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NZ Property Report: Bursting bubble unlikely in New Zealand

Property Here - Monday, June 03, 2013

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Bubbles burst and people get hurt. That's what happened in Ireland, Spain and the United States through the global financial crisis when house prices fell by between 30 and 50 per cent.

But is a bubble forming in New Zealand - or, rather, Auckland - and, if it is, could the end result be ugly here?

For answers to those questions,Property Report talked to economist Rodney Dickens (pictured), an expert in residential real estate and a former ASB Bank head of research.

Dickens sees a bubble as "a somewhat vague concept".

"I think about it in terms of the yield on the asset," he says. "A sure sign of a bubble is when price increases result in really low rental yields that are not justified by other things.

"In this context a key factor is that [today] low interest rates are making low rental yield look reasonably okay, so to me it is not technically a bubble, certainly not compared to the relativity that existed between rental yields and interest rates in 2007."

However, Dickens says there are "considerable risks" if interest rates increase significantly at some stage. If that happens there's a real chance of prices falling as they did in 2008/09.

"But this would still be nothing like a fall of bubble bursting-scale, and a real bursting is extremely unlikely unless something really bad happens on the employment front, resulting in lots of forced sales."

More likely, he says, prices could be "eaten away over a number of years" if moderate progress is made in delivering more affordable new housing.

Because the current housing upturn isn't driven by the sort of investors that drove the apartment building and coastal property bubbles, there isn't the same risk of demand collapsing, he says. However, interest rate rises could result in "somewhat more than normal cyclical fall", exposing the underlying affordability problem.

Dickens says it's silly to compare New Zealand with the United States because the quality of lending was so poor before the bubble burst. Mortgages were given to people who couldn't afford to pay interest even at low interest rates and were therefore at huge risk when interest rates rose.

In New Zealand, while rising interest rates carried the risk of a "mini-burst", it would take "some calamity" to produce more mortgagee sales than during 2008/09 and result in a large fall in average prices.

Rodney Dickens is managing director of Strategic Risk Analysis.