Rodney Dickens warns of the bear trap awaiting unwary home buyers who gear to the max encouraged by low mortgage interest rates

Rodney Dickens warns of the bear trap awaiting unwary home buyers who gear to the max encouraged by low mortgage interest rates

By Rodney Dickens*

Since early-2009 low mortgage interest rates have disguised the extent to which New Zealand has a housing affordability problem.

Interest rates should remain low while the financial crisis continues to fester, but at some stage in the next five years or so the crisis will have abated enough to allow interest rates to return to more normal levels.

The time it will take for the financial crisis to abate significantly is directly relevant to the length of the fuse on the housing affordability time-bomb.

This Raving quantifies the extent of the underlying housing affordability problem and how much low mortgage interest rates are disguising the problem.

I don’t expect mortgage interest rates to increase significantly any time soon, but when the financial crisis eventually abates there is a real risk that interest rates will increase significantly.

To take this into account this Raving presents three scenarios that provide some valuable insights (that is, that house prices are unlikely to keep increasing more than incomes; that house prices are more than normally vulnerable to increases in mortgage interest rates).

It also warns of the bear trap awaiting unwary home buyers who, encouraged by the recent experience of low mortgage interest rates, gear to the max.

Quantifying the underlying housing affordability problem and the interest rate disguise

The REINZ stratified median house price increased from $114,000 based on the average for the three months to March 1992 to $382,000 based on the average for the three months to July 2012, a 235% increase (black line in the chart).

Three month averages are used to smooth the volatility in the monthly median prices, while the NZ stratified median price released by REINZ is a pretty good proxy for the national average house price.

In isolation, the 235% increase is meaningless. To have meaning it needs to be compared to what happened to the prices of goods and services in general, as measured by the Consumers Price Index (CPI) and to incomes.

The green line shows how much the national average house price would have increased since 1992 if it had increased in line with prices in general as measured by the CPI. It would have increased to just over $180,000 instead of $382,000 or a 58% increase instead of a 235% increase.

Since 1992 the national average house price has increased 4x more than prices in general, which should ring warning bells.

But in countries with growing populations, like New Zealand, it is normal for house prices to increase more than prices in general, just as incomes generally increase more than prices in general.

The blue line in the chart above shows what would have happened to the national average house price if it had increased in line with incomes since 1992. Average hourly earnings, including overtime, from the Quarterly Employment Survey, are used as the income measure. If house prices had increased in line with average hourly earnings the national average house price would have increased to just over $212,000 rather than $382,000, an 86% increase rather than the 235% increase that occurred.

Since 1992 the national average house price has increased 2.7x more than incomes.

Now this really should start to ring warning bells.

However, looking at the relationship between house prices and incomes in isolation is misleading when mortgage interest rates have changed hugely since 1992. The blue line in the above chart shows that the average mortgage interest rate charged by the major banks is currently 5.88% versus 9.3% in January 1992 (right scale).

The black line shows the impact of both changes in the national average house price and changes in the average mortgage interest rate on the affordability of buying the average national house for the average employee.

The black line assumes the following:

(1) in each month since January 1992 the average income earner buys the average house;

(2) he/she borrows 80% of the value of the house:

(3) he/she pays the average mortgage interest rate applying at the time.

The black line shows the resulting annual interest cost expressed as a % of the average employee’s gross annual income. In early-1992 the average employee had to spend 29% of his/her annual gross income to pay the annual interest on the mortgage if he/she bought the average house with 80% debt.

Most recently, the average employee would have to spend 34% of his/her annual gross income to pay the annual interest on the mortgage if he/she bought the average house with 80% debt. So in interest-cost terms there isn’t currently a major housing affordability problem. Certainly not compared to the situation in 2007 when the average employee had to spend over 60% of his/her annual gross income to pay the annual interest if he/she bought the average house with 80% debt. But the moral isn’t that there isn’t an underlying affordability issue (and two negatives do make a positive in this instance).

The moral is that the financial crisis, which is largely behind the low interest rates, is helping disguise the underlying problem.

This chart provides another way of quantifying the underlying housing affordability problem that is currently being disguised by super-low interest rates and will continue to be disguised for some time. There are two lines in the chart, but they move in perfect synchrony because they each use income as the denominator and because proportional scales are used in the chart.

