I was asked if there is a property bubble happening at the moment. To answer the question you have to think about how a bubble is formed.

First you have to have the ingredients then it is a matter of blowing some air into them to create the bubbles. They start as little things but can grow exponentially.

Right now the housing market is perky. Most of the ingredients are there and some air has started blowing. One of the key ingredients is money. Money is cheap. It’s as cheap as it ever will be.

Judging by the reaction to last week’s official cash rate announcement and news that the US Federal Reserve doesn’t expect to hike its cash rate until 2014 we won’t see the cost of money increase quickly any time soon. In fact in the past week and a half ANZ National, ASB and The Co-operative Bank have all cut home loan rates.

The other thing to remember is that banks have become more conservative and wary since the global financial crisis. When it hit they limited the amount they would lend on a house to 80% of it value because they didn’t want to risk losing money if the market turned down some more. Banks have now eased this requirement and will often lend up to 90-95% of a house’s value.

This tells me that they believe values will start increasing.

Then there is the supply and demand equation. This week’s housing consent figures were the lowest in 46 years. We aren’t building enough houses fast enough to house our growing population.

The other sign that things are happening is the news about rents in central Auckland. They are increasing, and have reportedly gone up by more than 20%, and there is tight competition from prospective tenants.

History tells us that the first place a housing bubble starts is central Auckland then it moves outwards into the suburbs.

It’s a little like dropping a pebble (or rock) into a pool of water and watching the circle of waves move out. Over time these waves reach the provincial centres like Rotorua and house process increase.

We hear all this news that houses in New Zealand are unaffordable. One thing that I am sure about is that they are not likely to suddenly become more affordable (unless of course our incomes suddenly rise rapidly).

We have been through the bottom of the housing market cycle and the only way is up.

If there is a positive in this it is simple. Rising house prices make us feel wealthier and we spend more money. That helps economic growth.

At the end of last year we had The Economist on the topic, since then there have been reports from Massey University and Demographia.

It’s hard to argue with the results of these surveys. But it is much harder to find a solution.

Earlier this week Radio New Zealand invited me onto The Panel , Jim Mora’s afternoon show on National Radio to talk about the subject.

Panellist Gary McCormack was particularly hot on the subject suggesting if we can’t bring house prices down then democracy is stuffed. One answer , he suggested, was to make land more readily available for building on.

If it was only so easy.

What people seem to forget about this argument is that house prices are governed by many factors. Home loan rates, immigration, building costs, land cost, supply and demand and so the list goes on. While there are all these factors their interaction with each other is complex.

Really there is neither a simple answer nor a straightforward solution to this problem.

You can’t, and no government would dare, make a bunch of changes which would drive house prices down just so they were affordable for the small group of people (relatively) wanting to get onto the property ladder.

Housing still remains our biggest financial asset. To make changes like that would wipe billions of dollars off the wealth of New Zealanders.

When you look at the housing market it is clear the bottom of the cycle has been reached. That means there is only one direction that it is likely to head. Upwards.

The reality is that property isn’t going to get more “affordable”.

Instead of looking at all these surveys and complaining that you can’t afford a house. Look at it like this.

Houses are now more affordable than they were in the past four years.

PS: Don’t forget there is a capital gains tax and it is enforced. Indeed both Labour and National-led governments have provided millions of dollars to the PCP (Property Compliance Programme) and seen rich rewards for their investment.

There is a feeling of excitement and trepidation that it will be a great ride.

Today Barfoot and Thompson put out its latest stats on the Auckland market and the news is that house prices in New Zealand’s biggest city have hit a six month high.

Then we have some research from JP Morgan saying that house prices are just five percent below their November 2007 peak.

Earlier this week Auckland Property Investors Federation president David Whitburn launched his new book on property investing.

It’s called Invest & Prosper with Property. The name says it all.

More importantly though it’s been a long time since we had a comprehensive guide telling people how to invest in property.

That earlier title came out when the previous cycle started.

Maybe this one is a marker for for the start of the next property wave?

We talked to David Whitburn about the book and will run a couple of videos over the next week. The first one is a little shorty where David talks about his favourite chapters in the book and why he loves property investing.

You can watch it here.

All this news does make one feel like we are anticipating catching the next wave.

