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Opinion: Alistair Helm disputes the idea that we are on the brink of another property price bubble. You agree?

Opinion: Alistair Helm disputes the idea that we are on the brink of another property price bubble. You agree?

By Alistair Helm*

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.

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.

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 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

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.


Alistair Helm is the chief executive of and blogs on Unconditional

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Looking at both what Helm and Hickey have written, the Helm analysis seems to be more on the mark.

This can apply to the message above:
Why Smart People Fail to Beat the Market
even explaining it......proved to be too difficult.....

That's because the Efficient Markets Hypothesis is a load of rubbish. Markets of any kind ride waves of euphoria and despair. The rational utility calculating man of Bentham and Mills is for the most part a fiction. Human psychology and luck are more important than reasoned analysis.  Applies to property as much as anything. I had friends who lost a lot of money on a Ponsonby villa 10 years ago - just bad luck with their timing. Take any 5-10 year period and whether you make any money on an investment/speculative play will depend mostly on luck - when you bought and when you sold. Move the whole period forward or back a couple of years and the results will be completely different. Mob psychology will overwhelm logic everytime.

I think the point that Bernard was making is that the Reserve Bank did not take appropriate action to stop the bubble in house prices and if we ended up in the same situation now they would just sit on their hands again.  I for one don’t believe the answer is in the interest rates, we need a low NZD and we won’t get that with high interest rates.  What the reserve banks needs to do is regulate the high street banks, 20% deposits required for home loans etc.  AB says this causes distortions, I don’t know what he means by this, the only distortions I foresee would be the exact ones we need.
Only when we stop the average kiwi speculating in property can we get this economy back on track.

20%, I agree on, but Im not aware its within the RB's scope to do so?

Listen to the chatter. You can tell when it's happening. It's happening now. They're back. They're at it again. For the first time since 2007 received a phone call from a person who had a strange accent. Gave his name as Lee? or Li? A tele-marketer. Wanted to know if I was employed? Wanted to know if I owned my own home. Wanted to know if I had a mortgage. The mortgage pushers are on the move again. They ran hot in 2005, 2006, 2007.
Pssssst. Have I got a deal for you. Want an LVR of 110%?

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

I love a challenge - check out the CPI adjusted chart I have added to the article on Unconditional to see that CPI adustment actually only reinforces the argument.

A chart with a % increase/decrease would have been easier to understand, is there a reason why the scales totally different?

The principle of the chart is to esnure that they 2 lines start from the same axis position

Worldwide events will increase the demand for immigration and NZassets by foreigners - property, land, businesses, etc. A government under financial pressure will certainly welcome such developments.
Where does that factor comes into account in your analysis A. Helm ?

Walter , is Bernard now saying that houses are gonna go up 30 % ...... instead of down 30 % .......
..... has his sense of direction failed him , again ?

GBH - “Chart men Bernard” like other experts say a lot during one day, using more unnecessary charts in stead of comprehensive analyses using practical logic.

or to put it another way "
Looking into current developments on many fronts – the world will never recover again, simply because among the powerful in societies ethic and moral requirements and standards don’t prevail

or to put it another way SNAFU

gonz – that sentence is relevant with reality - good on you. You are learning fast.

What about when Greece defaults and a significant number of credit default swaps trigger, and the banks have to find money to make payouts.  What if the off shore supply of money we're using to pay more and more for our houses, dries up?  So many things could happen, so complicated...

Central Banks will print.  Central planning is #winning.

The boom from 2002 - 2007 was certainly due to more factors than just the OCR setting (nothwithstanding it's significance).
This was a period of high net migration. Taxation policy was more favourable to property investment. Boom times in London saw many kiwis go there for their OE, and come back with a stack of NZ dollars to buy property (have many friends who did this). All these factors have fallen away. That only leaves a stimulatory OCR setting.
Look, things are far from booming, apart from central Auckland.   Wouldn't be surprised if a bubble is forming there. As for elsewhere? No way 

also what was the unemployment rate then and now?

yep good point. I think unemployment was circa 5% back then? The general level of economic confidence was much higher then too, there was a general sense of unbridled optimism and confidence. I distinctly remember people talking of a golden era, a boom that would last a long time
so the list, beyond OCR setting, that applied then but not now:
- lower unemployment
- strong business confidence and GDP growth
- high immigration
- the returning OE factor
- more favourable tax settings 
- a median house price to income ratio that was sane, as a baseline

Having said all that, at least the supply response was fairly strong back then. Demand is weaker now but so is supply

We are paying down debt, so the banks are awash with cash, their margins are under pressure, ie their ownly option is to increase the size of the potential borrowing pool which means 95% is the norm.
For a 400k house at 80% you have to find $80k, at 95% 20k, far more doable....or of course you get a bigger house.....this inflates the bottom of the market. Those sellers in turn can now leverage that extra as well at flows all up the chain.....Steve Keen I think lays it out well. It has to stop at some point.....I think its pretty much here and now.....