The black line, right scale, shows the national average house price as a multiple of the average employee’s annual gross income.

In early-1992 the average house cost 4x the average employee’s annual gross income. At the peak in 2007 the average house cost 8.6x the average employee’s gross income and most recently it cost 7.2x the average employee’s annual gross income.

There is still a massive underlying housing affordability problem (i.e. there is still a ticking time bomb). But it probably won’t raise its ugly head again until mortgage interest rates eventually increase to more normal levels.

The thick, light blue line hiding behind the black line shows the same thing but from a different perspective. It assumes the average employee buys the average house each month and it shows the deposit (20% of the value of the house) as a percentage of his/her annual gross income (left scale).

In early-1992 the 20% deposit was equal to 80% of the average employee’s annual gross income. At the peak of house prices in 2007 this had increased to 171% and most recently was 144%. Assuming the average employee pays a 25% tax rate and can save 10% of his/her after-tax income per annum, the time needed to save a 20% deposit to buy the average house has increased from 10.7 years in early-1992 to 19.2 years currently.

At the peak of prices in 2007 it would have taken 22.8 years. Super-low mortgage interest rates are largely disguising the housing affordability problem in terms of the interest outlay for the average employee buying the average house. But this doesn’t overcome the dramatically larger hurdle would-be first home buyers now face when it comes to accumulating a deposit. The specifics I used above won’t be relevant to all would-be first home buyers, but they help quantify how dramatically things have changed over the last 20 years and especially the last 10 years in terms of how long it now takes would-be first home buyers to accumulate deposits. This applies irrespective of whether the target for would-be first home buyers is a 20% deposit or a 10% deposit.

The BNZ-REINZ monthly survey of real estate agents that Tony Alexander writes is useful in helping assess how far we are down the track in terms of would-be first home buyers having saved the larger deposits now needed relative to incomes. In the last year it has reported a significant increase in first home buyers, which has been partly helped by Kiwisaver. To access these useful monthly reports use this link.

But I suspect that many of the first home buyers entering the market don’t realise the bear trap that awaits them down the road if they haven’t been conservative in the amount of debt they have taken on board.

The ticking time bomb of housing affordability

As discussed in our monthly economic reports, the financial crisis is a long way from over (for info on these reports visit http://www.sra.co.nz/index.php/interesting-times).

The best international research I have read on the topic suggests that when a debt crisis is eventually resolved a period of strong economic growth emerges, which was NZ’s experience in the mid-1990s after crawling out of a debt and inflation crisis. And with strong economic growth comes significant interest rate increases, as happened in NZ in the mid-1990s.

It therefore appears to be a question of when not if interest rates will return to more normal levels, although it is too early to push the panic button.

In the Housing Prospects reports we predicted that house prices would increase this year and we expect the upturn to continue into next year. Since we commenced business in 2006 we have provided clients with advance warnings of every upturn and downturn in house prices, so we are confident that it is too early to hit the panic button (see http://www.sra.co.nz/pdf/HousingProspectsSample.pdf for an assessment of our track record at forecasting house prices and housing market activity). But it is useful to preview what may happen when the veil of affordability provided by super-low interest rates is removed.

Predicting what will happen on the financial crisis front is extremely difficult, if not impossible. This means that any predictions of interest rates should be treated with lots of scepticism. So rather than predict the future for interest rates and the housing market I provide three scenarios that help highlight the implications of a significant increase in mortgage interest rates over the next five years.

All three scenarios assume that the average mortgage interest rate increases from 5.88% currently back to the average rate of 8.12% experienced since 1992 by September 2017 (see the light blue lines in the three charts on this page, right scales).

Scenario 1 (above) assumes that life goes on as normal with house prices and incomes both increasing at the average annual rates experienced since 1992 (i.e. 6.4% and 3.0%, respectively). If this occurs the average employee would need 55% of his/her gross annual income to pay the annual interest bill on a mortgage equal to 80% of the value of the average house by September 2017 versus 34% currently (top chart).

This path leads to a housing affordability time bomb.

This isn’t to say it won’t happen, at least in part. But if we head down this path for any length of time a subsequent significant fall in house prices is inevitable, just as happened after housing affordability last became a massive challenge in 2007.

