Mike Williams: Bubbles do eventually burst

If the supply of houses does indeed exceed demand, then the boom in prices becomes a bust. Photo / File

One obvious outcome of the Covid-19 pandemic has been the repeated inaccuracy of predictions about the New Zealand economy from normally reliable sources.

Just this week the tax take came out well above that which many economists had predicted and there were more jobs created than lost, resulting in a decrease in those on the jobseeker allowance.

These healthy job numbers were a real surprise given that several of the normally large generators of employment - including overseas tourists arriving and international students studying here - are as good as dead because of the closure of New Zealand's border.

The reduction in the number of unemployed may be partly the result of the tight lid on immigration and the need to attract Kiwis into jobs like fruit picking and work in retirement villages but this surely would have also meant fewer people in the country and therefore less pressure on accommodation.

Logically this should have meant downward pressure in house prices and rents.

This is pretty much what most economists predicted a year ago, but the real numbers tell us that both house prices and rents have been rising at a rapid rate throughout the period of the pandemic.

During the week, however, a slight decrease in house prices occurred in Tauranga, previously one of the hottest markets.

This tiny reduction of less than 2 per cent in one month led to speculation that the golden weather was coming to an end and the seemingly inexorable increase in house prices was coming to an end.

Nevertheless, the pundits agreed that house prices would rise by another 15 per cent in 2021 and as if to confirm this prediction, Wellington prices reached stratospheric Auckland-type levels of an average of over a million dollars.

One journalist this week reminded us that house prices are just as capable of dropping as well as rising, though she did point out that the last time that this happened significantly, at least in Auckland, was nearly 50 years ago.

House prices do indeed seem to be detached from reality.

Last week, out of curiosity, I looked at a property for sale in a large, gated village of 50 cottages next door to where I live on the Te Atatu Peninsula, Auckland. It was nice enough, but with only two bedrooms, one bathroom and very limited outside space, I thought its Council Valuation (CV) of $730,000 was somewhat generous.

This cottage was to go to auction, but a pre-auction offer was accepted, and the property changed hands at over a million dollars.

Te Atatu Peninsula is a middle-class harbourside suburb, swinging between support for either National or Labour in recent elections.

In recent years, the location has been affordable and seen a steady flow of first-home buyers and young families attracted by the excellent state schools and its closeness to the Auckland CBD.

Mike Williams

The Peninsula has many houses, built in the 1960s and 70s, on what used to be called full-sized sections.

On at least 20 sites in what is not a large suburb, such houses have been purchased by developers, removed or demolished and are in the process of being replaced by as many as 15 terraced or townhouses per section.

This is happening all over Auckland.

In addition, there are large new suburbs developing to the north, south and west of Auckland.

This appears to be a New Zealand wide phenomenon with annual building consents hitting a 47-year high in January, with 39,900 new homes consented in the 12-month period.

This total is up nearly 6 per cent on the previous year.

This is happening at a time where immigration is practically nil, except for a dwindling trickle of homecoming Kiwis courtesy of the pandemic, and New Zealand's birth rate falling under what is required for population replacement.

Statistics New Zealand reports, "In 2020 the total fertility rate was 1.63, the lowest on record in New Zealand. This TFR is now well below replacement level of 2.1 children per woman."

This adds up to a population growth of close to zero at a time when house building has cranked up to be the highest in nearly 50 years.

An obvious driver of this orgy of property purchasing has undoubtedly been the record low interest rates that the Reserve Bank has fostered as a counter to the economic damage expected from the Covid-19 pandemic, but these rates are now twitching upwards.

There is reportedly a need for perhaps 40,000 new houses to catch up with slow house building from previous years, but with nil population growth and nearly that many consents in the last year, the country must be approaching a situation where supply begins to exceed demand.

If the supply of houses does indeed exceed demand, then the boom in prices becomes a bust.

Bubbles inevitably burst.

- Mike Williams Mike Williams grew up in Hawke's Bay. He is CEO of the NZ Howard League and a former Labour Party president.