale value to yeilds ratio. End of story.
Look. There is only one real thing to talk about. How much does it cost to build a new home, on an all-up per square metre basis? Solve the problem of artifical cost inflation, and the supply will rapidly build itself away. Everything else is loser-confuser cryptic bullshit.
Quote: "The Government should focus on important issues rather than tinkering or introducing measures that may destabilise confidence in the housing market."
With houses costing 3x as much as they should to build, I would say they need to do much more than "tinker". And this is not a real issue? Jesus Christ.