Scenario 2 (above) assumes that house prices and incomes increase at 3% per annum, which is the historical average rate of growth in the measure of incomes used in this analysis.

This means that housing affordability remains the same relative to incomes as is the case currently.

But with mortgage interest rates increasing, the annual interest cost of buying the average house with 80% debt would increase to 47% of income by September 2017 versus 34% now. Again, it can’t be ruled out that we go down a path like this for a period. But the constraint of housing affordability would eventually kick in and result in house prices increasing less than incomes (that is, if mortgage interest rates eventually return to around the historical average rate then house prices will probably increase less than incomes).

Scenario 3 (above) looks at things from a different perspective. It assumes that mortgage interest rates return to average and that incomes grow at the average rate of 3%, which is the same as the other two scenarios. But it assesses what the average house price would have to do to keep the annual interest cost associated with buying the average house with 80% of debt fixed at the historical average of 34% of annual income. By chance, the current annual interest cost of buying the average house with 80% debt is equal to the historical average of 34% of income (after rounding).

For the annual interest cost to remain fixed at 34% of income, the national average house price would have to fall from $382,000 currently to $326,500 by September 2017 (i.e. a 15% fall). It is extremely unlikely that the national average house price will fall 15% over the next five years.

But Scenario 3 is useful in highlighting the vulnerability of house prices to rising mortgage interest rates because the current starting point is one in which house prices are still extremely high relative to incomes.

Scenario 3 shows that even if incomes increase at the historical average rate over the next five years it makes only a little dent in the underlying housing affordability problem, leaving house price more than normally vulnerable to increases in interest rates. All three scenarios highlight that the underlying housing affordability problem is still large.

This means it will probably take quite a bit longer than five years for some form of normality to return, while whatever occurs it won’t happen in the neat, straight-line fashion shown in the scenario charts.

The bear trap that lies ahead for unwary house buyers

People almost invariably base their expectations of the future on relatively recent experience.

Mortgage interest rates have in general been below 7% for the last three years. Consequently, I suspect that many recent home buyers will have geared up on the assumption that mortgage interest rates won’t increase much (i.e. won’t increase above 7%).

But the current situation is unusual and won’t last indefinitely.

The recent experience is also that borrowing floating or relative short-term fixed rates has worked best and reflecting this 80% of total outstanding bank mortgages were either floating or fixed for less than one year based on the latest data supplied by the Reserve Bank, while a massive 95% of outstanding mortgages were either floating or fixed for less than two years in July (as in above chart).

The focus on floating and short-term fixed mortgages may be quite rational for minimising interest costs over the next couple of years. But if this remains the case it means lots of borrowers will get an unpleasant surprise when interest rates eventually return to more normal levels.

Home buyers who gear to the max over the next couple of years on the assumption that interest rates won’t increase much face the risk of a disaster.

Again, recent experience has undue weight in the decisions people make.

This means it is almost inevitable that a reasonable portion of home buyers over the next couple of years will unwarily borrow too much and not fix for long enough.

This group risks having an unpleasant encounter with a bear trap when interest rates eventually increase to more normal levels.

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* Rodney Dickens is the managing director of Strategic Risk Analysis. See more detail here.

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

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Good appraisal. Absolutely agree it's a trap. Absolutely sure the banks are hoovering what incomes there are, and will deal with the repossession sales later. Probably to the same folk, after soaking a rental off them, post-default.
 
But
:  "The best international research I have read on the topic suggests that when a debt crisis is eventually resolved a period of strong economic growth emerges, which was NZ’s experience in the mid-1990s after crawling out of a debt and inflation crisis. And with strong economic growth comes significant interest rate increases, as happened in NZ in the mid-1990s."
 
There's better around. If we get 'strong growth', it'll only be off a lower base, and the later it starts, the surer it is that we won't 'top' what we've already experienced. This time it's different.
www.zerohedge.com/.../chris-martenson-trouble-money
 
So we will likely see inflation/QE, being the only tool available to avoid mass defaults. Be an interesting cross-over period where your house is worth a loaf of bread.......

Keep renting.  Buy your house from the bank after the default.  Those will be the real auctions, worth attending.  A tulip bulb auction is not worth attending.  All sheep led to the slaughter. 
 