Being a Wellingtonian at heart, who spent a bit of time in Auckland, left to live in Rotorua and still supports the Hurricances and Lions, Auckland hasn’t yet won me over. But.

Last week I had a bit of an epiphany. It’s a little weird. In some ways I wouldn’t really take much notice of news stories about a draft plan to revitalise the Auckland CBD.

I heard some news stories at the start of the week and took a little notice. But it was sitting down at a Crockers function to listen to Auckland City Council Manager of Environmental Strategy and Policy Ludo Campbell-Reid changed my view.

He outlined the council’s plans for the downtown area and made me realise why there were all these bits I hate about Auckland; how for years the city has had rubbish leadership; how buses and roads clog streets; how the city has failed to embrace its natural beauty – particularly its harbour.

The vision he outlined seemed simple and visionary. At the least logical. What’s more you could see how, if the plans were implemented Auckland could rival great international cities like Sydney and Melbourne in the future.

Everyone should take notice of what is planned as it will have direct implications for the performance of the New Zealand economy and for the people and businesses which live and trade within the greater Auckland area.
Property investors should too.

Auckland is often considered the centre of the property investment universe in New Zealand – partly because 1.4 million people live there, and its growth and geographical characteristics give it important investment characteristics.

The enthusiasm was slightly dampened when the final slide showed the timelines for these developments. Episode three, as it’s called is planned for 2027-2052.

When those years roll around I won’t be using cycle lines it’ll be more like looking for places with wheelchair, or walking frame access.

Many of the changes will happen in the first episode starting 2012.

Jokes aside go and check out www.theaucklandplan.govt.nz and see what’s planned.

Alan Bollard, as we all know and expected, left the official cash rate unchanged at 2.50% and made noise that it may stay there for longer than expected.

Those comments tally with what we have been thinking for some time. That is the pressure on interest rates is likely to be downwards rather than upwards. To see a big hike in rates you’d need to see some pretty positive economic news. But as Bollard said last week when you look offshore there are dark clouds everywhere.

Things are much better in this country, but that won’t be enough to trigger rate increases.

There are some interesting things happening at the moment and on balance they are positive for borrowers. The “emergency” 50 point OCR cut earlier this year was made in the wake of the events in Christchurch and to shore up the economy.

There is a growing argument – well one I hear – that the Christchurch factor isn’t the relevant and the cut is actually benefiting other centres, particularly Auckland. In this city the housing market is significantly stronger than the rest of New Zealand.

The argument goes on to suggest the 50 point cut should be removed quickly to slow Auckland down.

And then we come to the banks. It seems none of the big boys are falling over themselves to get into a Spring campaign which invariably comes an expense exercise in getting new business.

Lending growth isn’t that strong at present an there is not enough new business to chase. Rather the banks are focused on customer retention.

With floating rates they have fat margins and there is no need to sacrifice these and get borrowers onto fixed rates.

While there was a growing expectation that the Reserve Bank would increase the OCR 50 basis points in December that is now looking less likely.

For borrowers and property investors the interest rate looks pretty benign and what you see is what you are going to get for some time.

While the banks have been quiet for the past couple of years, thanks to the global financial crisis and sad housing market in this country, it’s likely they will get out their box of party tricks very soon.

Unfortunately in this area we are currently following Australia. Across the ditch this week ASB’s parent, Commonwealth Bank of Australia has launched a campaign which looks a lot like the now infamous Unbeatable campaign BNZ ran in New Zealand a number of years back.

Commonwealth Bank is pledging to beat any advertised rate among its three big rivals
Meanwhile there has been little activity on the rates front in this country with few changes in the past month. The Reserve Banks is due to release its latest pronouncement on rates this Thursday.

Our survey of 13 economists shows that the majority aren’t expecting to see any increase until December.

Eight out of 13 are predicting the next increase will just before Christmas. Three of those eight are forecasting a 25 basis point hike to 2.75% however the reminder are opting for a 50 basis point hike.

Two economists though are predicting that the OCR will rise when the Reserve Bank releases its announcement in October.

The remaining three are suggesting increases won’t be until the first quarter of 2012.

The wide variation in predictions, including the size and timing of the next OCR increase shows that there is still a lot of uncertainly in the market.

The one thing that is certain is that as soon as the OCR increases floating rates will rise.

