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Andrew King: Is NZ in a Housing Bubble?

Monday, June 23, 2014

Is NZ in a housing bubble?

Last week, we asked financial journalist, Bernard Hickey, to address key market indicators and discuss whether New Zealand is heading right into a housing bubble.  This week, we put the same questions to NZPIF Executive Officer, Andrew King.  

We asked Andrew

1. What are the warning signs of a growing house bubble? 

2. Do you believe New Zealand (and in particular, Auckland) to be experiencing a housing bubble?  

Andrew King Andrew King - Executive Officer, NZPIF

A bubble situation is not just house prices getting high, it is where fundamentals have got so out of whack that there is a high probability of large price falls. 

In the years leading up to 2008, this occurred in the US when they pumped the market full of cheap mortgage funds and removed requirements for deposits, which dramatically increased demand and prices. Too many houses were then built than was required.  When the cheap interest rates increased to market levels, demand plummeted and there were large amounts of new homes with no buyers.

Do I believe Auckland to be experiencing a bubble?  No.  Auckland house prices are going a typical cycle. We have had low interest rates for a number of years and high levels of migration causing high demand for property.  At the same time we have had low levels of homes being built.  This is a classic case of excess demand over supply and property prices are reacting appropriately. 

The Reserve Bank has implemented LVR restrictions and interest rate rises to protect the market. At this stage we still have a shortage of new building, so there is no over supply.  The Massey University Home Affordability index is increasing, but it is still considerably lower than it was in 2007.

There is nothing to suggest a bubble. In fact there is everything to suggest prices will continue to increase over the next year or two.  Economic conditions are constantly changing, so we will need to monitor the market to make sure the fundamentals are not getting too far out of kilter.

Stay tuned for the next instalment of this series as we put the same questions to Alistair Helm of Properazzi.co.nz.  

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