 

The bounce in house prices in the 90's, was largely driven by interest rates, same as it was in America.  Interest rates halved, and house prices doubled. Then the crash. 
Then interest rates went down again, to where you can now get a 3% mortgage, locked for 30 years!  Yet nobody is buying!  And house prices are relatively flat!
So, assuming interest rates do go back up, the law works in reverse, house prices go down because the payments are less affordable. 
The other option is interest rates go down further- this is what I think will happen- until they can't go down any more, and that when the "house is worth a loaf of bread" scenario plays out.  Interest rates reflect risk, and what happens when other countries lose faith in your government.  For instance, would you invest your money in a nice Spanish bond?  How about Greece?  What interest rate would you accept on your hard-earned money? 
Is Aotearoa that much different?  Are we really a good investment, as a country?  Doubtful.  Too much debt, just like OZ, whose great ride is coming to an end, along with their iron ore prices. 
Prices go up and up, and up again, until buyers finally save "stuff it" and LEAVE the market!  That's how it happens!  The party ends, and people GO HOME!  They LEAVE, like a flood receeding. 
Like the iron ore story says- it's a "buyer's strike." 
 
The property market simply went away, in America.  That happens when people's fingers get burned- they swear "never again."  Just like NZ and the stock market in the 80's.  Everybody made property their favorite investment after that. 
It's only an "investment" if it returns your money, plus a profit.  To do that requires a greater fool to buy your property, when it comes time to sell.  Who will buy your overpriced cracker-box, when it is time for you to retire? 
 
In America, the wind was taken out of the market, just as it is here.  With thanks only to Chinese politicians, arriving with pocketfuls of stolen money.  Like citizen Liu or other "naked politicians"
I think it no coincidence that the cities enjoying the boost, like Auckland, Vancouver, Sydney, happen to have direct flights from China.  So upon arrival, deposit cash with the closest property they can find.  These people are the foundation of your "investment"- with stolen cash.  It's temporary. 
So the circus is in town, but the circus eventually folds its tent, and leaves.  The tent comes down, trapping those who forgot to exit when they had the chance. 
 
 

Conveniently the charts all start at 1992 just after interest rates moved from the 15-22% level to somewhere around 7-8%.  House prices obviously have corrected for the different interest rate environment and inflation rates.
 
In 1987 Christchurch a good modern 200m2 family home cost about $220k with close to 20% mortgage rates.
 
In 2012 Christchurch an equivalent good modern home costs about $500k (one 25 years newer).  Interest rates are about 6%.
 
Therefore mortgage payments on an 80% home loan are actually less today than 25 years ago in NOMINAL terms!
 
In real terms today's mortgage costs half the amount!
 
AND you can lock in the rate for 5 years!
 
Some people need to stop whinging!

Chris_J - some good info. Here's a link that also provides some info relating back to costs and income in 1987.
 
http://www.infometrics.co.nz/article.asp?id=5648
 
Income tax was higher in 1987 but GST was cheaper at 10%.  Didn't have all the compliance costs that housing has today, there was really only the building permit and dealing with the building inspector and there was no RMA  to deal with back in 1987. 
 
You could also buy old houses to get on the property ladder back in 1987 as they were valued far cheaper than what a new house was.  The value difference between old and new housing today just isn't there. House values were also more closely related to rental incomes achievable at the time. High interest rates had to be factored into the rent pricing in 1987.

The point not made above is that, amongst first home buyers at least, that 20% equity is an oft unattainable goal. 10% is the new "goal" with plenty jumping in at 5%. Add to this things like Kiwisaver, the Kiwisaver first-home hand-out and Welcome Home Loans, and a SIGNIFICANT proportion of new-home owners are jumping into the property market with no actual money down, simply on the basis that they can "own" their own home for about the same price as renting (at current interest rates).
 
These are the people that will be the first to come unstuck, and they'll have done so as they're a generation of people who've never known property to do anything other than make piles and piles of money over a given 5-year period. Property is always a good investment in the long-term, but long-term to many of the current crop of first home buyers is as little as 5 years!
 
I just hope and pray that when the vust does come, the government doesn't step in and hand out grants and direct assistance to keep people in their own homes, which will use taxpayer money to prop up property values instead of allowing them to reach a true market level. Sadly, both National and Labour realise that the large majority of their voters are home-owners (moreso National) and I'm pretty sure WINZ will launch a massive number of "accommodation supplements" so prop up the first-home speculators that didn't do their homework and lost when the inevitable eventually happened.

