Only a disaster will burst bubble

It appears that Auckland's housing bubble is indestructible if one bank economist is to be believed.

BNZ's chief economist Tony Alexander is forecasting the city's house prices will go up by 14 per cent this year, just as they did last year.

"Short of a nationwide outbreak of foot and mouth disease, Mt Rangitoto erupting, or an asteroid striking, Auckland's house prices are likely to remain high and keep rising," he says in a paper called Auckland is Different.

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"Few people will now assign credibility to forecasts of house prices collapsing given that prices only fell 13 per cent during the GFC, then recovered all those losses by November 2011."

He says Auckland is New Zealand's London, is vastly different to the rest of the country and "projected to become more so" due to immigration and predictions that 40 per cent of the population will live here by 2043 (currently 34 per cent).

One reason for Auckland's critical shortage of affordable housing can be traced back to 2008. Yes, the shadow of the GFC, and the ripples caused by banks suddenly becoming careful about making loans, are still with us.

Alexander says although the number of building consents has doubled since 2011, we are back to only pre-2008 levels of home construction. "Consents for new dwellings [today] only equal the long-term average, which produced the shortage in the first place."

Meanwhile, he says, construction costs for homes have risen by 13 per cent since 2011, while the CPI (consumer price index) sits at just 3.6 per cent for the same period. Who's putting 10 per cent in their back pocket?

Alexander cites the Government removing tax advantages, such as Loss Attributing Qualifying Companies, as a reason for a lack of housing -- the change meant landlords could no longer offset investment income losses against other income.

Changes to the way depreciation is calculated on property "similarly produced no listing flood".

So on top of the GFC, and land banking, changes to the tax system have directly contributed to the housing shortage.

On top of that, a lack of listings, says Alexander, has been caused by homeowners in the city sitting tight -- hedging their bets.

"People since 2013 have been saying 'I cannot afford to sell in Auckland or I will never buy back in again'," he says.

"People are reluctant to sell before they arrange a purchase, thus limiting listings."

However, he says young people are buying small, cheap, properties and renting them out, hoping the capital gain can be used as a deposit on a home they will live in.

Low interest rates, while helping mortgage payers, are encouraging people to take cash from term deposits at the bank, offering poor [taxable] returns, to buy into real estate. And at an apparent annual return of 14 per cent, why wouldn't you?