If I had a $ for every time I’ve read that NZ house prices are too high and overvalued I could have retired from writing this blog already! To misquote Churchill, seldom have so many economic commentators given so many reasons to support the idea that house prices are exorbitant.

Recently the Economist magazine added one more. It compared house prices with rents and income around the globe and came to the conclusion that NZ house prices are significantly over-valued. Whoop de doo!

Reality just doesn’t seem to bear this out. We’ve just been through the GFC, a once in a generation thing which put the microscope firmly on debt levels and yet we saw only a 10% drop in NZ house prices against what sounded like a calamitous economic event. This drop has now been recouped in Auckland and as today’s news headlines attest prices are higher than ever.

What’s more there is no sign of any coming drop in house prices in the near future and the first law of economics (that prices are driven by supply and demand) is firmly in play — lots of demand, not a lot of supply. Just as the law of gravity is hard to argue against so is this, it doesn’t matter what your opinion is!

Despite the subdued economy the population of both NZ and Auckland has continued to grow. On top of that interest rates make borrowing more affordable than ever and together that creates demand for housing. On the flip side the supply of houses (ie new construction) has been at extremely low levels over recent years due to lack of development finance and difficulties in getting sensible projects sensibly consented amongst other things. Basically, supply has not been keeping up with demand. Is it any wonder that prices have gone up? Rents have gone the same way too for very similar reasons.

Supply can catch up though. But as it takes at least 12 months to build a single house let alone the tens of thousands required in Auckland and even more in Canterbury, it’s going to be many years before the supply side manages to even come close to catching up. If we could reduce demand a little that might help and policy makers are probably secretly hoping that migration to Australia might pick up. But recent news suggesting Australia’s commodity boom is coming to an end might put paid to that!

So when you hear about prices being too high just keep your hair on and think. Prices are what they are and ‘the market’ is simply reflecting the reality of there not being enough supply to satisfy current demand. Complain about it all you like. Gnash your teeth about how unfair it is or whatever. The only thing that matters is what you’re going to do (if anything) to take advantage of ‘the market’ right now or to position yourself in such a way to do something about it in future.

A final word — house prices are not rising in some parts of the country. I bet the proposed closure of the mill in Kawerau has just knocked the value of houses in that town right back. Greymouth is probably suffering the same fate with the mine closure too. The current market isn’t all about rising prices y’know.

 

About Campbell Hastie

Cam is one half of Auckland based mortgage brokers, The Go 2 Guys.

He makes a living by sharing what he knows about mortgages with people, arranging mortgages for people and then insuring people.

He doesn't claim to know everything about mortgages himself which is why he teamed up with David Mercer — hence the ‘2’ in Go 2 Guys.

He writes posts regularly on his blog and has been told he has an ability to share his knowledge in a simple and sometimes memorable way.

Feel free to comment and ask any questions. Contact Campbell Hastie m: 027 697 7789.

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