The bubble is back. Long live the bubble.

I'm told the good times have returned. Real estate agents report multiple offers on properties and contested auctions. Buyers are worried they might miss out and sellers are worried they might not sell high enough. House sellers are being urged to get their properties onto the market because of a shortage of properties. New Zealand's housing market is getting its mojo back.

Here's a taste from the BNZ consumer confidence survey, which asks respondents for comments to give readers a flavour. It's well worth a read if you looking for a snapshot of the 'mood of the nation'.

"Some buyers are feeling frustrated and starting to make strong offers to secure good properties," said one real estate agent. "There's more activity in the market than we've seen for some time. Listings are in short supply."

Here's another gem showing the excitement bubbling up to the surface again. "Sellers are much happier and buyers seem to be too, as interest rates are still low and many are happy to risk floating for a year or two," said another agent. "A good solid foundation exists now that was not evident last year," another piped up.

And here's the classic: "Armageddon slipped by without touching down."

With a tip of the hat to David Lange's famous one liner, I can almost smell the greed on the real estate industry's breath.

So why is this happening now in the middle of our deepest recession in almost 20 years and at a time when housing is still unaffordable for many?

The simple answer is that the Reserve Bank threw another can of petrol of the fire. Despite his comments about being worried about another bubble, Alan Bollard cut the Official Cash Rate by a record amount to a record low in a record short period of time. No wonder the rental property investors are returning. Why would anyone accept 2 per cent after tax from a bank account when they could be buying rental property and offsetting some of the cash losses by claiming back any income tax?

Those in a position to save (mostly baby boomers) have written off the stock market and finance companies as options for investing. They are reverting to their old favourite of rental property. Anyone who bought an investment property from 2002 until mid 2007 is still sitting on capital gains that are likely to be in the many hundreds of per cent if they were highly leveraged, and most were. There is no contest.

The REINZ median house price is only down 4 per cent from its November 2007 peak, yet it rose 90 per cent between September 2002 and November 2007.

So everyone is back on the bandwagon. Rental property investors are buying because not only is financing cheap, but they think they might be getting a bargain, which makes the potential capital gains even bigger. Real estate agents like a rising market because it increases the number of deals and therefore their commissions. Banks like lending to home owners and investors because it's simple and they can often tie the loan to an individual's wages or salary, which is much easier to measure and document than the future earnings and cashflow of a limited liability business.

Even retailers like it because both property buyers and sellers feel wealthier and tend to slosh around cash knowing the value of their equity has risen.

Everyone is happy.

Except me.

I forecast last March that prices would fall 30 per cent because I assumed wrongly that the global financial crisis would force the housing market here back to rationality and the sort of affordability levels last seen in 2002 and 2003 when the median house prices was about 6 times after tax income. Currently it's around 9 times after tax income, just below the record high 10 set in late 2007.

I didn't account for a couple of things. Firstly, New Zealand's banks are still lending and have actually accelerated their lending to home owners in the last couple of months. That's because they are the safest banks in the world and freaked foreign investors are happy to keep lending money to them hand over fist. Luckily for us, the Australian owned banks never got into the crazy sub-prime lending in Europe and the United States that caused many Northern Hemisphere banks to implode.

We can thank the widely unloved, dangerous and yet brilliant Paul Keating for that. He pushed through the Australian compulsory super scheme which created a A$1 trillion savings pool and he banned the big four banks from either buying each other or being bought by foreign banks.

Secondly, I didn't imagine the Reserve Bank would cut the OCR to 2.5 per cent or that stock markets overseas and finance companies here would collapse so brutally, thus wiping out any investor appetite for anything but rental property. I've downgraded my forecast to a 15 per cent fall from the peak. Housing remains 30 per cent overvalued on several measures, but irrationality rules for now.

The bubble is back...until someone pops it.

It will happen eventually. Our debt levels are too high, our current account deficit is too high and we have just blown about NZ$100 billion on unproductive assets that have done nothing to lift our wealth generation capacity in the last 5 years.

Here's a final couple of facts to put all this into perspective. New Zealand's overseas debt to GDP ratio rose from 125.9 per cent in March 2008 to 140.9 per cent by March 2009. Banks borrowed an extra NZ$31.7 billion overseas between the beginning of 2008 and the end of March this year. During a recession and a housing bust we added that much debt.

Eventually a ratings agency will take notice and take to our bubble with a machine gun. Bring it on. We couldn't kick our addiction ourselves. It's time for an intervention.

 


Bernard Hickey

 

Photo: Stix the Scarecrow from Pongaroa. / Dannevirke News