Alistair Helm examines the record to see if the current housing market is entering a bubble phase

Alistair Helm examines the record to see if the current housing market is entering a bubble phase

By Alistair Helm*

The term "Housing Crisis" has been the standard text of many news articles in the past week - a quick Google search reveals the extent of the coverage and the political mud-slinging.

Now, whether or not there really is a crisis regarding the availability of houses or if we are seeing a bubble in property prices is always a matter best explained and rationalised after the event, never during it.

This leads me to ponder the old adage of "What can we learn from examining history?"

And equally the wise comment "Past history is not a certain predictor of future trends".

However despite these cautionary words it is useful to examine the history of property data, in the context of which, history covers in relative terms a fairly short period; for accurate factual data of property selling prices goes only back to 1992.

Since that time we have had a monthly median sales price reported by the Real Estate Institute.

That's 22 years of data which does at least cover a couple of key cycles, most significant of which in price terms was the period from 2000 to 2009.

During this period of 9 years we saw the national median price (measured on the Stratified House Price Index) to more than double from $174,850 to $344,566.

The key questions is whether the current bull market witnessed since 2009 is in anyway a repeat of history?

Certainly that slope looks very similar and can be seen to some extent to be accelerating over the past year.

To attempt to answer this question, I have compared on an index basis these two periods and overlaid them on the same chart.

For the national picture the chart below tracks these two periods with the 2000 - 2009 period represented by the grey line and the recent 2009 to date represented by the red line.

Into the 5th year of this bull run the national median sales price is up 21%, this compares with a rise of 52% over the earlier property bull run at the start of the last decade. A case of the circumstances looking similar but actually the extent of the rise being nothing like as significant.

However when I thought more about this analysis a question struck me, which is as to whether indexing is appropriate a measure after all a 10% increase on $200,000 is $20,000 whereas a 10% increase on $400,000 is $40,000 and I know which capital appreciation I would prefer to have.

So to answer the question, the capital appreciation over the early part of the last decade representing that 52% increase was $91,250 and the most recent rise of 21% represents an appreciation of $77,821. The chart below more ably demonstrates this.

So there appears to be a lot of similarity in capital gain between the current bull run and the last bull run - half way through the cycle if history were to be repeated, it would seem.

However this is where the rich data available can provide a very different view as to forecasting the coming years as to whether future capital appreciation will match the past decade. For although the national picture shows a striking similarity in capital appreciation thus far the components of the key regional markets highlights a very mixed story.

The REINZ Stratified House Price Index only covers the main 3 metro areas and then provides a figure for the North Island (minus Auckland and Wellington) as well as the South Island (minus Christchurch). Here below are these respective analyses of capital appreciation for the period of 2000 to 2009 and 2009 to date across these metro and provincial areas.


Auckland we all know is cited as the driver of the current NZ property bull market, but would you have imagined for a moment that it is outstripping the performance of the last bull run?

In just over 4 years the capital appreciation of the median sales price is $198,355; after the same period at the start of the last decade it was $132,810.

There was certainly a hesitant start but that capital appreciation has been rolling along at a fair clip for the past 2 years - those two lines are certainly diverging more and more.


It probably come as no surprise to hear that the capital appreciation for the Wellington market is less than Auckland, however the extent to how much lower may surprise.

After just over 4 years the capital appreciation of the median sales price in Wellington is $28,582; after the same period at the start of the last decade it was $84,035.

You could, looking at the chart even question the security of that accumulated capital appreciation - just 4 months ago to amounted to $65!


The Christchurch market, very much as a result of its own set of unique circumstances has been cited as the partner to the Auckland market in driving the bull run of house sale prices nationally.

Well the data certainly bears that out, not quite as extreme as the Auckland market but keeping very much inline with the last bull run. 

After just over 4 years the capital appreciation of the median sales price in Christchurch is $107,982; after the same period at the start of the last decade it was $92,185.

Other North Island

This set of data comprises what remains of the North Island excluding Wellington and Auckland which is a large part of the North Island property market. It does cover the Waikato region including Hamilton as well as Tauranga, the Hawkes Bay, Taranaki, Northland and Manawatu / Wanganui, a very diverse range of property markets.

