Euphoria with the Auckland property market

Maintaining investment discipline through times of euphoria or panic is not easy. Investment principles and practices often go out the window at such times. It is why equity (share) investors and fixed income (bond) investors historically underperform equity mutual funds in the US by over 5% and the Barclays Bond Index by even more. No different in NZ from my experience dealing with people who have ‘lost’ money using managed funds. It is also why property investors often over leverage (borrow). Ask any Aucklanders any mundane questions about life and the booming property market will become a major topic. People love instant riches.

In times of euphoria, people take undue risk. In times of fear, people panic. Investment and money seems to accentuate both these foibles. Let’s take the Auckland property market of the moment. Nothing surer than some people are going to lose their shirt and some will get lucky. It’s called speculation, not investment. People are speculating on price because sure as heck the yields don’t stack up now, let alone when interest rates rise – and they will. The world cannot print money to the extent it has without creating inflation.

Over the last 60 years, property prices have increased, doubling many times. However, it is not without volatility. From 1950 – 1954, real property values increased by 66%. From then until the early 1970’s – very little increase. From 1971 to 1974, real prices jumped by 59%, however from 1974 to 1980 real property values plummeted due to inflation. Over those 60 years, history shows us that after hitting a peak real house prices tend to bottom out. In the late 1970’s when values dropped they did so by 37% - a crash. From 1980 to 2007, median house prices gained a whopping 826%. But not consistently. There were five periods through those 27 years when property values decreased. In 1989, the average cost of a house – 5 x average family income. In 2007 over 10.5 x

If speculators don’t think either this government or the next will not take action to change this market anomaly they need to consider why the supply and demand curve is where it’s at. Especially in Auckland and more temporarily in Christchurch.

Demand

Demand reflects the number of people wanting (and able) to buy. Largely affected by our economy.

Immigration interest is also a factor – we are experiencing record immigration numbers – over 50,000 net last year.

Because interest rates remain so low, people are prepared to leverage and banks are prepared to lend because the liquidity in the world markets is high – due to countries printing money.

Whilst we (NZers) think our interest rates are low – overseas markets see our interest rates as high, and therefore money keeps flowing in (for banks to lend).

Supply

When supply dries up, demand increases – prices go up. The Auckland market has simply not kept up with natural demand of population increases – without the immigration numbers fuelling further demand. This is certainly not happening in the rest of NZ and Christchurch will adjust with a bang when its extraordinary numbers of re-build personnel complete their building programme.

The Auckland local authorities have not made it easy for Auckland developers to A) acquire land for development, B) given ‘consent’ for development – this will change. When it does, due to a multiplicity of local and central government decree and central bank controls, we will see the transition occur. When governments get involved dramatic highs and lows are the inevitable outcome.

It seems impossible to consider now – but oversupply in both Auckland and Christchurch is inevitable. We know what happens then. Meantime in Wellington and provincial NZ, we are certainly not shooting the lights out – I’d prefer that to the roller coaster ride up north and down South.