Anatomy of Auckland ’s [New Zealands] property cycle
Anatomy of Auckland ’s property cycle
Article written 6th April 1998 - Past On By A Good Friend, who is also an investor found this via Google and passed on to me.
I thought it would of interest to compare what was written then with the current situation in this cycle. Read on….
It was always hard to see how house prices could continue to inflate by more than 10%pa when general inflation was around 2%. Household incomes have risen at best by around 3% to 4%pa in nominal terms since 1990. The outcome was a growing gap between what households could afford and what was available. 
Over the 1990’s the Auckland property binge has been fueled by easy access to unlimited amounts of capital courtesy of world capital markets besotted with our sumptuous interest rates. But this didn’t trigger the initial surge in house prices. The upturn in exports in the early 1990s plus strong migrant inflows both from overseas and other parts of New Zealand kicked the market in to action. The generous supply of capital kept it well stoked. The high interest rates were not a problem to borrowers with the well-founded expectation that asset values would rise rapidly. Far from being punishing the apparently high nominal interest rates were low when deflated by Auckland property price inflation. 
One of the side effects of having this sort of debt steroid for the property market was that it pushed up the exchange rate. As the capital flooded in on the back of high interest rates the real exchange rate was pushed well above its long term average over the mid-1990s. Slowly but surely this undermined the trade surplus. This contributed to the steep deterioration in the balance of payments current account over the last year, although it has not been by any means the main culprit of the dire state of that deficit. 
There are now several factors conspiring to choke-off property market exuberance. Firstly, net foreign migration has slowed substantially since the mid-1990s. Secondly, the rapid rise in the cost of housing in Auckland has steadily reduced the number of people who can afford to buy the houses. Thirdly, people feel less secure about their jobs and incomes as firms try to cope with high interest rates and tough trading conditions. Finally as property price inflation has slowed, interest rates have in fact risen pushing up real interest rates substantially. The cycle is now clearly in its downward phase. Given that, and the fact the Reserve Bank has clearly indicated a further easing in monetary conditions, why have interest rates risen?
It comes back to one of the consequences of the boom. When property price inflation was at its peak so also was the real exchange rate. The damage done by the latter is only now obvious in the huge current deficit. The large deficit has helped undermine the confidence of international capital markets in New Zealand . So, not only are they clearer about why interest rates were so high here those interest rates now have to be even higher to encourage foreign capital to stay.
How low will the cycle go? Strong population growth and the economic impact of the America ’s Cup and other significant international events over the next two years will help limit the downside of the cycle in Auckland.
Comment; I have seen quite a number of people over the years lose the gains they have made by not observing the property cycle and taking appropriate action for their situation. Please do your due diligence. It is always a good time to buy but please do your numbers and make sure that you can continue to service your mortgages even if you had the occasional vacant investment property. There are quite a number of different strategies that will help you, including lease options. If you would like to know more about this then please email me at 
leaseoptions@getleverage.biz