It will though come as no great surprise to see that these collective markets being more of provincial New Zealand, have not experienced a bull market for the past four and a half years.

Over this period the capital appreciation of the median sales price across these provincial North Island centers is $16,820; after the same period at the start of the last decade it was $67,225.

There is certainly a lot of similarity between the Wellington market and the rest of the North Island excluding Auckland, further reinforcing the fact that this bull run is very centric to the two major cities.

Other South Island

Excluding Christchurch from the South Island still leaves a reasonable property market with Otago as well as the Nelson / Marlbourgh region, the balance of the vast Canterbury region and of course Central Otago comprising that unique market of Queenstown.

This aggregation of provincial South Island has benefited somewhat better in the past four and a half years than their North Island counterparts recording a capital appreciation of the median sales price of $37,426; after the same period at the start of the last decade it was $92,550.

Clearly this region enjoyed a strong bull market in the past bull run, this time however the markets seem more subdued.


The above article was written by Alistair Helm, and is republished with his approval. The article was originally published on Properazzi here

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I don't get it, Why are the squiggly lines superimposed?  Oh well I'm not an economist.  I thought the future housing market would be dominated by the following factors.
1. The Health of the embattled Chinese economy which has the potential to decimate the NZ economy.
2. The continuance or cessation of what Jim Rickards describes as "One of the greatest episodes of capital flight in human history"   (Re:China)
3. The continuance or cessation of our open door immigrating policy which strongly correlates to national house price inflation.  (possibly at the low end sub $400K? nobody has stratified this?)
4. The continuance or cessation of easy QE money in the USA, Japan and Europe.  Which is debasing all fiat currencies and in effect inflating all asset classes.
5. The outcome of the next election which, if Labour wins and delivers on its promises, will not only affect points 2 and 3, but will throw a CGT into the mix.

The squiggly lines are superimposed to show evidence of a linear relationship between the two variables. In this case argueing that capital appreciation.
I have long felt that whenever anyone is comparing percentages, you have to go back and look at the absolute change in raw numbers (in this case capital appreciation). It is the same in cases like imports vs exports, there is a difference in final result between both going up by 5% from the same raw number (continued balance) vs going up 5% from different raw numbers (increasing imbalance).

What two varyables?  He's just extrapolating past capital appreciation to future capital appreciation.   To be fair he does say  "Past history is not a certain predictor of future trends".    

He is arguing that the two variables capital appreciation to date show a bubble pattern differently to the two variables indexed price to date.

With a wages to buy of 6 to 1, when 3 to 1 or 3.5 to 1 is the norm, its hard not to say its anything but a bubble already.

2 speed house price inflation.   Auckland / Christchurch............the rest of the country. 

      Auckland and Christchurch together still holds far less than half of NZ's total population.  A lot of headline grabbing "bubble"  articles over the last few months forget to mention.

Look at Wellington.  Still has the highest average wage in the country....Yet house prices remain a lot lower than Auckland.

So why the 2 speed?
Chch is understandable, there is a genuine shortage.
Wellington, well it has good wages and land restrictions yet the prices are not crazy.
Auckland, the prices are crazy in some zones.  So why?
Huge job growth? nope...
Got to wonder onthe specualtive component and the foreign % of that.

A key variable is missing here - affordability. Values need to be relative to something otherwise they are meaningless. How do average incomes look in comparison to property values over time? How about rents against property values (yield)? I don't think affordabiliy ever corrected back to historic levels, i'm betting we're still in overvalued territory.


Why?  ... Why yes?
I've been following this debate for 5 years now
Nothing has changed in that time. Situation normal.
People keep talking about affordability 3x, 4x, 5x, 6x ... what a waste of time
When you have high-rollers active in the market, with increasing numbers coming in every day, price no object, property in Auckland is no longer a home that will be the biggest expense / asset you will own, where you will live and raise a family and try and live happily ever-after
Houses in Auckland are no longer Homes, they are now Casino Plaques
The high-rollers who are tossing these plaques around do not have the slightest concern about the pain they cause the peasants, or the consequential affordability problems that arise

Agree, and I suspect that money can move on fast as well...
Why? NZ hasnt melted down yet...
GFC2 looks due, and the next and the next, like a buzz saw the fingers will go to one blade, just which one.

