House Price Index Declines

The graph above charts the percentage change in house prices, measured since 1962 to the present day.

Currently, house prices are increasing at a subdued rate, in the vicinity of 8% per annum to June 2006. If the current trend continues, by mid 2007 it is likely house price inflation will subside to 3% to 4% per annum. This contrasts to the near 15% annual increase that has been enjoyed over the past four years.

The graph above shows a clear trend of gradually declining peaks in each cycle over the past 40 years. If the trend line continues, house price inflation in the next upward leg of the cycle is likely to be less than in past cycles. We anticipate a maximum increase next “boom” in the order of only 10%.

This stands to reason as the property market at the end of the current boom has had a very “soft landing” with still solid activity. Past booms in real estate have been partly driven by very low interest rates, a very low exchange rate, the economy building from a period of stagnation and high unemployment, unusually high migration and a “catch up” phase in property prices.

None of the above factors appear likely at this phase of the slowdown (migration gains excepted as these are always somewhat “unknown”). Our dollar is holding up and predicted to fall only to a low of 55 cents – 10 cents above previous downturns in the property market. Unemployment numbers are likely to remain low. Interest rates will remain close to current levels – a drop to 6% fixed rates which occurred in the last two boom cycles seems a remote dream. Property prices already appear high, particularly in relation to incomes, thus there will not be any “catch up” in the next upswing.

House price inflation therefore looks set to enter a more subdued period of growth. In the anticipated slow down period over the next couple of years, house price inflation in Auckland may be anything from 0% to 3%. A negative price fall could occur but seems unlikely with the current positive migration numbers, low unemployment, wage growth and reasonable performance of the economy.

In the next upward phase – probably 3-4 years out (i.e. Spring 2009 or 2010) – the “boom” should be a much weaker one. We will watch the house price changes with some interest to see if this is the case. Predicting the magnitude of any downward or upward phase of the property cycle and just when it occurs is very much like looking into a crystal ball. But, based on past trends, the above scenario seems the most likely. This all assumes, of course, there is no major international crisis which would undermine our economy and the property market in general.