Housing boom and bust

By BRIAN FALLOW

New Zealand's housing cycle tends to be marked by short, sharp booms and mild, longer-lasting busts, a study by Westpac economists has found.

Since 1970 there has been a pattern of pronounced cycles every seven or eight years.

"This doesn't mean you are guaranteed a big housing boom every eight years but it is what has happened over the past 35 years," says Westpac chief economist Brendan O'Donovan.

When demand climbs for whatever reason - a surge in migration, perhaps, or low interest rates - supply cannot respond quickly because of the time it takes to get consents and then to do the building, especially when skilled labour is in short supply.

Prices accelerate sharply, over two or three years. That creates its own momentum and pulls in speculators.

But when the supply-demand balance tips and boom turns to bust, house price inflation falls away just as rapidly.

Not to the point that average house prices fall, however, at least not very much or for very long. There were mild (less than 5 per cent) declines in house prices in 1991, 1998 and 2000.

Those averages can mask big variations, though, between different regions or segments of the market, O'Donovan says.

"So when we talk of 'the market' potentially falling 5 per cent next year, parts of the market will fall far more and others not at all."

Nominal prices tended not to decline because people do not like selling into a falling market, keeping their houses off the market instead and ensuring the bust is several years of static nominal prices, he says.

Early signs of a turning market are reduced turnover and a preference among vendors for indicative prices rather than tenders and auctions.

The average number of days it takes to sell a property is another indicator, ranging from around 50 at the trough of the market to around 25 at its peak.

O"Donovan says that by these indicators the market is starting to drift off but not dramatically so.