Housing price free-fall on the cards?
Posted by: Matt Nolan on: October 16, 2008
In the US, one of the main reasons given for the housing bubble was a result of an “over-supply of housing“.
In New Zealand we did not build that oversupply of housing even though population rose quickly pushing prices up. This was because it was very difficult to get consents and we had a substantial shortage of builders 
This is why we are unlikely to see a free fall in house prices like the one seen in the US. Our bubble was only in the expectation of house prices – it did not feed into excessive construction and so when the price corrects it will be less harsh.
Discuss
9 Responses to "Housing price free-fall on the cards?"
October 16, 2008 at 8:17 am
“apart from the apartment bubble”
Man, the apartment bubble was bad – it has been popping for about 3 years now. Thank goodness I never brought an apartment
“one discounts Leaky Building syndrome as an indication of excessive new construction”
Leaky building syndrome stems from an asymmetric information problem – I wouldn’t say that it indicates “excessive new construction”.
Fundamentally, builders will only want to add features if they get a return from it – as the quality is relatively unobservable, some builders (who did not value doing a good job for example) built rubbish houses, thinking that the cost to them would be trivially small. It does not matter whether we have an oversupplied or undersupplied market this will be the case
BTW, at about one I will say more about the “housing shortage/surplus” in New Zealand – I just don’t like to put up posts too close together 
October 16, 2008 at 9:10 am
We currently have about the same level of oversupply as the US, around 11 months worth of listings at current sales rates. At the height of the boom it was more like 4 months in both countries.
The argument from some (e.g. BNZ economist Tony Alexander) is that because new construction is falling this will translate into lower supply sometime next year and hence prices will not fall too far, but that remains to be seen. We also have higher personal debt per capita than the US, and much higher house price to income ratio, so arguably prices have further to fall here.
October 16, 2008 at 9:22 am
“We currently have about the same level of oversupply as the US, around 11 months worth of listings at current sales rates”
At the current price yes – but is that the price we should be looking at.
We all agree that price expectations were out of control. But how far we have to fall until we are at the “equilibrium” price is an issue of fundamentals.
In the US they built too many houses – which is why VACANCY rates are so high. In New Zealand we do not have this problem of vacancies because, given fundamentals, there aren’t “too many” houses.
This is the real oversupply problem that I’m discussing here, and the undersupply problem that Tony Alexander is talking about.
It isn’t the fact that, at the current price, there are more sellers than buyers – it is the fact that given the population and the current person per house ratio there just isn’t enough (or barely enough) houses to go around
Given this, we would expect to see a fall in house prices insofar as buyer and sellers expectations about the fundamental value of property has to adjust.
However, the US also has the issue of a true “over-supply” of property, where some houses are just empty because there is no-one to live in them. We are nowhere near that situation here, in fact with further population inflows it looks like we are going to have an issue of undersupply again soon (where there is nowhere for new people to move into).
If the “bubble” element is the same between NZ and the US, then as a result of this building activity we would not expect price in NZ to fall as much as they have in the US.
October 16, 2008 at 9:27 am
“We also have higher personal debt per capita than the US, and much higher house price to income ratio, so arguably prices have further to fall here”
That is an essential point for why we may see a big fall here as well. I completely agree. The only counter would be that NZer’s might implicitly value a house at a greater rate than people in the US – leading to a higher price to income ratio. Even so I agree that prices are too high on this measure.
I just wanted to raise the point of the “supply” of property – given that it is a factor that is often ignored when making comparisons of the NZ and US housing situation.
October 16, 2008 at 10:04 am
I’m amazed that thehouses down my street are continiually selling at $50k more than I payed for mine in june 2007..
Looks like the housing bubble hasn’t hit my street yet!
October 16, 2008 at 10:09 am
“Looks like the housing bubble hasn’t hit my street yet!”
Maybe people had previously under-estimated your street
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October 16, 2008 at 8:13 am
… apart from the apartment bubble. And if one discounts Leaky Building syndrome as an indication of excessive new construction.