By David Chaston
House prices have now stagnated for more than four years, their longest period since the 1988-1993 plateau.
And it's not over yet.
On an inflation-adjusted basis, this current period also represents the biggest decline in real house prices in almost 30 years.
Capital gains for most of the market have evaporated. Capital losses are a real prospect.
CPI inflation has risen to over 5.3% per annum in the latest quarter, and we are entering a period where housing debt is being inflated away. Savers are paying the price, but borrowers may also be risking their equity.
For the 51 month period from April 2007, median house prices in New Zealand rose just 3.2% from NZ$349,000 to NZ$360,000.
Over this same period, the CPI index rose from 1010 to 1157, up 14.6% over these 17 quarters.
On this basis, real inflation-adjusted house prices have fallen 11.4%, the second largest fall since records began in 1963, a period of 48 years.
We are probably in the middle of this period of nominal house price stagnation. We also seem to be entering a period of high inflation. The combination will drive real house prices down.
These latest trends are just one third of the fall in real terms that the New Zealand real estate market went through in the seven years from 1974 to 1980. At that earlier time, nominal prices rose more than 6% per year but average inflation over this period was more than 15% per year. The net result was a whopping fall in real house prices of more than one third over seven years - a decline of 36%.
The last time prices stagnated in nominal terms was between January 1997 and July 2001, a 55 month period when national median prices rose 6.3% from NZ$160,000 to NZ$170,000, or just 1.4% per year.
Over this period inflation was especially low and the CPI index rose from 823 to just 876, up 6.4%, which meant that house prices declined -0.1% in real terms in those four and a half years.
For most markets in New Zealand, housing is no longer a hedge against inflation. In fact it hasn't been since mid 2007. Although there is no way to know how long the current stagnation will last, public policy seems to be shifting to accept - even encourage - a shift away from 'investing in real estate'. The current trends may well last as long as, or even longer than, the ten year stretches 40 years ago. We could be less than half-way through the cycle.
* Data on median house prices from 1992 is from the REINZ database. Prior to 1992 the data is based on Statistics NZ long-run data series. CPI data is from Statistics NZ.
47 Comments
There is a difference between savers and speculators, savers pay tax, property speculators for instance dont. How is that fair? consider that with Labour's plan the firtst $5k will be tax free....doesnt that help savers?
If savers are in deposits its a virtually guaranteed risk free rate of return....to egt more you have to risk your capital like everyome else....
Sorry but I dont see that "savers" should get a non-taxed return, any and all profit should be taxed....
regards
What has risk got to do with how much you are taxed? nothing, nor should it, if you are stupid enough to take big risks with your money, you're an idiot, but don't expect lower tax rates because of it.
If you are trying to encourage a certain behaviour, like encouraging people to save (because we happen to be right there with the worst in the world like Greece and Ireland) and it's what all economists agree we need to do more of, then you don't have tax policies that encourage the exact opposite.
Or otherwise you just go down the toilet, like the other massively indebted countries.
There always was a policy to take the speculation out of property, traders be it in shares or property are requiered to pay income tax on their capital gains.
Only the IRD were asleep at the wheel during the boom when mum & dad propertry trader were busy buying a place, polishing the floors & flipping it for a handsome profit.
One must also ask the question, did labour make sure this was so to keep the bubble going & claim they were awsome stewards of the economy?
I believe Labours CGT will only increase speculation as the tax rate will effectively halve for traders.
Still beating the drum on this one?
For property investors - when understanding underlying return on the initial equity invested into the house it's more relevant to look at nominal prices. Why? Because debt is not influenced by inflation. House prices may grow in line with inflation (not necessarily on a 1 to 1 basis) - debt does not. A very (overly) simplistic way would be to say that a burst of inflation actual increase the house owners equity in the house.
For example, and holding all things constant, say: A home owner buys a house for $100, gets an $80 loan, and puts in $20 of equity. Say house prices inflate 2% while the wider CPI is 3% - so a real price reduction of 1%. The new house value is 102 less the 80 of debt, and equity is now 22%. Because of debt, the owner has geared his investment to return 10%, or 7% above CPI.
This just for illustration - there is interest and renters (or if owner occupied looking at the overcoming the opportunity cost of their own personal rent), debt paydown which increases the equity portion, etc.
This is basic financial engineering.
That assumes accompanying wages/income rises Keyser. Debt only gets 'inflated away' if income rises, otherwise they stay in tandem. Worse, actually! As those stagnant wages are deflated by any the comparative CPI rise. Financial repression at its best...because who's had the 70% wages rises over the last 20 years, above the CPI rise, that houses have put on? Not many. It's all been in Capital Gains ( an they have been eaten/spent/holidayed/more propertied etc, away). Now all we have is pretty much the same balanced national housing stock...at twice the relative debt!
like i say holding all things constant.
But i can paint you an easy picture where the return on the initial equity invested (the only thing that matters) still grows without any capital gain - driven on account of the amortisation of debt from renters. Landlords are idiots and look at it the wrong way - the net rent / price, because that never works. The gearing of the household and utilisation of renters to pay down the debt can increase the equity value in excess of inflation without any capital gain.
