Understanding the boom-bust nature of property investment
The property market is like any other, with ups and downs, booms & busts. The most important thing you want to make sure is that when the tide goes out, you’re not the one caught swimming naked! As a smart, contrarian investor, it’s important to understand property cycles and use them to your advantage when making property investment decisions.
The history of the New Zealand market.
The value of New Zealand property seems to double on average every 10 years, with previous peaks occurring roughly in 1987, 1997, 2007, and most recently, 2017… (more on this to come as the market develops...). Over a 10-year period, the market tends to find fair value, adjusting to the whims of investors, and helping to allocate investment in New Zealand housing markets. Buying low, and selling high is easier said than done; here’s what you need to know…
Understanding Market Cycles
All good markets start with a recovery phase. After a bust, excess housing supply at reduced prices will be absorbed by the market. Low interest rates spur investment, and boost economic activity, which leads to net immigration increases, and toward a general upturn economic activity.
Once the market has stabilized and confidence returns, investment will increase, wages will rise, and spending will hit new highs. The bust that occurred 3-5 years ago will start fading into a distant memory, and the media will change their tune, throwing fuel onto the fire. Reports of ‘record profits’ and ‘structurally better market conditions’ will lead many to believe the another bust is unlikely. Beware, it’s just around the corner… The property has entered it’s boom phase. After a certain point, the demand property rental properties peak, and rents no longer increase. Property values, however, are spurred higher, forcing rental yields down. Bank lending remains strong and pushes regulators to consider increasing the OCR/cash rates.
The higher demand for borrowing forces bank funding costs higher, which in turn leaves less disposable income for everyday, hard-working Kiwis. People who are over-leveraged feel the pinch the most. Businesses begin to suffer as people aren’t spending as much on discretionaries, and start laying off staff. All of this usually happens in conjunction with cooling markets overseas. Suddenly New Zealand is looking very small and insignificant, and the market will start heading into a bust phase.
As a consequence of the GFC in 2008, the New Zealand property market experienced it’s most significant fall in values. In inflation adjusted measures, values fell by around 15% from 2007 to 2011.