Another example of how property is favoured over everything else. Say you become unemployed with $100,000 in the bank or a share portfolio but you are renting. The govt rightly expects you to use your liquid assets up until you have reached $15,000 before you can claim a benefit.
 
If you have a house with a mortgage but only $5,000 in the bank, there is no obligation to sell your house in order to claim a benefit, even if you had $200,000 of equity in the property. The govt will even support your mortgage payments with a supplement to whatever benefit you are on.

Another reason why we need the Big Kahuna - that's a perfect example of the perverse incentives of the present tax and welfare system.
 
To add further comment - you'll also likely then qualify for a rates rebate via your local council .. so the subsidy madness extends to property tax as well.
 
.

MIst42nz - are you sure about this? I know of several families (large in size) that received an enormous amount of mortgage assistance in our old home town.  There was more money going into these households than what the locals could earn in a week.  I know of one unemployed couple who had 6 children and they built their house on a lifestyle block while picking up the benefit. 

True, my old landlord, with whom I was flatting, was collecting my $150 a week of (undeclared) rental income, and WINZ was paying the vast majority of his mortgage for him as well as giving hom the dole. He stayed on the dole for 20 months, went on holiday to Egypt and Europe, and was turning down jobs under $55k because, to quote him "It's not really worth getting up early 5 mornings a week and going to work for that when you consider I'll have to start making mortgage repayments again". That bloody boiled my kettle that did.

He also had a "bad back" so used that to turn down a bunch of offers, and he had a very narrow skill set, which tended to make him a little less employable. He was milking it, until the right job opportunity came along, at the taxpayer's expense.

Curious as to what point you have to sell the house? Straight away before access to benefit? 3 months? 6 months? What if your house is in a trust. Do they ask if you are a beneficiary of a trust and ask to see the trust's assets?
 
Or worse in a small town where you can't sell your house or only sell at a loss.

WTF - absolutely correct! The system is a flippin shambles and people are not treated equally. 
 
I know of a few people who were once on ACC for accidents they had had. ACC abandoned/denied/kicked them off and told them to apply for a sickness benefit. Some of these people made the mistake of selling their homes to pay for treatments and also to fight ACC over their case. They found they could not get a sickness benefit because they had the cash and they could not buy a house because they couldn't borrow as they had no income. 
 
People with cash are heavily penalised and those with bricks and mortar have protection.

So that's a vote for the Big Kahuna then?
:-)

I like the Big Kahuna concept especially the guaranteed minimum income but worry about the complexity of calculating and collecting the tax on capital. Wonder if a universal financial transaction tax of 5% on every transaction in and out of an account, collected automatically by the banks like RWT wouldn't be easier. Tax everything at same rate. Income, company, land. Would also pick up a lot of the estimated $10b+ black market. Maybe if enough was collected do away with income tax  and gst altogether. Get rid of stupid little taxes like FB and do away with depreciation schedules and the need for accountants. Buy a $1m house, thats $50,000 to the govt from the buyer and seller. But have a 20% tax on trusts to discourage people hiding assets away from creditors.

I agree wtf,
Scap every single tax that we have and replace it with one single flat tax of 5% every time money changes hands and scrap ALL tax deductions.
When you get wages or salary 5% tax reguardles of the ammount.
Run a business then you pay 5% on your sales and no deductions for expences. If you want to pay millions on adverts, fine, but they are not tax deductable. Want to pay a million dollar salary and run lots of company cars, fine, but not tax deductable. Every single business will be in the same boat so you will have fair competition.
Sell your house, fine, you pay 5% tax on the money you recieve.
Sell shares, fine but you pay 5% tax on the money you recieve.
Send money overseas, fine but you pay 5% tax.
The only exemtion would be bank deposits but the interest would pay 5% and supperan payments would be tax free.

Kate - not so sure I agree with the Big Kahuna. While I applaud them for putting out a new and alternative system, I don't believe it is fair (I have not read the book only read the online information).
 
The Big Kahuna doesn't get rid of the inefficiencies of Govt or its Agencies or downsize these organisations to levels that are affordable.
This concept actually places another layer of compliance on people.
 
