Average house price inflation to halve.

There are three key factors above all others which explain house prices rising near 150% while average wages have risen by just 33%. First, because of the 2008 recession and then the Global Financial Crisis (GFC), house construction in New Zealand fell to the weakest levels since the 1960s by 2011.

Second, net migration boomed right after this collapse in house construction courtesy of a net migration surge from 2014 adding an extra 390,000 to the population – a boost of about 8.6%. Our population has grown some 18% since 2012.

Third, interest rates were slashed in 2008 to fight the effects of our recession and then the GFC. When growth in the economy picked up, inflation failed to appear as expected. Reacting to this the Reserve Bank had to cut interest rates further and even before the global pandemic started the official cash rate had fallen to 1.0% from the 2.5% it was cut to for fighting the GFC.

Firstly, the number of consents issued for new dwellings to be built stands at a record high and continues to grow as all stops are pulled out to try and build as many houses as possible as quickly as possible.

Secondly, net migration has been almost zero over the past year and as the world eventually settles into a new, largely vaccinated, normal, we may see net negative migration flows for a while. We Kiwis are highly mobile internationally, especially across the Tasman. In Australia there are labour shortages across numerous sectors, and it is highly likely that over the next three years a substantial number of New Zealanders will shift to take advantage of higher wages.

Thirdly, interest rates have ended a three-and-a-half-decade period of falling. As they rise a number of potential house buyers will find themselves no longer in a financial position to be able to make a purchase. Some may also find they need to sell.

On all three fronts the case is made for the average pace of house price gains over the next ten years to be substantially less than the gains seen over the past ten. The average annual rise in house prices since 2011 has been about 10% in Auckland and near 9% elsewhere.

This will make a big difference to the pace with which one accrues wealth through property ownership, especially taking into account the greater costs of running a rental property these days and the loss of ability to deduct interest expenses on existing properties.