THE PROPERTY MARKET CYCLES OF THE PAST 25 YEARS
When property prices are on the rise, the commonly asked questions are usually based around how long can this bull run last?; are we in a bubble?; or have prices become disconnected from reality?
All are fair questions. However what is really interesting is the fact that these questions tend to float to the surface of the media precisely at the end of a property cycle. Property cycles are a historic part of the property market, here in NZ and globally. These cycles tend to last around 5 years and represent periods of either stagnant growth, accelerated growth and in some case declines.
I have chosen to use a different data set from The Real Estate Institute of New Zealand for analysing the market. I have chosen to use the House Price Index (HPI) – this data set is probably the most reliable and accurate data set for property sales prices in NZ. The Index which was developed by REINZ in cooperation with the Reserve Bank of NZ ensures that this price data set is not effected, as it can be by composition changes. That is to say if in a month a higher proportion of sales occur in a relative price band or suburb set this can skew the median price which is the most common and trusted method of sale price calculation.
I also decided that I would analyse two data sets namely Auckland, and NZ excluding Auckland. The fact is a single NZ data set is itself a compositional skewed data set as Auckland being c.40% of the market heavily skews the National picture which then becomes irrelevant for properties outside of Auckland. (More of this is a future article).
Now back to that opening question – what are the key cycles of the property market of the past 25 years and how similar or different are they?
Here is a more detailed analysis of the price index data I have concluded upon for which I have identified not 5 but actually 7 phases of the property market over the past 25 years.
Now before you email or call me to ask what on earth I have created, let me explain. I have taken the HPI data and broken it up into these 7 periods or phases of the past 25 years which are tracked along the horizontal axis from 1992 to 2018. For each of the 7 phases I have identified the inflection point and recalibrated the start point to zero. So let me walk you through the 7 periods to help explain.
PERIOD 1 – JANUARY 1992 TO FEBRUARY 1993
Just a one year period which saw the price index grow by just 7% for Auckland and 7% outside of Auckland. This is subjectively an odd data set as there is no record of what happened pre-1992 and especially from the after affects of the stock market crash of 1987. Best to disregard this phase.
PERIOD 2 – MARCH 1993 TO MARCH 1996
Now this was a period of significant price growth. Auckland price index leapt 68% in just 3 years whilst outside of Auckland the price index went up 22%. This 3 year rise of 68% in Auckland is the fastest rise that has ever been seen over the past 25 years.
PERIOD 3 – APRIL 1996 TO JANUARY 2002
This period of close to 6 years included the Asian Financial crisis and saw property prices stagnate. By the end of the period Auckland price index had risen by just 10% and the rest of NZ excluding Auckland 12%. Twice during that period Auckland prices dipped. By 5% in the first few months after April 1996 and then again late in 1998 dipping by 3%.
PERIOD 4 – FEBRUARY 2002 TO NOVEMBER 2007
This would be viewed by many as the most explosive period of property price growth. In the five and a half year period the property price index for NZ excluding Auckland more than doubled, rising 116%, far outpacing the rise in Auckland of 89%. All of this of course foreshadowed the GFC.
PERIOD 5 – DECEMBER 2007 TO DECEMBER 2009
For a full 2 year period the property market went into a funk. Prices went down. A scenario that many thought would never happen just a few years earlier, however property prices will at some point, just as with all assets; go down in value as much as they may go up. For Auckland the price index slipped 12% in the first 12 months before easing back to be down 3% by the end of the second 12 month period. For outside of Auckland the level of price fall was less severe, down 9% in the first year before clawing back half of that to be 5% down after 2 years.
PERIOD 6 – JANUARY 2010 TO JANUARY 2013
A full 3 years in which property price index rose just 2% outside of Auckland, spending the first 2 years underwater adding to the prior 2 year period making a full 5 years when properties collectively outside of Auckland failed to recover the peak they had attained in late 2007. For Auckland the recovery from the GFC came earlier with this 3 year period seeing a modest sustained growth up 18% over the 3 years.
PERIOD 7 – FEBRUARY 2013 TO DATE (MAY 2018)
This current 5 year period may in later years be revised to a 4 year period ending in August 2016 when Auckland’s property price index peaked up 70% in that period of three and a half years, close on the same rate of growth seen back in the ’93 to ’96 period. At the same time for properties outside of Auckland the price index keeps rising, up 49% over this 5 year period, the second highest rate of growth of the past 25 years.
So in conclusion, property markets move in cycles and these cycles lead to price movements. It is likely, based on historical evidence of the past 25 years that we are in, or will be shortly be entering a plateau phase, typically these periods can last from 3 to 6 years dependent upon the background economic circumstances. As to when this period started, in the case of Auckland we may already be 2 years into it. In the case of the rest of NZ it maybe that we are about to see this plateauing start very soon. If there is any silver lining it should be seen that a correction that sees property prices fall is less likely and with a strong economy we are likely to see property prices take off again within the next decade. The only certainty is that it is almost always impossible to identify the infection point until after the event!