If I understand it correctly, debt is taxed. There is an adjustment for the interest component to be deducted from the value of the capital asset - however the CCT appears to apply to the full valuation on land and buildings regardless of the debt level on the asset. A business such as farming might have debt levels of say 80% of which the get taxed on this valuation.
I also note that assets like shares are left out of the CCT, while this would seem an obvious thing to do because of the fluctuations that occur in share prices, I believe this CCT concept has the ability to distort different types of markets.
 
Business's that don't require expensive/extensive land and buildings to operate  will pay very little CCT, while business that needs expensive land and buildings is actually penalised.  The Big Kahuna if ever implemented would only create new market distortions and a new type of inequality in business. For example a business in IT that can be operated from a computer anywhere has low level Capital asset requirements so therefore would not contribute much to this type of taxation.  While these low level Capital asset business's would be contributing via the flat proposed 30% income tax that everyone would pay above the UBI it doesn't appear that their CCT contribution would be of any insignificant amount.
 
 
The Big Kahuna doesn't appear to allow for the annual rate of inflation which is similar to our current PAYE system. 

I've always thought with regard to alternative tax/benefit regimes why the govt doesn't take sample groups from across the income spectrum, from beneficiaries to SME owners and retired people and apply different systems to their financial circumstances for the next 12 months and see what the real effects are and what unintended consequences emerge and how behaviours change. The Big Kahuna and derivatives of it could be one of the tested regimes. 1-2000 peole/households should be sufficient. Or would that be too challenging to the status quo?

Why is it, you people babble on and on and on ................."house prices are going to collapse. blah, blah, blah". In the mean time the share markek goes up then crashes down again, then goes up again and crashes again................... and on and on. Yet not a word from you people about the yo yo share market.
I wonder why?

Um, perhaps because unlike property, nobody actually claims that shares only ever go up or that you can't lose with shares.  Maybe some people did have this sort of attitude prior to 1987 but the crash seared into our collective consciousness the fact that shares are a risk asset and with high returns comes high risk. 
 
The fact is that property is also a risk asset, only slightly less risky than shares (risk obviously varies according to property type/location).  However, thanks to years of house prices trending up with only relatively minor drops many New Zealanders think it's as safe as cash.  A big crash wouldn't be pleasant but it would at least disabuse Kiwis of some of their ridiculous, recency-biased ideas about property. 

Nokia ( NYSE : NOK ) dropped another 16 % , overnight , down to $US 2.38 .........
 
..... a far cry from year 2000 ,  when they traded up to  $US 56 ,  and their products were the dernier cri of cell phones .....
 
At least sharemarket investors are painfully aware that the world keeps on changing .......

The NZ public at large are not sophisticated enough to figure out that they will be screwed if interest rates go up significantly. They will just borrow the maximum that the bank says they can, and the great property scheme will just go on and on, propped up by the government when it falters.  
Until that is, one day of reckoning.  
And then we end up like Ireland. 
When will that be? Your guess is as good as mine.

Trouble is we really dont know who is buying and if its cash or mortgage.
Also I dont think interest rates will rise much if at all....however ppls ability to pay I expect to drop.
 
regards

Another great piece from the always excellent and truly INDEPENDENT DIckens.
There WON''T be another boom, the real question is will prices increase roughly in line with inflation, gradually fall away or crash...
the one thing I don't agree with DIckens on is the expectation of a strong rebound in growth sending interest rates way higher. I suspect WHEN things do eventually pick up, it will be pretty modest, and there will be relatively modest interest rate rises. This, in my view, will prevent a bust. But I think it will definitely limit price increases.
The release of the Unitary Plan allowing more supply to come on line will also limit price gains  

Since the boom is obviously already well underway in Auckland and spreading to Hamilton, I assume you mean there WONT be another boom in Murupara/Hokitika etc.
You might be correct!
 
