The Dim-Post

The difference between a bubble and scarcity effects on value

Via the Herald:

Precisely the same factors that plunged Ireland into its housing crisis last decade are now in play in New Zealand and could spark a big correction, says a leading Auckland fund manager.

Milford Asset Management executive director Brian Gaynor said house prices might come down “10, 15, 20 or even 25 per cent” and he cited the former Celtic Tiger as a warning.

Westpac’s chief economist, Dominick Stephens, shares Gaynor’s concerns, and said the outlook was for a possible 5 per cent adjustment by 2018.

“Our forecast has been for declines of 2 per cent per annum in 2017 and 3 per cent in 2018, so 5 per cent overall,” Stephens said.

“But there’s a wide range of possibilities and a sharper decline is certainly a possibility.”

Ireland’s house prices stabilised in 2007, then started falling until the second quarter of 2010, by which time they had dropped 35 per cent.

Gaynor said the factors behind what had also happened in Greece and Spain showed the potential for a “devastating” situation in New Zealand.

“I think of the Irish example and the similarities which happened in Ireland [compared] to here are huge.

“The first thing is the role of the media,” he said, citing articles about house prices being given the same prominence as articles about tragic drownings.

“House prices are one of the sensations. The media played a huge role in Ireland in record prices – the best suburbs to buy, highlighting people who had bought and three months later made huge gains of 20 or 25 per cent or more.

There’s a big, big difference between the Irish housing market in the 2000s and the modern day New Zealand housing market: scarcity. I was in Ireland in, I think, 2005, and their housing market was insane. They were building about eighty thousand new houses a year. 100%+ mortgages were routine. Banks were happy to lend that money because they could sell the loan on – no risk to them if the loan was worthless. Some enormous percentage of the population worked in the construction industry. They were building gigantic, Spanish-style beach resorts on the north coast of Donegal, which does actually have very pretty beaches, but also wind and sleet and rain for about fifty weeks a year. It was a classic speculative bubble.

Is New Zealand like Ireland? Well, we’re building about ten thousand new houses a year. Our net migration for 2015 is supposed to be fifty thousand people. If we built four times as many homes as we currently are then prices would maybe stay still. Our houses are a lot more expensive to build than those of comparable economies. Our laws are structured so that if you invest in these scarce, valuable assets you don’t pay any tax on the capital gains. Investing in a scarce, valuable asset protected by tax loopholes is just a really great thing to do with your money, and its the reason the Auckland housing market is going berserk. If more and more people arrive here – either through birth or immigration – and want to live in Auckland and there aren’t nearly enough affordable houses built to accommodate them then the bubble will never burst, because it isn’t a bubble.

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