TOP 7 ups and downs events that changed the New Zealand Housing Market in the last 20 years
New Zealand house price for the last 20 years has been rising enormously. According to the data sourced from the REINZ, the median house price in May 1999 was about 167,500 and 607,500 in October 2019 - it was about 360% increase. When we look back in a short history of New Zealand’s housing boom, the house prices surged by almost 144% during the previous housing boom from 2001 to 2007. This massive changed was a period when the economy expanded by an average of 3.6% every year.
House prices started to fall in early 2008, therefore compared to other countries the decline was much less than in other countries. After falling by 8.95% in 2008, house prices rose by 5.42% in 2009 – but only to fall again by 1.67% in 2010. The housing market started to recover in 2011 with 2.82% growth, thanks to the healthy economic fundamentals. New Zealand house prices began to soar again by 67.4% from 2011 to 2017, including double-digit price rises in 2015 (11.49%) and 2016 (13.85%). Besides the healthy NZ’s economic growth, there are other reasons behind the rising house prices such as low-interest rates and high level of immigrants residing in New Zealand.
As property investors, we can sharpen our investment strategies by learning from the highs and the lows of past events. In the next section, we will discuss the top 7 highs and lows events in the last 20 years based on an article by Ashley Church published in oneroof.co.nz.
The top 7 Downs
1. The government’s intervention on the property market
Based on New Zealand’s property history, both Labour and National have remained to intrude in the market over the past 20 years. There were some significant events such as introducing Brightline Test on 1 October 2015, the foreign buyer bans on 22 October 2018, and the ringfencing of tax losses from 1 April 2019. We believe the reasons behind these regulations are for the benefit of New Zealand. Still, none have achieved the targets that they’re expected and costing Kiwis money for no real benefit.
2. The fall of Blue-Chip investments
Blue Chip Investments, a structured property investment company, collapse under the heavy debt burden due to their investment scheme that purely relied on the rising of the property prices every year. They didn't have a safety net when the market flattened or plummeted. According Nick Krause (Stuff.co.nz), Blue Chip collapsed in 2008 owing to 3000 investors $80m. Moreover, Blue Chip's Mark Bryers, who was bankrupted in October 2009 owing creditors $230 million, was formerly executive chairman. He now lives in Sydney and was banned from acting as a company director in New Zealand and Australia last year.
3. The insolvency of 67 finance corporations
It is a shocking number, but this is a fact! There were 67 finance corporation bankrupts in New Zealand from May 2006 to the end of 2012. Not all of these businesses are in the mortgage industry. These businesses focus on higher risk lending, which major bank tend to shy away. The most eminent and damaging collapses were South Canterbury Finance, Hanover Finance and Bridgecorp Holdings. At their peak, these and other finance company could hold assets of about $25 billion. Moreover, lack of supervision and financial misconduct that causes the collapse and the complete failure triggered legislative and regulatory alterations.
4. The global financial crisis
In September 2008, US investment bank Lehman Brothers has collapsed and kicked off the Global Financial Crisis. At that time, New Zealand was already in recession, therefore the consequences of the crisis were less intense compared to the other part of the globe. According to Global Property Guide, house price in New Zealand was experiencing negative growth of -8.95% and after inflation-adjusted -11.93% during that period before picking up again in 2011 and kick started the next property price growth cycle.
5. The leaky homes crisis
The leaky homes crisis triggered after the introduction of the Building Act 1991. This thoughtless piece of legislation on residential building, allows the framing of homes to be constructed using untreated timber and also allowed the usage of fibre cement sheets for cladding which were not watertight. These caused a massive number of homes built between 1994 and 2004 having weather-tightness problems or are unhealthy due to moulds and spores developing within the damp timber framing. In 2009, the cost to address the leaky homes crisis was estimated about $11.3 billion, around 34% was borne by government and councils, with the rest become homeowner’s responsibility.
6. Loan to Value Ratio restriction
Back in October 1, 2013, the Reserve Bank of New Zealand introduced restrictions on mortgage Loan to Values Ratios (LVR). The restriction prohibits banks from lending to home buyers with less than 20% deposit (with a small number of exceptions) and investors with less than 30% deposit. The intention was to reduce the growth of house prices. However, house prices continued to rise, showing that LVR restriction couldn’t slow the market and didn’t worked. As a result, first home buyers are restricted from entering the property market and have robbed many young kiwis the opportunities to acquire household wealth.
