New Zealand Property Market Bubble

[dhalsun]

The total value of real estate in NZ has more than doubled in past 6 years (Statistics NZ). This has lead to a huge consumer borrowing and spending binge, resulting in lowest unemployment in a decade and huge current and trade deficits. The debt service ratio and household debt is at records highs, savings are at their lowest levels. The Reserve Bank has warned about the trend of easy liquidity through overseas flows being unsustainable and has increased interest rates to moderate the housing price rise. The higher interest unfortunately attract more funds from overseas chasing higher yields resulting in a stronger dollar and continued increase in consumption. The going is good so far, but NZ needs to take a clue from countries that are depending on asset inflation (appreciation) and consumption for growth rather than productivity improvements and investments. The higher dollar and lowest productivity on record does not paint a healthy picture and it is only a question of time when the housing market stabilizes and then crashes (the population per sq km in NZ is among the lowest), there is plenty of land to expand. Any external/internal event can cause the foreigners to pull their money out of NZ, that will result in a crash in the kiwi and probably a recession. It is important for the Reserve Bank to come out with some other measures to get the macro structure in place before it is too late, once the party is over, someone has to pick the bill.

Sunil Dhall

[Gatekeeper]

Nice summation Dhalson. Welcome to the forum

[cube]

there is plenty of land to expand

There may be plenty of 'empty' land, but I'd be interested to know how much of it is unproductive. New Zealand's economy is still based around primary production, and to do that,you need 'land, lots of land, and the shining stars above!'

The chances of a genuine 'knowledge' economy emerging any time soon are pretty remote, and the govt and local councils will continue to restrict the land available for development because they can't afford to put in the infrastructure required (roads, railways, water, electricity, sewerage, schools, community resources...) needed to support it.

The compliance costs on building a new house are already stifling development (putting pressure on rents), and raising money to build roads etc will only make things worse.

cube

[Paul34]

Great sum up Sunil. This site is polarised by the overly optimistic, not eco. backers of a miracle recovery and the followers of history, fundamentals who are let us say less optimistic. Which makes for great debate!

I agree with your view as would most of the world. When this debt cycle finishes and we realise there is little underpinning the economy other than house inflation and expanding govt then life will give a dose of reality. This third wind is making that hard landing more and more likely. The bb retirement, the lack of productivity and debt driven consumerisim must play its card sometime.

[Gatekeeper]

A bit of light entertainment

The Real Estate Rollercoaster (for those who don't get graphs 1890-Present US)
http://www.youtube.com/watch?v=kUldGc06S3U

[fudosan]

Hi Sunil, welcome to PT. To add to your comment:

We are spending $114 for every $100 we earn.

Our total debt to foreigners has reached $143 b, or $35,000 for every Nzer.

Amazing we can build a nation on debt-based consumption!

[tricky]

It is important for the Reserve Bank to come out with some other measures to get the macro structure in place before it is too late, once the party is over, someone has to pick the bill.

Sunil Dhall

Hi Sunil,
In your opinion, what should the Reserve Bank do?
And what do you think of my suggestion that the OCR should be lowered, not raised?
cheers
tricky

[essence]

Roller coaster

Thanks Gatekeeper

That's an interesting way to look at house prices!!! I wonder if some bright bunny here, could do that for NZ house prices?

Now that would be worth looking at.

[Gatekeeper]

Thanks Gatekeeper

That's an interesting way to look at house prices!!! I wonder if some bright bunny here, could do that for NZ house prices?

Now that would be worth looking at.

Certainly not me

But NZ house price cycles do tend to be more volatile with more ups and downs, so it would be an exciting ride.

http://www.propertytalk.com/gallery/...1/4/prices.gif

[Tucker]

Yes is a lot different but interesting to note that it has only had 3 negative changes. The most being around -3%. I thought there were more.

[whitt]

The stas are varyed slightly dpends on who produce them and what method they use to display.

An example is the difference inflation makes when presented.

EG.


House growth for a term at 5%, less inflation 4%= real growth 1%
5% growth compared to 1% is a big difference.

[calmone]

I notice that on page A24 of todays Herald a letter the same as the first post by Sunil Dhall of New York is published.
I wonder from what position the comments are made, and if there is an agenda yet to be disclosed.

[Libertas]

I notice that on page A24 of todays Herald a letter the same as the first post by Sunil Dhall of New York is published.
I wonder from what position the comments are made, and if there is an agenda yet to be disclosed.

Yes I found that letter in the Herald as well.

In my Opinion it is one of the best written articles about the NZ property market at the moment.

I don't think there is any hidden agenda. Sunil Dhall has told it like it is.

[Gatekeeper]

Yes is a lot different but interesting to note that it has only had 3 negative changes. The most being around -3%. I thought there were more.

The only graph I have only goes from 68 to 02, but shows nominal and real (less inflation) prices.

[whitt]

Nice graph Gatekeeper.
Where did you find it?