Prices are supposed to be market signals. When they rise, they put some people off buying the goods and encourage suppliers to produce more of the goods, which tends to bring the price back down.
But financial markets, for trading in the likes of company shares and national currencies, are different. When prices rise on those markets, more people want to buy the share or currency. It is now abundantly evident the market for houses has become a financial market.
The Weekend Herald's report yesterday on the frequent "flipping" of investment properties shows buyers are treating inhabitable houses like a stock or other valuable paper.
Between January last year and May this year, 1500 Auckland houses were bought and sold again. Nearly 100 were sold three times in those 17 months. Seven were sold four times and two five times in less than a year.
These houses are unlikely to be housing anybody. The buyers might not have even visited them since the purchase. They stand empty, sometimes in pristine renovated condition, while their value rises - by an average $1600 a day over those 17 months. Every time they sell, the seller books the capital gain as equity that can be used to buy another house, and the churn continues.
Markets like this do not run on supply and demand, they run on confidence. So long as investors are confident prices will continue to rise, the market will attract more investors seeking more of the stock.
The Government's efforts to increase the supply of houses, especially low priced houses, and the provision of more residential land in the Auckland Unitary Plan, will serve the demand for more stock. It seems most unlikely to bring prices down.
Nor do the tax changes last October appear to have had much impact so far. The "bright line" test for capital gains tax and the foreign registration rules were in force for the past seven of the 17 months the Herald has surveyed. The market slowed a little over the summer but regained momentum by March and real estate agencies are still talking with confidence that the "bubble", as even they call it, is not about to burst.
But sooner or later it will burst. Confidence can drop suddenly and unpredictably when nervous or smart money bails. Be ready.