 

sk,
frankly we dont know why some of Auckland is doing so well, but if you look at Auckland's / NZ's economy it doesnt justify it except for external sources such as the Chch earthquake and chinese buying fast.
regards

I don't accept a boom is underway (other than in some Central Akld suburbs). Median prices in all of Akld are up what, 5-6% since the start of the year???...that's not a boom....if they hit 10% for this year and repeated it next year then yes, a boom is underway. But I rate that as  unlikely   
And remember the more that prices go up in the shorter term, and the more people get loaded up with debt to their eyeballs, the greater the likely downside in house prices with even moderate interest rate increase. The less prices increase, the less likely moderate interest rate rises will bring property down....so either way a prolonged boom is not coming    

You dont know why?
OK here you go:
Floating rates at 5%, severe underbuilding, a decade of buildings to be torn down due to not keeping water out, some internal mig from chch yes.
 
ps- Chinese people dont buy in any of the 5 fasted appreciating value suburbs.
So that theory is out.

Floating rates at 5%, severe underbuilding, a decade of buildings to be torn down due to not keeping water out, some internal mig from chch yes.
Fair points, but to provide some BALANCE, on the other side of the ledger:
- ongoing mediocre economy with poor GDP / income growth
- likelihood of economic deterioration and growing unemployment = more mortgagee sales 
- ongoing negative international migration   
- new Unitary Plan leading to much more development opportunity
 

Can we quantify the underbuilding? no not really....under-building isnt just Auckland and Chch...yet only these 2 are hot.
Leaky homes, same issue its a Nationwide problem not just 2 cities.
Chinese not buying in the fastest appreciating surprises me....they are not stupid, maybe you can present some data?
regards

What are the fastest appreciating suburbs? If they are Grey Lynn/ Westmere etc (ie. inner western suburbs) then I wouldn't expect much Chinese interest there. In my experience the Chinese interest tends to be more pronounced in the "good" school areas eg. Remuera, Epsom, Takapuna etc.

In three years, the property next to me and two others following on have been sold to people of Chinese and Taiwanese origin. That is in Kohimarama, near the Beach. No sign of children, but then again it isn't a "good" school area. They've chopped down trees, thereby giving us a sea view. It's all good, and I expect likely to accelerate as friends visit them and get comfort with being in the area.

Rodney,
To say 5 years is IMHO to short a time frame. I think at best we will stagger on for many years, ie in excess of 10....That however is the least likely scenario.
The most likely (90%+) is we plunge into a greater depression aka 1929. The share market shock of then will be repeated but I think given today's technology a lot faster is quite possible. Take the USSR, it lost 25% of GDP in one year, I cant see the USA being immune to that same effect.
To see interest rates and OCR recover we would have to see a clearly booming economy and without oil that just isnt going to happen for long and significantly.....so for myslef I dont expect to ever see a high OCR except if the RB is Q is suicidal.
regards

not much bull from the bulls on this topic, probably because the logic and maths of Dickens, a preeminent independant (as opposed to Bank) economist is damn hard to counter  
So lets summarise...
Dickens provides three scenarios, scenarios 1 and 3 would likely see a strong correction in house prices, scenario 2 would see small annual increases, albeit less than income growth  
Hardly boom times
I would add another scenario, which is that the strong recovery never comes, interest rates stay similar to what they are now (or slightly lower or higher), but the potential house price inflating effects of low interest rates is balanced out by the economic weakness and higher unemployment limiting demand

From Tony - like him or not - these are statistical facts:
(you can see the graphs in todays BNZ update)
Over the past three months the sales to listings ratio was 25.5% compared with 23% three months ago and
16.4% a year earlier. This is the highest sales to listings ratio since May 2007 and in fact the fourth highest such ratio since 2005. As I have long highlighted here, there is a very good correlation between movement in this ratio and changes in the annual rate of change in Auckland dwelling sales prices.
A clear gap has opened up between the ratio and prices. Therefore the chances are that in the next few
months prices will rise quite strongly following an 11.5% gain in the past year.
 

Is that average prices (flawed measure) or median prices?
Tony is a conventional bank economist - clearly not independant with an obvious vested interest in spruiking house prices, and like most economists unable to shift out of his conventional view of the world to explain the complexities and new uncertainties of the new world order    

Cant believe you are still resisting the truth.
TA (and me) has been far more accurate than yourself on this. But you are right on one thing - it's a rather boring subject and some people are making a packet regardless of the polemics.
SK
 

bullshit. 
TA never predicted the 2008 slump (-11%). That's often ignored. Did you?
Because I did predict it
Yes the increase this year has been more than I expected (I predicted median prices in Auckl up by 2-3%, looks like they might go up 6-7%) , but hardly out by a long way
Let's see where house prices are in 3 years
 

MIA, Central Auckland prices are realistic up 30% from 2008.  The maximum fall in monthly REINZ medians was from from $352k 11/07 to $325k 1/09, but this includes the monthly variation which is obviously volatile.
 