7. The Christchurch and Kaikoura earthquakes
According to GeoNet project, around 50 and 80 earthquakes occur each day in New Zealand. There are two earthquakes which have the most effect on the property market over the past 20 years. The first event was the Christchurch earthquake on 22 February 2011 that causing severe damage and killing 185 people. In its aftermath, about 10,000 homes required demolition and over 100,000 were damaged. The estimation cost to rebuild the city is around $40 billion with an estimate to be completed within 50 years. The second quake was on 14 November 2016 located in Kaikoura but caused widespread destruction to property in Wellington and Nelson. The impact of both earthquakes is still going on, not just in respect of the loss of lives and cost of claims but also impacting the construction standards, how insurance premium will be levied, and the risks that may be harmful to humankind.
The top 7 Ups
1. Private sector housing constructions
Despite the failure of Kiwibuild, census and building stats tell us that the construction of new dwelling in New Zealand is still able to meet the need for shelter. During 1986 and 2013 565,000 new houses are being built, and another 290,000 between 2013 and 2017. These numbers are in contrast to the regular warning about homes shortage. While it’s still too early to say there isn’t a housing shortage. After all, it’s certainly starting to look that way.
2. The internet and the digital economy
It cannot be denied the internet and digital economy make people able to work and connect from anywhere as long as internet connection and laptop or smartphone are available. What does this have to do with the property? According to Quintin Howard from the New Zealand Transport Agency, the population of some rural towns and cities throughout New Zealand is declining. For instance, the Central North Island town of Taumarunui. The 1981 Census recorded that there were 6,540 permanent residents in Taumarunui. It declined to 4,503 residents by the 2013 Census about 30% over the past three decades. The closure of Taumarunui’s businesses causes this and encouraged people to move to bigger cities to get jobs. But everything changed as internet speed getting faster and the technology becomes more sophisticated and widespread throughout New Zealand. It opens up opportunities for many people to work and staying in the area that they love. Ultra-fast broadband, high-definition streaming, and an enormous selection of software and apps mean the tyranny of distance once suppressing rural area have mostly evaporated. With a stable and increasing population, the housing demand has grown and enhanced the capital growth in house values throughout many parts.
3. The dominance of first home buyers
According to Stuff.co.nz, in May 2019, for the first time, first home buyer borrowed more money than investors. Investors borrowed $1.14b and first-home buyers $1.15b. Both first home buyers and investors were affected by the LVR restrictions, but first home buyers were finding a way around it. The restrictions have been relaxed to a greater extent for owner-occupiers than for investors.
With capital growth slowing, investors might find it harder to rationalise the purchase. Buying a property now isn’t as lucrative as it was in the past. Therefore, first-home buyers are emotional investors. Current condition is balanced between investors and first home buyers with poor yields still for investors, and loan-to-value requirements are made tougher than for owner-occupiers.
First home buyers were still the single largest group of house buyers everywhere except Auckland in every year between 2013 and 2018, whether they’ve achieved this through the help of parents or other strategies. In short, first home buyers contribute to driving property sales.
4. Mum and dad investors
The rental market consists of typical ‘Mum and Dad’ operators and professional investors. They play one of the essential roles in the property sector by providing around 440,000 of the roughly 525,000 rental properties in New Zealand and saving billions of dollars in taxpayer money. Every rental provided privately is one less needed to be provided by the taxpayers. It’s important that they continue to be active in the market, despite being demonised by advocacy groups and politicians as property investors help to keep the property prices down and at the same time providing accommodation for people who can’t yet afford to go into the property market.
5. Strong immigration growth
New Zealand has transformed from a country that lost more people than it gained into an immigration hotspot and a magnet for people with education, money and a desire to make a new life in this beautiful country. New Zealand population grew by almost 175,000 between 2016 and 2018. While annual numbers have eased down from their peak in 2016, they’re still considered high by historical standards.
6. Low mortgage interest rates
The economists believe the upward trend of house prices since the 1980s is mostly due to the decrease in mortgage interest rates. Back to January 2000, the average two-year fixed mortgage interest rate was 8.4 per cent. In October 2019, that same two-year rate was 4.4 per cent with some banks even offering less than 4 per cent. As a result, New Zealand has been in a non-threatening mortgage situation for almost 20 years. Currently, the proportion of household income consumed on servicing the mortgage is similar as it was in 1976. Based on data reported by interest.co.nz, the two-year fixed mortgage interest rate on 12 July 2002 is at 7.8 per cent, compared to 29 November 2019 is at 3.47 per cent. This data clearly shows that low mortgage interest rates are contributing to stimulate home purchases in New Zealand.
7. The market
The property market in New Zealand has always shown growth over the past 20 years. Despite the exaggerated claims about an impending market collapse, the property market continues to grow between 70 and 100 per cent every 10 years. According to REINZ, the New Zealand’s average median house price back in 30 Nov 2009 was at $355,000 compared to in 30 Nov 2019 at $630,000. That is a whopping 77 per cent increase over 10 years.
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