That's something that ran through my mind a while back, too: all this business of people trading up to bigger and dearer houses must hit a snag at some point. Imagine if some years back you bought a house for $150k, and at the time aspired to a $300k house next. Fast forward a few years and everything has doubled, so you're now sitting on a $300k house (with a tidy boost in your own equity) and your aspiriational house is now around the $600k mark. Yes, your own house has doubled in value, but so has the gap between the two houses. There must come a point when house price appreciation means that even existing home owners simply can't manage to trade up anymore, as the gap is increasing along with everything else. A $150k different might be managable, especially as your earnings increase, but $300k is a very different proposition.
Moreover, it's now common place for both individuals in a couple to work, so it's not like there's an untapped reserve of earning potential for people to use to service bigger and bigger mortgages. Not everyone will want to take on a boarder or housemate, so there's simply not that much give in the system. (To say nothing of the risk when two people are needed to service a loan - it only takes one to loose a job...or get pregnant...and things get very tight indeed.)

That comment is on to it

Exactly. Good old fashioned mathematics means another boom is unlikely (except in maybe some discrete locations / circumstances) for a long time

There is a property ladder, its just the rungs getter further and further apart and a lot of people can't even get on the first rung. Nobody wins except those with additional investment properties and the banks. Funny that.
You're also right about no untapped earning reserves. First stage in maintaining the post war lifestyle was working extra hours, then putting the wife out to work and finally borrowing more. Suppose we could send the kids back down the mines.

Bang on. All the main banks are desperate to get more mortgage customers - it's a key part of their income stream after all - but the tightened standards of 2008 are/were keeping first time buyers out of the market, so they've had to 'relax' the standards a little. They've done the regressions and are comfortable that there won't be as many losses as last time, but with a 5% buffer, it doesn't take much to hit trouble. (Remembering that a R/E Agent's comission is ~4%, so if you sell for the same price you bought for, then you're basically out of your deposit.)
What I've yet to have explained to me is how exactly things are different now? The economy is stable, let's say, but there are still more redundancies to come in the public sector, and house price appreciation is patchy, so can't be relied on to boost thin levels of equity. The banks are no doubt more confident with regards obtaining overseas funding, but I still don't get why things at a local/national level are much different to 2008 when things were suddenly tightened. Perhaps the banks just need those revenue streams and are prepared to take the chance.
(I also remember hearing that wihtout 1st time buyers, the rest of the market slows up, as they need to buy the houses off people looking to trade up, etc, so the whole chain is affected.)
One bank is even running seminars where they suggest that if you don't have sufficient deposit, people borrow money from their parents or use the equity in their parent's home. Disgraceful. Imagine losing your job and then having to tell your folks that they're going to have to come out of retirement to pay for their slice of your mortgage.

"The average man in the street can not afford to buy a house ,he does not even have the 20% deposit required ."
I know, when the banks hand out mortgages with such high loan to value ratios, we could call them 'sub prime' loans.  The people who cannot afford to save for a deposit, well they can have Adjustable Rate Mortgages with a payment option.  The payment option can be less than the interest that's accruing.  Then when everyone can buy a house, the prices will take off and we'll all be very rich. ... Just like the U S of A.  (yeah, there's sarcasm in there)
I find it staggering how much debt people are willing to take on.  Presumably these are people too, who will actually work/slave the rest of their lives to pay for said house (and not have a way to make someone else pay for it).
Gone of the days of paying off a house by the time you're thirty after which you could actually invest in something productive like a business.

Gotta laugh, prices are going to fall, fundamentally too high, wages are too low ratios are out of wack, people leaving the country, NZ is not different, property needs to fall by 30%, all rational reasons for property to fall, I even buy into them.
RBNZ keeps rates on hold, we have a property bubble brewing. What happenned to the fundamentals? RBNZ does nothing causes boom?
The problem with makets is that they are always trying to find equilibrium and while they are trying to find equilibrium the equlibrium changes, bit like me trying to find my socks I know where they were and where they should be, but by the time I went there, the wife may have put them away or not, so I end up on a merry journey usually finding my socks somewhere else.
You can bet on a dead cert, but all the research in the world comes undone when the horse is given a bucket of water before a race.