Dunno if you've spent much time physically in AKL? - observing what's happening
I don't see it as something that will reverse itself with a GFC MK2
Instead, should that happen, there will be a much greater risk of a Martingale play
We are not alone.
France has a similar problem, with different dimensions, they're a little louder about it
France: Mr Jean-Marie Le Pen said:
There is a demographic explosion in the world and a risk of submersion.
A replacement of (the national population) is under way
However, he added: "Monsieur Ebola can solve the problem in three months."

No, I avoid Auckland like the plague.
When you get to the top of the bubble I think even small shocks to it will cause a reset, and I dont see just small shocks ahead.  
I dont think GFC2,  GFC3 or GFCx are going to be small events. Yes I'll agree we seemed bullet proof during the first one, but there were some external events like OZ was booming, not so now.
Oh and peak oil had soaked in...when it does, and the signs are its beginning to be calculated adequately by more and more I cant see how such house prices can be justified.
Also look at the property gamblers in here, when the running starts unable to comprehend risk, it will be messy.

Hemihua,  prices of property have become "decoupled" from their service value.

It's like a fancy art painting or collectible memorbilia. As long as someone else is willing to pay more, and the current owner can afford to hold indefinitely, then that and only that will set the price.

Rents then rise on demand curve.  Rents, not property prices, are subjected to inelasticity of peoples' ability to pay.   check the wiki for Decoupling.

Auckland was a bubble in 2007 and is now a bubble on a bubble. This is true by pretty much any measure (incomes, rents, historic prices, compared to other countries, housing stock to GDP, housing debt to GDP, etc).
However, as is common with bubbles there are always attempts to explain (1) why Auckland is different and (2) why prices will go higher still. Unfortunately, most people assume past performance as a predictor of future gains.

What is interesting is the similarity with the gold bugs, its not just a % higher but factors of 2 and 3...Gold can get to 3000, 5000!!! I tell you, housing can get to multiples of x2 and x3!!!!
and their analysis of that? none except they own it.

Shows what a highly apathetic country we are; that we don't mind foregoing affordable shelter so we can become a hedge. Sorry, I think what we're meant to call it is all important 'foreign investment'.
Hope most kiwi's have a hedge for the NZ property market! Nope, doesn't look like it.

Low yields, low wages compared with house prices and highly leveraged properties..wages need to go up or prices will fall and I think the latter. Interest rates going up and coming off a low base will have a massive impact. Property at the peak of it's cycle.  "bubble in the making" Don't get left holding the can at the top!

that ssuimes that the house price is based on the renters wage, not the land value of the banked property.

Maybe Auckland's domestically being driven by FOMO (fear of missing out)?  Its certainly not being driven by fundamentals.  From an overseas point of view I think people are terrified of the results of money printing, ie. financial collapse, deflation or hyperinflation.  They will continue to make seemingly irrational investment decisions.  They'll snap up 2% yielding Auckland properties despite the exchange rate risk, it's still better than the counterparty risk from having your deposits in an insolvent bank.  Likewise for gold and silver.   Sometimes I think I'm a permabear and I read to many articles from zerohedge.

I think you're correct about the printing.

However I don't think that FOMO is a price setter, but it does push people to close higher then they'd like.
 Watching other trading markets it's very easy to Hold when Holding cost is low (ie not like current Sell on the NZD:USD) especially when there is very good confidence in prices going up AND your print to create devaluation in fiat "assets"

It is nice to know that I am not the only permabear!

So if history is anything to go by, in Auckland we have 3 years and another 20%+ increase in prices to go.  I don’t think however that past performance should be used as the only indicator of future performance.  This time around we have record immigration, most going to Auckland and record domestic migration into Auckland.  Interest rates are lower now than ever and forecast to stay lower.  Whilst land supply has always been tight in Auckland due to geographical constraints most of the developable land has been built on leaving less than ever before.  Then there is the difficult to calculate effect of the unitary plan and its proposal to intensify; all these factors combined would lead me to guess that this bull run is likely to be significantly bigger than the last. 
I predict that Auckland prices will rise a further 45% over the next three years, peaking mid-late 2017 and plateauing or dropping slightly in 2018. 

great assesment...  never could understand the pessimism that most spout on here.