Is there a property bubble brewing?

For all those property bears out there I have some disconcerting news. The property market is starting to stir and it’s only going to go one way – up.

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.

Rodney Dickens responds