Ha that chart for Auckland house prices lines up nicely with BigDaddy's $800 rents, maintaining a 5% yield.
The whole thing looks like we are in 2002, not 2003, give it another 12 months and lets see if it is any different this time.

The graphs would be much easier to interpret if both Median House Price lines were analysed using the same axis.  In fact I'm confused as to why they are on different axis's when the idea is to compare the same median price but in different time periods?  Care to enlighten?

I wondered that too.  It looks like the scale of the graphs have been adjusted so that percentage variations will produce the same visual 'blip' of the line.  Eg. a $40k variation on the old period would appear as large as an almost $80k variation on the new period (where house prices are almost double the earlier period).

Eastern suburbs up 22% and people are quibbling over the semantics of a boom?
Bit late for that isn't it?

maybe a discrete boom occuring there, every chance of a bust (or at least a pull back) IMHO

There is no "new" bubble, because the "old" one never fully deflated.
There is enough natural turnover to keep things ticking over, but as Alistair's volume charts show there is thin air under the housing market. Thin air.

Ask not whether the property market is heading for another bubble...ask what the banks that manage the countries finances would want....!

Mr Helm, to strengthen your argument further you could add rental yield to your charts.
I suspect in 2001-2003 rental yeilds were very good, as I know rents did not keep pace by a long shot with house prices during the 2001-2007 boom.
Rental yeilds to this day still don't justify large scale property investment, once they get good again (and they will as rents rise while house prices stagnate) then we will have a base for house prices to rise from.

I agree with some of you that house prices are overinflated and a large correction needs to occur, however I don't see this happening any time soon (not in Auckland anyway), I think this is 3 - 5 years away minimum. Supply and demand along with net migration flows (Auckland) almost ensure this outcome.
The rest of the country tends to follow Auckland, but is more likely to stagnate than grow, for the majority of regions anyway.
People can't afford houses at the prices they are currently, BUT they will continue to find the money as they always have through whatever means. Sometimes this will lead to heartache and forefiture, but none the less will continue to push the market upwards.
As Alistair indicates, this is solid growth, not a bubble.

Charts and trends aside the underlying issues indicate that the housing market is in a funny state.
1 Long term low interests should help cause a bubble
2 Very low house building rate should help cause a bubble
3 The loss of 30,000 houses in CH-CH should help cause a bubble
4 Caution and wage constraints and unemployment are resisting a bubble
5 The relative attractivness of Australia is drawing NZers away faster than the Government can replace them with immigrants
The government and parts of the comunity see ever increasing house prices as a good thing, yearn for a return to the housing bubble and actively pursue measures to facilitate this.  Oposing this is the fact that the ecconomy is so weakened by decades of foolish government and the still ridiculously high housing prices from the last bubble that a lot of first home buyers are precluded.  Most families are barely surving from one pay check to the next and not  accumulating a house deposit.  New home seekers simply cannot afford homes at these price levels and risk bankrupcy when interest rates return to normal levels.  They are locked in this position with ever increasing rental costs and many, correctly, see leaving the country as the only way out.
There simply is not the money in comunity to support a bubble and population loss will be the mechanisim that will maintain the supply demand balance.

You make a good point about the interest rates causing problems when they go up eventually. They might not go up for a few years, but over the course of a typical 25-30 year mortgage, they will definately go up.

My wife and I looked to buy late last year - and as part of our process I'd draft up some family budgets and 'stress test' by upping the interest rate to 9-9.5% and see if we could still manage the payments on our current income. Better safe than sorry, I reckon.

Imagine my surprise, then, to learn recently that one of the main bank's own stress testing is done at 6.10%! Even worse, the uncommitted monthly income they need a potential borrower to have after mortgage and all other expenses are accounted for is a whopping $300/month for borrowers with less than 20% deposit. (I think it's closer to $50/month if you've got 20%+ deposit!) And to top it off, the amount of household debt to household income you're allowed to have is around 5x! (ie. your household earns $80,000 and so the bank would be cool with a combined debt load of $400,000.)

Basically, as I posted earlier, I don't see that there's much give in the system from the borrower's perspectives, so the banks are having to step up and basically let you gear the dickens out of yourselves to get you into a house. A 6.1% stress test is a joke.

Wait for the mortgage terms to be extended next, I reckon. There's not much else they can do - a 5% deposit is pushing it, and interest rates are really low, so about the only option is to extend the borrowing term out to 35 or 40 years. Or perhaps allow more interest-only borrowing (which is basically renting, isn't it).