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Housing: Lessons from history

The last time house prices rose this far in consecutive quarters was in the early 1970s. That cycle ended in tears. While it is less likely to happen this time around, the risk profile points down.

Monday, June 13th 2005, 11:57AM
This article was published in the ANZ Market Focus - 13 June 2005

Observation 1: New Zealand’s house price index has trended upward over its 40-year history. Since 1984, inflation adjusted house prices have grown an average 3.4% a year, exceeding output growth per person of 1.6%.

Observation 2: House prices are procyclical. Periods of house price deflation coincide with troughs in the economic cycle. House price peaks, by comparison, do not necessarily coincide with peaks in the economic cycle, although prices do rise when the rate of activity is increasing.

Observation 3: The duration of real house price rises and falls differ widely over time (see Table 1): no two economic cycles are alike.

Observation 4: House prices tend to rise further than they fall: the average cumulative gain during each period of house price growth is more than 28%, while falls are just 15%. The most severe decline in house prices occurred in the mid-1970s. Real house prices have fallen on three other occasions, although these were smaller in terms of duration and severity.

Observation 5: There have been two major housing cycles in New Zealand since banking liberalisation in the late-1980s. New Zealand is currently experiencing its second housing market cycle, which began in September 2001. To date, annual house price growth in this cycle peaked at 23% in December 2003, its fastest rate in thirty years. Real house prices are currently 49% higher than three years ago.

Observation 6: A large part of the rise in house prices can be explained by falling interest rates and the strength in household incomes.

Observation 7: This cycle differs to the 1970s. Banking liberalisation allows households to borrow more. Unemployment is near all-time lows. Inflation is low and less variable than thirty years ago (less mixed signals). Real interest rates in the 1970s were negative – spurning debt accumulation. Ultimately, when interest rates rose, the housing market capitulated. Real rates are unlikely to rise as far today as they did in the late 1970s. Declining real house prices are more prevalent in a low inflation environment but not to the tune of 40-odd percent falls.

Observation 8: But prices are still likely to be weighed down as we go into the downturn in the business cycle. Easing economic growth is likely to see softness in the housing market into 2006. Easing employment growth and the effects of restrictive monetary policy will act as an anchor on house price growth. In real terms, house prices have the potential to fall. This, in turn, has implications for financial markets.

Date

Length (qrtrs)

Cumulative (%)

Growth

1971q1 – 1974q4

16

55.3

1981q1 – 1982q3

5

20.0

1987q1 – 1988q2

6

14.6

1993q3 – 1994q4 *

6

14.8

1995q3 – 1997q4 *

10

18.4

2001q3 – 2004q4 **

14 **

49.9 **

Average

28.8

Decline

1975q1 – 1980q4

24

-40.3

1986q1 – 1986q4

4

-9.1

1990q2 – 1991q4

7

-5.9

1999q3 – 2001q2

8

-5.5

Average

10¾

15.2

A growth/decline period is defined as at least four consecutive quarterly real house price rises/declines. The exceptions are 1995-1997 period where growth fell 0.6 percent for one quarter and during 2000-2001 where growth rose 1.0 percent for one quarter. * Sometimes considered one growth period. ** To date.

This article was published in the ANZ Market Focus - 13 June 2005

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Lender Flt 1yr 2yr 3yr
AIA 4.55 2.25 2.59 2.89
ANZ 4.44 2.85 3.19 3.49
ANZ Special - 2.25 2.59 2.89
ASB Bank 4.45 2.25 2.59 2.89
Basecorp Finance 5.49 - - -
Bluestone 3.49 3.34 2.99 3.34
BNZ - Classic - ▼2.25 ▼2.55 2.79
BNZ - Mortgage One 5.15 - - -
BNZ - Rapid Repay 4.60 - - -
BNZ - Std, FlyBuys 4.55 ▼2.85 ▼3.15 3.39
BNZ - TotalMoney 4.55 - - -
Lender Flt 1yr 2yr 3yr
CFML Loans 4.95 - - -
China Construction Bank 4.49 4.70 4.80 4.95
China Construction Bank Special - 2.65 2.65 2.80
Credit Union Auckland 5.45 - - -
Credit Union Baywide 5.65 3.95 3.85 -
Credit Union South 5.65 3.95 3.85 -
First Credit Union Special 5.85 2.95 3.45 -
Heartland Bank - Online 2.50 1.99 2.35 2.45
Heretaunga Building Society 4.99 3.40 3.50 -
HSBC Premier 4.49 2.25 2.35 2.65
HSBC Premier LVR > 80% - - - -
Lender Flt 1yr 2yr 3yr
HSBC Special - 2.25 - -
ICBC 3.69 2.25 2.35 2.65
Kainga Ora 4.43 2.67 2.97 3.13
Kainga Ora - First Home Buyer Special - 2.25 - -
Kiwibank 3.40 3.20 ▼3.40 ▲3.64
Kiwibank - Offset 3.40 - - -
Kiwibank Special 3.40 2.35 ▼2.55 ▲2.79
Liberty 5.69 - - -
Nelson Building Society 4.95 3.20 3.24 -
Pepper Essential 4.79 - - -
Resimac 3.39 3.35 2.99 3.35
Lender Flt 1yr 2yr 3yr
SBS Bank 4.54 2.79 2.99 3.29
SBS Bank Special - 2.29 2.49 2.79
Select Home Loans 3.49 3.34 2.99 3.34
The Co-operative Bank - First Home Special - 2.09 - -
The Co-operative Bank - Owner Occ 4.40 ▼2.25 2.59 2.79
The Co-operative Bank - Standard 4.40 ▼2.75 3.09 3.29
TSB Bank 5.34 3.05 3.29 ▲3.59
TSB Special 4.54 2.25 2.49 ▲2.79
Wairarapa Building Society 4.99 3.55 3.49 -
Westpac 4.59 ▼2.85 3.19 3.49
Westpac - Offset 4.59 - - -
Lender Flt 1yr 2yr 3yr
Westpac Special - ▼2.25 2.59 2.89
Median 4.55 2.71 2.99 2.89

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