Many of you would have been familiar with how much house prices have climbed over the past two decades.
This has been quite a lot. I’m sure many of you who are in your early 20s would’ve said to yourself, ‘They did go up quite significantly over the past 10 years.’
Well, over 100%.
But the question is, ‘Have you asked some of the millennials who are in their teenage and young adult years?’
I’m sure they will say something much different.
Something that, in fact, is unbelievable.
An incomprehensible indication of house price shift
Okay, let’s take a look at the sea view of this three-storey house within 5km of Auckland’s main CBD right here.
Source: Alistair Bilkey
Someone would easily put a figure on this house for over $2 million.
What if I told you this house was brought for $75,000 in 1982.
I don’t think anyone born in the 1990s or early 2000s would believe that.
I even think some millennials will struggle to comprehend that.
But, believe it or not, this is true.
This is quite scary — the amount of difference — when you think about it.
You must be thinking that, ‘Well, there’s inflation, and money is less valuable over time. So you must take that into consideration.’
However, doing the math to see what the value of $75,000 was back in 1982, it is just under $300,000 in today’s money. Taking into account CPI inflation between 1982 and 2020.
Which would be considered an ultra-cheap buy for a house within that distance from the CBD with that sea view.
Although this house was bought for $75,000, over the next two decades, around $250,000 has been spent on refurbishing the property.
That could mean the total amount spent on it, adjusted for inflation, would be the equivalent of around $500,000 – $600,000.
This is still much cheaper than the average house with a sea view today, which is within 5km of Auckland’s CBD.
As I said, it would usually cost $2 million+ for a house like that.
Is there still hope for younger millennials at the Kiwi dream?
This is a question that gets asked all the time.
I feel that there are many Kiwis running out of hope, thinking they could get the right house at the right price.
But is there still hope?
Could people still get the house they want?
It’s hard to say because, at the moment, the house prices are still skyrocketing, even in 2021.
However, in saying this, nothing just keeps going up and skyrocketing in value forever.
There could be a pullback at some point.
Just like in the 1987 stock market crash, or even in the global financial crisis in 2008, when some financial institutions defaulted.
So will this housing bubble burst?
It could well do, but then if it does, what does that mean?
Will that mean all Kiwis will have a chance at the Kiwi dream?
What is a housing bubble and what will happen if it bursts?
Just to give you a rundown: A housing bubble can often be referred to as a real estate bubble.
What this means is when house prices go soaring up due to the demand, speculation and excessive fear of missing out; these housing bubbles begin to form
This is due to a huge increase in demand, with a very limited supply.
Obviously, if you have been around for quite a while, you would have been aware that New Zealand has failed to deliver on the number of houses that are needed to be built each year to keep up with demand.
With New Zealand’s population on the rise and people migrating here, this has caused a further demand for houses.
Housing bubbles occur a lot less frequently than other bubbles like stock market bubbles.
But the real question is, ‘What will happen if this bubble bursts?’
What tends to happen is, over time, the demand spike begins to decrease as the prices keep soaring, and people are unable to afford them. Higher prices encourage rampant development. Some of which we may be starting to see with residential intensification in parts of Auckland. For example, the central city.
Could this be the beginning of the bubble deflating?
Suddenly, things shift around, and now there is an excess of supply compared to demand. Sometimes the market overcompensates with supply, as happened in Ireland and Spain during the 2000s.
The complete opposite of how things were before.
What comes as a result of this dramatic shift is a sharp decrease in house prices to compensate for less demand and excess supply.
If you were a home owner and you bought your house during the bubble, you could find yourself in a position where you’re underwater. And if interest rates increase, a mortgage may be more tenuous.
Something to think about for people wanting to buy a home
Many of you would have been aware that in 2020 and 2021, there was a global recession. Due to this pandemic.
What we saw in that recession was businesses were failing, stock prices were plummeting, and in March 2020, many markets fell to all-time lows.
Then everything started to correct itself as governments around the world started to pump in stimulus and use loose monetary policy to lower interest rates.
However, sadly, countries like the US have been hit really hard. Pew Research reported that 1 in 4 Americans know somebody in their family who has lost their job.
Despite this happening, things may go back to normal everywhere. It will just be a matter of time.
We even saw a restoration of values after the GFC (Global Financial Crisis) in 2008. We also saw it after the 1987 stock market crash.
You may be asking where I’m going with this when I’m referring to housing prices. But where it comes into context is we could be in a bubble, and house prices seem overvalued.
If this bubble bursts, things could come crumbling down, and then it may correct itself, and housing could be more affordable again.
Markets are cyclical. Yet bubble deflation depends on many factors, particularly supply exceeding demand. And buyers losing confidence that the market can keep rising.
But is there a way we can avoid making the bubble burst and not have a rippling effect on current home owners and the economy in general?
The Reserve Bank of New Zealand has recently been charged with considering house price stability in its remit. But the Reserve Bank has limited tools, such as setting the OCR and participating in bond markets.
It does not have a magic wand. If people lose confidence in the Bank’s ability to influence rates, the market will make up its own mind.
Analyst, Wealth Morning
PS: We have a plan to provide millennials with a decent roof over their heads. Please take a closer look at our urgent petition for affordable rental housing here