Blog - The bursting bubble can explode on our face
The bigger Auckland’s housing price bubble grows, the greater the likelihood it will burst and the worse the consequences for those caught up in it.
That is the warning that leading economists have given as Auckland’s house prices continue to soar. Within a year, the average house price in Auckland will exceed $1 million.
The government has allowed this to happen because it believes that huge inflation in house prices make those fortunate enough to own houses feel better off and more likely to be positive about the government.
However, there are now a growing number even within Government as well as in Opposition who are beginning to see the serious flaws in this strategy.
Veteran funds manager, Bryan Gaynor, a respected economist and economic adviser to Prime Minister Lange in the 1980’s, warns of the parallels with the soaring stock market before it collapsed in 1987.
People start to believe that the market will never fall and fail to see the warning signs until it is too late, he says.
There are plenty of examples around the world of crashes in house prices after they have become over inflated. At the start of this decade, for example, house prices in Dublin, Ireland dropped 57per cent in four years and in Nevada, USA by a massive 64 per cent in the six years to 2012.
Median house price in Auckland has nearly doubled since 2009 and people are going heavily into debt to meet the cost.
Housing debt in New Zealand has reached a record level of over $218 billion. If and when a crash comes, it leaves people with mortgages worth more than the price of their property and in financial crisis. It also results in a huge slump in consumer spending which would push the country into serious recession.
A number of factors could cause the bubble to burst. When interest rates go up, people with huge mortgages will struggle with the cost of servicing them. If migration flows change, for example with the recovery of the Australian economy, or if our economy suffers from some external shock like a slump in the Chinese or American economies, that could trigger a major drop in house prices.
Some economists and long-time property investor Olly Newland say that the property bubble is now too far advanced to fix. I hope for the sake of New Zealanders that is not correct.
What should the Government have been doing? Firstly, after the Global Financial Crisis of 2008 they let the building industry sink to a level that it has taken years to recover from. The Government needed to intervene to sustain building levels during the recession. That would have allowed them to acquire new houses relatively cheaply, build houses to meet the inevitable rise in cyclical demand and would have helped alleviate the effects of recession.
Secondly, by allowing demand to far exceed supply of housing, in part through record levels of migration into Auckland, Government ensured that housing prices would soar. All governments in the past have moderated migration to levels that infrastructure can cope with. They have increased migration in line with our ability to cater for housing and transport needs.
The Government has not attempted to ease pressure because it relied on immigration to hold up New Zealand’s GDP level.
Thirdly, as house price inflation has soared government has done almost nothing to stop the rush of speculative activity, domestic and foreign, which has caused house prices to rise even further.
As a member of the reforming Labour Government of the 1980s, I support a market economy. However, I also know that there is market failure and governments need to intervene when necessary to counteract that. Governments also need to intervene to ensure socially fair outcomes, such as by preventing homelessness.
Current Government policy pays no attention to these needs. As a result, we have an unsustainable house price bubble which, if and when it bursts, may have devastating consequences for all of us.