The myth of the housing bubble
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 on Budget day, but I am convinced that while we have an on-going housing shortage, the housing bubble is but a myth.
The bubble theory is controversial, makes for great press and is an interesting topic for discussion. I've listened to numerous clients, bankers, fellow accountants, valuation experts and other professionals debate the bubble theory from both sides and can conclude – as an adviser, a homeowner, and a long time property investor - that it is flawed. The housing bubble does not exist in the current market.
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 1930’s. The New Zealand building sector has traditionally been slow to respond to the rising demand for housing, so the initial market response has been to push up the prices of existing housing stock.
Commentators agree that housing supply did not keep up with demand in the 2000’s. 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 in anticipation 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 as to why we are in an unsustainable bubble.
The traditional method of calculating housing affordability (as a multiple of the average wage) is outdated and should be considered in conjunction with other ways of weighing up whether people can afford their mortgage or rent.
Times have changed a lot since we began measuring affordability in this manner - we now live very differently.
There are a lot more DINKS (double income no kids), SINKS (single income no kids) MINGLES (middle-aged singles) and one-person households. 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 factors all have the effect of increasing our disposable income from what it has been historically.
Certainly, there are times when prices decline in some areas and people lose money on their homes and/or property investments. These are simply market corrections to a long proven upwards trend.
A house is a home, not necessarily a financial investment to be traded while the markets rise and fall. It provides not only shelter, but is often the hub of the family, a place of pride, safety and contentment.
The Government should remain focussed on the important issues in this year’s budget rather than tinkering or introducing other measures that may de-stabilise confidence in the housing market.
Real estate is not an investment bubble - it remains the Kiwi dream.