Over 3 month periods it was $350k to $328k (-6.3%).  Currently $368k (+12.2% from the 2009 low)
 
Medians over 12 month periods were $347k to $335k (-3.5%)
 
http://apps.reinz.co.nz/reportingapp/default.aspx?RFOPTION=Report&RFCODE...
 
Nominal declines of about 6% when you iron out normal fluctuations.  Versus gains of 12% from the lows.  Using "real" terms (accounting for inflation) is irrelevant as your purchase price does not vary with inflation.
 
Everyone knew a market slow down was coming in 2007.  It didn't mean you had to sell up.  Indeed properties I bought in 2007 now look like bargains worth up to 50% more.
 
Buy right and get on with it.

ChrisJ - if you look at the divergence graph (incomes v prices), can you see where the underwrite is, to justify the spread? Where are your tenant incomes coming from? That divergence will be - in small part, latterly - low interest rates, but will they continue? Or will they track the inevitable inflation (which is inevitable in an increasing-scarcity world)?
 
Seems to me, we had a bubble which didn't burst, and which is being blown again. Pretty obvious from that graph. Bigger it goes, bigger the inevitable mess.

The latest QV Property Report was released on the 5th of September and it included a chart with the top ten best performing suburbs since the previous peak in 2007.
Here are the results with percentage increase since the previous peak.
1 Grey Lynn 23.5%
2 Westmere 22.1%
3 Kingsland 18.8%
4 Sandringham 18.4%
5 Ponsonby 17.2%
6 Epsom 15.3%
7 Mt Eden 14.9%
8 Pt Chevalier 14.0%
9 Ellerslie 13.7%
10 Western Springs 13.5%

Here are the buyers of your properties:
With thanks only to Chinese politicians, arriving with pocketfuls of stolen money.  Like citizen Liu or other "naked politicians"
The bounce in house prices in the 90's, was largely driven by interest rates, same as it was in America.  Interest rates halved, and house prices doubled. Then the crash. 
Then interest rates went down again, to where you can now get a 3% mortgage, locked for 30 years!  Yet nobody is buying!  And house prices are relatively flat!
So, assuming interest rates do go back up, the law works in reverse, house prices go down because the payments are less affordable. 
The other option is interest rates go down further- this is what I think will happen- until they can't go down any more, and that when the "house is worth a loaf of bread" scenario plays out.  Interest rates reflect risk, and what happens when other countries lose faith in your government.  For instance, would you invest your money in a nice Spanish bond?  How about Greece?  What interest rate would you accept on your hard-earned money? 
Is Aotearoa that much different?  Are we really a good investment, as a country?  Doubtful.  Too much debt, just like OZ, whose great ride is coming to an end, along with their iron ore prices. 
Prices go up and up, and up again, until buyers finally save "stuff it" and LEAVE the market!  That's how it happens!  The party ends, and people GO HOME!  They LEAVE, like a flood receeding. 
Like the iron ore story says- it's a "buyer's strike." 
 
The property market simply went away, in America.  That happens when people's fingers get burned- they swear "never again."  Just like NZ and the stock market in the 80's.  Everybody made property their favorite investment after that. 
It's only an "investment" if it returns your money, plus a profit.  To do that requires a greater fool to buy your property, when it comes time to sell.  Who will buy your overpriced cracker-box, when it is time for you to retire? 
 
In America, the wind was taken out of the market, just as it is here.  With thanks only to Chinese politicians, arriving with pocketfuls of stolen money.  Like citizen Liu or other "naked politicians"
I think it no coincidence that the cities enjoying the boost, like Auckland, Vancouver, Sydney, happen to have direct flights from China.  So upon arrival, deposit cash with the closest property they can find.  These people are the foundation of your "investment"- with stolen cash.  It's temporary. 
So the circus is in town, but the circus eventually folds its tent, and leaves.  The tent comes down, trapping those who forgot to exit when they had the chance. 
 

Best performing.
 
Interesting turn of phrase.