Peter Thompson: Reflections on the property boom

Peter Thompson, Managing Director, Barfoot & Thompson
Peter Thompson: Reflections on the property boom

The Auckland residential housing market is now 18 months into a new cycle.

This cycle is less active in terms of turnover than the previous cycle, which started as the economy emerged from the 2007 global financial crisis, and prices are more stable and holding at all-time highs.

It is more of a traditional cycle in which buyers have more time in which to consider their decisions, and where the parties involved need to negotiate and reach a compromise.

The majority of regions throughout the country have yet to move into a new cycle but are likely to in the not-too-distant-future as their markets (which came to life later than Auckland) hit their price ceilings.

As markets throughout the country quieten down, the opportunity exists to reflect on what occurred between the years 2008 and 2017 (in Auckland’s case) and question some of the claims made and methods employed to tame price increases.

The first claim I’d question is that the country experienced a ‘housing crisis’.

In taking this position, let me emphasise I’m talking about the mainstream housing market and not social housing.

There was never a crisis in relation to mainstream housing.

What we experienced was a period of rapid price increases and high turnover (also experienced at the same time in countries with similar economies to ours) compounded in our case by a rapidly rising population coming on the back of a decade of under-investment in housing.

A core contributor was the ready availability of low interest mortgage money. Even today, mortgage interest rates are the lowest ever offered.

Data published this month by NZ Herald One Roof and its partner Velocity gives some telling insights into what occurred.

This data puts to bed the claim that it was ‘flippers’ or investors actively trading who distorted the market.

During the peak period of 2013 to 2018, the percentage of homes that changed hands more than once in six months was 9%, while 75% changed hands only once in that five-year period.

What the data highlights is that as prices rose, a great number of people made the decision to trade up to the next level before that next level got out of their reach while another group made the decision to become long-term investors.

Trading up is a normal part of market activity and the classical path people take as family size and affluence increases while the majority of financial advisers’ advocate holding a portion of any investment portfolio in property.  

While many first-time buyers and those on limited incomes did find it increasingly difficult to get into the market during those years it was not as a consequence of affluent foreign buyers and local investors dominating the market.

It was the Reserve Bank’s deposit to loan ratio regime, designed to slow the rate of price increase, that was the barrier. And throughout the cycle their main competitors for houses were existing owner-occupiers trading up.

What brought the 10-year cycle to a close was the combination of the market hitting its price ceiling and the Reserve Bank regime.

My conclusion is that the foreign buyer ban and the extension of the bright line test beyond two years were unnecessary, and talk about a capital gains tax being the answer was a red herring.

In the end, the application of existing Reserve Bank regulations worked and that positioning mainstream housing activity as being in crisis was more hype than reality.

Talking about the mainstream housing market in crisis could also have led to society taking its eye off the very real plight of social housing.

There is urgent work to be done here and this is where the State should be focusing its attention and applying its resources.

It’s also time to revisit the question of housing for those holding positions in critical occupations.

Our teachers, medical providers and those that ensure the smooth working of our major cities need to be able to find accommodation close to their place of work.

Without them, big metropolitan areas cannot work efficiently.

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