Like I say - this is financial engineering. Landlords don't know it - but the best ones are basically doing exactly what any good old fashioned private equity player does.
All asset should be judged on ROI. Thta's why if nominal prices fall ~ as they will :) ~ that rosey picture you may want to paint, turns into a nightmare, as rents decline in the face of lower b/e calculations. Ask 'investors' in any one of many countries you may want to take your easel to.
WOW steven - amazing concept, if everything goes wrong and the macros go bad then yes losses will accrue. Thanks for that pointing that out to me. I was illustrating a concept that never gets discussed or occurs to 99% of readers on this site.
The point you should have made is that financial leverage actually acts as an accelerator on both sides of nil capital gains - it will juice your upside, but likewise will ampliphy your downside.
C'mon they will try to avoid labour's CGT so their first home will be passed down from the rich parents!
In the meantime their rich parents will try to shelter their 150K plus tax income bracket by claiming their negative equity on many of the old houses they owned
Yes i totaly agree. For the right wing purist that have shares in the blue chip sector, they would be well advised to think first before opening their mouths. To grab back any form of social welfare payment, would send the economy and share market into a big wind down. Profits at the petrol stations ..supermarkets ..large cheap retailers etc would pummet, not to mention power supliers.The spin on would mean more job losses, and an even greater trauma. Any form of benificiary has the cash one day..and its back into the economy the next. In fact the irony of the situation is the welfare money is the mainstay of the economy.This is a fact.
Absolute garbage. Every dollar handed to a beneficiary has been taken from someone who produced something. If the money hadn't been stolen from these wealth producers they could have kept it and spent it/invested it on something else. Beneficiaries are a massive drain on the economy. This includes bureaucrats and politicians.
This article is the biggest load of rubbish that have ever (dis) graced these pages.
To take the median price and extrapolate sensible numbers from that is disinformation at the best and down right economic dishonesty at worst.
The median price is a nonsense for this exercise because it includes all the failed developments, including the extremes in the over-blown and collapsed apartment market, the down grading of bare land projects that now lie idle, and the losses on the leaky homes fiasco all of which depressed parts of the market and must be excluded if a fair picture is to be painted.
The only true measure would be the average ( or median if you insist) of standard homes in the main centres such as Auckland, Wellington, and Christchurch ( pre earthquake) plus a few other smaller cities that are not villages. The figures will be much different then to be sure.
What this article author cannot grasp is that the property market is not one big pond where everything is the same. It is not a case of comparing apples with apples. The market is made up of a huge number of separate parts all going at their own speeds. In the past few years property prices stormed ahead of inflation, and now inflation is catching up.
What the author of this article doesn't know would make a library anyone would be proud of.
I agree BigDaddy, if the statistics show a drop then eliminate all of the factors leading to that drop and it will improve the statistics..yippeee. Oh there were and always have been aspects of housing that have historically dragged down the medium but we will ignore those now as it doesn’t help pump up the hype.
Question on your recommended removal list, should we also remove the billions that are spent on home improvements over the period that has the effect of raising the medium?
What amuses me about this report is that we have a CPI rise through no Oz tomatoes and massive profiteering by the oil companies and the govts share of petrol and all of a sudden a comparison occurs.What happens in three months time when the CPI is lower again David?.
Plus all the rises effect all peoples in NZ not just a homeowner.
"In June the asking price expectation of those new listings coming onto the market at $415,053 showed no change as compared to May and in fact represented a 2% fall in price as compared to the recent 3-month period."
Hmmm Deja vue??
Reading DC articule above is almost a mirror image of the stagnation/inflation accumilating in 25/27% interest rates on mortgauges of the Muldoon yrs.
Yes 27% for those who where not around in those days or still having their nappies changed. Cant happen in NZ? Dont u believe it,mark my works (and those of DC.
Current inbterest rates, long period low inflation, US printing money, imported inflation. yep history rolling over repeating right on time, about 40 yrs.
Sure does! And to see him now, on his own, struggling to survive with the pension that he was lead to believe would keep him and my late Mum in their old age, in his one and only property, his home, is heartbreaking. Somehow his "Musn't grumble" comments just sum up the War Generation.
http://gisborneherald.co.nz/article/?id=23799
Headline is SOLD FOR HALF ITS VALUE
I sold it late 2007 for $307000, you wont believe what it sold for today!
I'm guessing that $120K is about what the price of the property would have been around 2004?
And what an interesting article - although the slant is all "upbeat" regarding the overall statistic - every individual sale discussed looks like the seller had to take a bath on the price they paid previously.
It's not just a regional thing either - It's happening in the best parts of the major centres too...
In April/May, the median price in the Eastern Suburbs "plummeted from $902,000 to $755,000" http://www.stuff.co.nz/sunday-star-times/news/5163349/House-buyers-in-the-box-seat
...and we're looking on the North Shore - there's a nice place with a 2008 GV of 790k. On the market for a while now. Price dropped to 729k ...then 719k... then 699k ...now we're getting chased by agents asking how 660k sounds.
We welcome your comments below. If you are not already registered, please register to comment.
Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.