David Roberton, the Auckland-based head of equities at Macquarie Securities (NZ), has released a timely commentary in which he recalls Canada's real estate boom and bust in the 1980s which saw prices plunge up to 50 per cent.
Roberton's commentary was circulated among other finance experts, who indicated it could be read as a warning for Auckland.
Roberton declined comment on the report but Shamubeel Eaqub, NZIER principal economist, says it is timely as many of the same issues faced by Toronto in the 1980s were in play in Auckland right now.
"The Auckland housing market is a speculative bubble. Debt is fuelling the Ponzi scheme and we have no idea what will be the catalyst for a change," Eaqub said. "Most likely, it will be external, affecting our economy, jobs and supply of easy money. Maybe a hard landing in China or Australia. But that is purely speculative."
Roberton's report examined the combination of circumstances which fuelled Toronto, then listed the reasons why it collapsed, pointing out how many people were caught up in the hype at the time.
Some similarities with Auckland included rising immigration, strong jobs growth and a population which envisaged no end to price rises during the boom.
But as Roberton points out, that was to their extreme cost eventually.
"Between 1985 and 1989 the average price of a house in the greater Toronto area increased by 113 per cent in real terms or by $240,992 in today's dollars. Low unemployment and large inflow of immigrants helped to inflate the bubble. Some critics pointed to the fact that in the early 80s many women were still just entering the workforce and thus doubled the income of households by the mid 80s which further fuelled the bubble.
"However, one could argue that bubble was fuelled mostly by massive speculative investment. In the late 1980s, everyone thought that the housing prices are going to rise indefinitely and that turned real estate into a compelling investment for everyday Joe. More people jumped into the market hoping to make a fortune causing an artificial increase in demand. Suddenly housing became scarce, which further increased the price. Developers decided to profit on this illusive scarcity by building condos ...
"During the peak of the bubble 5 year fixed mortgage rates reached 12.7 per cent. Coupled with the early 90s recession, a spike in unemployment and a drop in immigrants, housing prices in the greater Toronto area collapsed.
"Between 1989 and 1996 the average price of a house in GTA declined by 40 per cent adjusted for inflation or $182,625 in today's money. Downtown of Toronto was hit the worst with over 50 per cent decline in value of a home."
Milford Asset Management executive director Brian Gaynor has said the same factors that plunged Ireland into last decade's housing crisis were in play here. Westpac has said historically low fixed mortgage interest rates were the main house price inflation driver.
"These are among the lowest mortgage rates New Zealanders have seen in a generation. And we see no scope for the Reserve Bank to push mortgage rates higher again this year. Consumer price inflation is awfully low, and that obliges the Reserve Bank to keep interest rates low," the commentary said.
But Reserve Bank moves to identify property investors as a separate class of borrowers "to facilitate the introduction of a macro-prudential property investor policy, should that become necessary" could signal mortgage lending restrictions to property investors, Westpac noted.
• 113% house price rise in three years during 1980s
• Then prices dropped 40% in greater area and by 50% centrally
• Boom caused by low unemployment, immigration, women entering workforce, speculative investment
• Bust caused by 1990s recession, unemployment spike, immigration drop
• QV says values now 20.3% above late 2007 previous market peak
• Values rose 13 per cent from March 2014 to March this year
• Boom caused by low interest rates, high immigration, supply shortage, economic confidence, job growth.
• NZers now have about 73% of assets in real estate, drawing international warnings