Our home loan rate table shows that the lowest standard floating rate at the moment is 5.60% from the Public Trust.  SBS and its subsidiary HBS Bank are close behind offering 5.65%

BNZ and Kiwibank offer 5.50% and 5.59% respectively for their offset mortgages, while Westpac has chosen to lead with its revolving credit mortgage, Choices Everday, at 5.60% while its standard floating rate is 6.24%.

NZ Property Investors Federation president Andrew King said it is a big issue and needs to be fixed quickly as it is costing landlords money.

“At the moment we are losing money,” he says.

Normally landlords can issue a 14-day notice to tenants when there is a problem such as unpaid rent and apply to the tribunal for an order.

King says it was possible to get tenants out of a house in three to four weeks.

In some areas that process is taking up to three months because of delays at the tribunal.

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King says there are a number of reasons for tenants not paying rent, including the state of the economy, however tenants can make applications to WINZ for help.

He says news of this situation is getting known and some tenants are just having a go and not paying rent.

In some cases the tenant leaves and the landlord can chase them for unpaid rent, however some are staying put which means new tenants can’t be housed.

Housing minister Phil Heatley acknowledges there is a problem.

He says issue is about scheduling of court time and the e Department of Justice is making 10% time available to the tribunal for hearings.

Yes this sounds crass. Making money out of a tragedy of monumental scale.

But it’s not meant to be as mercenary as making money from other people’s misery.

The big boys are doing this. You just have to look at what is happening with companies like Fletcher Building. It is poised to make many millions from the rebuild.

There was a piece on the TV news the other night about someone, it may have been the government, brought in fund managers and institutional investors, to see what the “opportunities” are in the Christchurch rebuild.

There is no reason why residential investors can’t take the same attitude and see what are the opportunities to make money in the Garden City.

How to make a bob in Christchurch though is something which may require some creative thinking and risk taking.

Clearly there is a demand for rental properties so buying up suitable properties maybe one option. I suspect buying properties that can be remediated and tenanted quickly is another area of opportunity.

So too will be in building new homes. Those who own suitable land to build on look to be in a good position, even though getting builders and materials may prove tricky.

Likewise, adding additional dwellings, such as minor dwellings if they are allowed, is probably attractive.

I suspect there are many other options worth considering too.

Investment theory says those that take on the most risk make the most returns. Christchurch is clearly a place where an investor will be taking on risks, but they may well be worth it.

The centre piece is, as leaked last week, a 15% tax on capital gains. Or as Labour’s finance spokesman David Cunliffe says; people will be able to keep 85% of the capital gains. (And the tax is on gains less costs such as agent fees).

The tax is forecast to raise $26 billion over 15 years.

While the CGT information was much as expected there was one other thing in the announcement investors may not have known. It was only dealt briefly, but Labour plans to ring fence tax losses on property.

Property investors won’t be pleased with what’s planned. I attended the media conference today and one of the underlying themes that came through is the anti-property theme.

Cunliffe trotted out the (disproved) Tax Working Group argument that says landlords pay no tax on $200 billion of assets.

NZ Property Investors Federation president Andrew King has on many times explained why that number is wrong.

However it felt there was an anti-property theme to what is planned.

Labour’s economic development spokesman David Parker said things like: “Our tax system currently favours the speculator and penalises the productive export sector.”

“The OECD and Treasury both say it is wrong for our tax system to have advantageous tax rules for property investment.”

The theme being that property investors make too much, don’t pay tax and are holding back the economy.

Without trying to defend the CGT idea it’s worth suggesting that some form of CGT is inevitable. It will happen some time. New Zealand is finding it is harder and harder to escape pressure to doing things like other countries.

There is an argument that CGT is political suicide or a “third rail” issue. Touch it and you die.

That argument is intellectually lazy.

What would be good would be to see one of the big two political parties being prepared to address the other third rail issue and raise age of eligibility for New Zealand Superannuation.

Is there anything good about a CGT? One of the redeeming features is that it is reasonably comprehensive and covers other assets and excludes the family home.

Also it is not retrospective. The idea is there will be V-Day when the value of all assets are set. The gains will be from capital appreciation from that point in time.

While V-Day stands for Valuation Day, there is no doubt Labour thinks it’s V-Day, as in World War II terms, for them in the general election this November.