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Property Institute challenges ‘price crash’ claims

Property Institute challenges ‘price crash’ claims

Property Institute of New Zealand Chief Executive, Ashley Church, has challenged renewed warnings of a coming Auckland ‘property crash’ and says that those who make such claims are ignoring both history and the root causes of the current Auckland property boom.

In a speech delivered to Victoria University last week, but only released yesterday, Finance Minister Bill English warned of the risk of a house price crash because of an over-supply of housing, eight years after the initial shock in demand. Mr English claimed that this eight-year crash scenario had been borne out by extensive studies in the United State following the global financial crisis. He did not say when this ‘demand shock’ started –but there has been subsequent media speculation about a price crash in 2021 based on this scenario.

But Mr Church says that such claims are unhelpful and are the economic forecasting equivalent of reading the entrails of chickens.

“The events which shaped the collapse of the US property sector, prior to the GFC, bear no resemblance to the kiwi property market and have no value as a guide to what might happen here”.

“The American experience in the years leading up to 2008 was basically a comedy of errors. During that time US Banks significantly relaxed their loan criteria and were lending to people who were not in a position to pay back their loans. To get around this they were also offering balloon payments which meant mortgage payments started low but ratcheted up steeply after a few years. There were also a number of States which passed laws allowing homeowners to simply return their keys and walk away if it got too hard to make their payments”.

Mr Church says that the New Zealand property market could not be more different.

“New Zealand has very tight controls around lending – probably too tight – and the Auckland housing crisis is underpinned by real demand - not an artificial boom created by the banks as was the case in the US”.

“It’s also worth noting that Australasian banks came through the GFC largely unscathed because they operated in a far more responsible manner than their US counterparts”.

Mr Church agrees with Mr English that the current Auckland property boom will eventually end when supply catches up with demand – and acknowledges the suggestion, by Mr English, that the country may even end up with more homes than are actually required.

“New Zealand has a history of ‘overshooting’ the mark and building more homes than we need – which means we may end up with a surplus of properties that take a year or two to absorb”.

But he rejects a claim, by Mr English, that a price crash is inevitable.

“Mr English said he was yet to find a housing market anywhere in the world where prices go up but don’t come down. Well, he lives in one. You have to go back to the early seventies to find a time when there was a significant fall in the Auckland property market following a boom”.

Mr Church said that the Auckland market has a history of leveling off after boom periods – with prices going nowhere for a few years then starting to rise again when the next boom kicks off.

ENDS

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