Capital gain time over?

Comparative research by Reid Quinlan, who is a director of property valuation firm Seagars, suggests that property owners are not likely to make any more capital gain in this property cycle.

Once adjusted for inflation, which was very high in the 1970s and 1980s, the research shows that the current cycle is following a similar pattern to those in the 1970s, 1980s and 1990s.

These cycles were not as dramatic as the 2000s cycle which was a bit of a super-cycle, Quinlan said.

“In this cycle, prices have followed pretty much the same pattern as the 1990s, which peaked 5.25 years into the cycle, fell by 5% a year after the peak, and slowly recovered to only a 2% loss by four years after the peak.”

At the end of each of the previous four cycles, the research shows a “real” fall in values of -38%, -6%, -7%, and -14% respectively – but the 1970s and 1980s value falls were masked by inflation.

Quinlan said that we are 5.5 years into the current cycle so, assuming it is a “normal” cycle, the market will lose 10% or so from current peak prices over the next four or so years.

But, going by past cycle patterns, there is likely to be a small “dead cat bounce”, which looks like a recovery but isn’t, in the years after peaking before the market finally peters out.

“This time round, a dead cat bounce will look good in a year or two, but that will peter out. This type of bounce is pretty common but the renewed interest tends to fade out as people realise that things still aren’t sustainable.”

The good news is that the cyclical peaks in real terms have been 160% for the 1970s, 138% for the 1980s, 138% for the 1990s, 186% for the 2000s, and 151% for this cycle, he said.

“Add inflation at 1% a year and house prices will likely increase by about 50% over the next cycle.”

Goldman Sachs recently described a house price “bust” as house prices falling 5% or more after being adjusted for inflation.

However, many commentators don’t generally consider prices falls around the 5% to 10% level as “busts”, rather they reserve the term for falls in the order of 40% or more.

Given the current high prices in New Zealand, particularly Auckland’s housing market, a 5% to 10% price fall would constitute a correction more than a “bust”.

Property Institute chief executive Ashley Church is not convinced that we’ll see even a 10% drop in house prices.

He said there has been an ongoing upward trend in New Zealand’s housing market cycles with the exception of the end of the GFC.

“Also, the cycle patterns would be similar if the market drivers were the same – but they are not. This cycle is being driven by a big spike in immigration and a real need for labour.

"That is different to those previous cycles. For example, the booms in the 1980s and the 2000s were driven primarily by speculation.”

The situation is complicated by the fact that New Zealand no longer has a national housing market and instead has many, quite different markets, Church said.

“The drivers behind the Auckland market are very different to those behind the Wellington market.

“Wellington does not have the population pressures of Auckland, or Hamilton and Tauranga, and is being driven by speculation. The same goes for some of the regional markets, like Wanganui.

“But the market in Auckland, as well as Hamilton and Tauranga, is being driven by immigration and the demand for more houses for growing numbers of people.”

The LVR restrictions are an artificial clamp on demand but in Auckland, and Hamilton and Tauranga, the demand is still there and those markets still want to grow, he said.

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