The Economist has done an amazing job with its recent “House Price Indicators” tool.
Below is the “prices against average income” chart for the US, New Zealand and Australia:
This makes it obvious in a simple way what is very apparent on the ground in NZ and Australia – that income and housing is wildly disconnected. The housing bubbles in these countries are still raging.
The “% change” over the bubble period for the US will give some indication of the pain to come in NZ and Australian housing:
A look at “prices in real terms” suggests Australian and New Zealand housing needs a 50% haircut simply to get back in line with inflation adjusted norms!
The Australian economy with its heavy reliance on hauling metals out of the ground has had a good story to sell people because of the roaring demand from China for resources. Australian income has in no way kept up with housing prices though so this is a chimera.
New Zealand, on the other hand, has not even had a good storyline for its housing inflation. With an economy based on farming and tourism any link to the China new era story is far fetched. NZ does sell raw logs to China but with a 20-30 year lag between planting a tree and harvesting it any attempt at a speculative planting bubble in trees will need some patience to realize income. New Zealand has almost no native trees not protected by national parks and an aggressive environmental lobby so any harvests must come from forests planted on private land.
The final chart the Economist allows you to make is one that should be very familiar to most readers – a house price index based off resales which is known as the Case Shiller in the US.
To anyone who followed Case Shiller with amazement before the bubble popped the shape of the NZ and Australian bubble should be very familiar.
For anyone that believes that the future for the US is going to look a lot like Japan over the last twenty years this last graph will be fairly sobering. It is “prices against average income” and compares Japan to the US. Keep in mind that incomes in Japan over this period have not exactly been soaring!
Sly Capital 
…do you have a take on when the housing market bubble will burst in New Zealand? not looking for a specific month necessarily – although that would be nice!! but do you think this year, 2010 or next, and which quarter is it most likely to be??
thanks Lindsay
Hi Lindsay,
The bursting of bubbles are social events and don’t lend themselves to precise predictions of end dates.
Good chances for a shock include the US Fed’s stated reduction of liquidity in March this year, a meltdown in Greece or Spain which could occur at any point or China following through on a stated plan to pull back dramatically on commodity purchases.
There is a very good chance in NZ’s case that the end to NZ’s bubble will occur in tandem to a shock that also involves the Australian economy. Almost all banks in NZ are foreign owned and they are mostly Australian. NZ has practically no sovereignty over its banking system.
If you own property in NZ now would be a great time to sell as you are sitting on large gains if it is not a recent purchase. One thing to keep in mind is that bubbles turn on a dime and by the time you realize it has ended your chance to get out intact can be severely compromised.
Good luck!
New Zealand has the highest interest rate in the developed world. This has resulted in a carry trade whereby international investors take money from Japanese banks and place it in New Zealand for a set period, this in turn raises the value of our dollar and gives banks money to hand out for mortgages. Currently there is no proper means of investing money in New Zealand that has high yields; except housing. New Zealanders are not interested in exchange markets, sharemarkets, investing in local companies and therefore have all their eggs in one basket. The Bubble you speculate will not go away anytime soon, nor will the demand for housing. In a downturn, all NZ needs to do is let in more immigrants (currently at 30,000 per annum) and we all know people need to sleep somewhere. Due to the relative low value of our dollar, any person migrating to NZ is able to purchase a nice house that is cheap compared to their own home currency.
Hi Bill,
You have a lot more knowledge than most about the source of NZ’s capital. Your explanation for capital availability is sound.
Your conclusions are wrong however. There are many ways to explain why but the simplest is always income. A unit of housing is now beyond the ability of NZ’ers ability to pay. The only way this is being sustained is by additional borrowing – a classic Ponzi scheme.
It is tempting to see immigrants as a source of new demand, especially in a country as small as NZ. However, this ignores two obvious facts. The first is that letting in additional immigrants requires lowering standards. A good example is Australia. Australia has historically been fairly xenophobic and has also demanded high skills and or wealth to immigrate. At present being a hairdresser qualifies as a skilled immigrant in Australia! In other words the income to pay the mortgage must be generated within Australia.
The second obvious flaw in this plan is that we are experiencing a GLOBAL recession. Where are these immigrants going to come from dragging wealth? Wealth reduction is a global phenomenon. The myth of the “wealthy foreigner” is also used extensively in the US as a justification for RE investment which is somewhat humorous as in NZ the myth is often the “wealthy American” who is pushing up prices.
The biggest flaw in your reasoning is an inability to see what will happen if the capital flows reverse. Rates are high in NZ because the country is viewed (rightly or wrongly) as a risk. The risk is now very real as NZ simply cannot afford to pay its collective mortgage. Visit Iceland for a look at what happens when the market realizes a small country is living beyond its ability to pay.
Your point about NZ housing being cheap on an international basis is factually wrong. The median price of a house in the US is US$177,900 and in NZ it is US$254,429. New Zealanders, with lower income than Americans, are paying 43% more for their housing!
We are not speculating there is a bubble – the facts say there is a bubble.