The longest (in records dating back to 1962) was five years, peak to trough, between 1975 and 1980.
The Global Financial Crisis (GFC) slump was punctuated by a brief return to growth in 2009, but even if we ignore that, the market bottomed out in four years.
I think the duration of the slump is more interesting than the depth this time around.
Clearly, the horrible inflation-adjusted figures (which I will run through shortly) are exaggerated by the big Covid-era property spike.
Low interest rates and Covid stimulus sent house prices soaring in 2021.
So we should take the scale of the fall with a grain of salt.
Unless you are one of the unfortunate people who bought a first home in late 2021, you’re probably still doing all right on your long-term valuation.
But as this downturn drags on into its fifth year, I’m interested in the cultural shift it may bring in Kiwi attitudes to property investment.
This is the biggest market shift we’ve seen since the mid-1990s, when the arrival of Aussie banks and easier mortgage conditions kicked off a national love affair with property investment.
Prior to that period, mortgages were much harder to get, and capital gains (in real terms) were almost non-existent.
If you look at the long-term New Zealand property graph (I’m using one on the US Federal Reserve of St Louis website – which sources Cotality data), then you can see the real extent of the housing slump through the 1970s and 1980s.
House prices surged in the early 70s to peak in late 1975. Then, as mentioned above, they went into a five-year decline.
What is really shocking is that it took another 15 years for them to get back to that peak in real terms.
It took until 1995 for prices to match the 1975 values.
Those 20 years were a period of high inflation, high interest rates and generally lousy economic conditions in New Zealand.
From then until the 2021/2022 peak, the property market soared … and so did our levels of debt.
Kiwis cashed in on capital gains (tax-free), but we also inflated house prices out of reach of many and sent billions of dollars in interest payments off to those Aussie banks.
It was an era that looked like it would never end. There was no shortage of hand-wringing about how we might engineer a rebalancing of the market.
Now it happened. And it looks like we are in a new era.
There is no prospect of national house prices reaching a new peak (in real terms) for several years at best.
The ugly inflation-adjusted numbers
Latest Quotable Value figures show the average Kiwi home is now worth $912,190, which is 0.2% less than the same time last year and 14.2% below the market’s previous peak in early 2022.
I promised I’d dive into those ugly numbers, so here we go…
If we do an inflation adjustment and look at that national slump in real value terms, average prices are down about 29%.
But the national average is flattered by growth in southern markets like Canterbury and Southland.
The QV data show Auckland’s average home value was unchanged in the May quarter at $1,198,000, 22.3% below its previous peak.
Wellington, meanwhile, recorded a small amount of growth.
Its average home value increased by 0.2% this quarter to $910,286, which is 27.6% below its previous peak.
The QV release describes these markets as treading water.
But going sideways in a high inflation environment is basically going backwards.
In inflation-adjusted terms, Auckland and Wellington are now off by 35.5% and 40% respectively.
If we generously assume 7% annual growth from here and 2% annual inflation, it will take another nine years for Auckland prices to get back to the end of 2021 peaks. It will take 13 years for Wellington prices to do the same.
And I do think those numbers are generous.
The starting point for inflation this quarter is likely to be above 4%. No one is sure how long it will take to get back to 2%.
When it comes to supply and demand, it seems highly unlikely we’ll see the kind of conditions that drove average price growth of 7% for the 30 years to 2022.
We are starting with relatively low levels of immigration (net migration gain 24,000 to March), and we are building more than enough houses to keep up (37,813 new homes consented to March).
We’re probably still playing catch-up after years of underbuilding.
But changes to zoning, allowing for greater intensification, mean we’re unlikely to see that level of underbuilding again.
What do we learn from all this?
Well, first, there is a small but very unlucky bunch of people who bought at an extremely unrealistic peak in 2021.
We can say that with hindsight, but at the time, the market was awash with Fomo (fear of missing out).
Secondly, the big slump doesn’t mean so much to those who owned a home for at least a year or two pre-Covid.
They are still likely in positive equity.
Thirdly, investing in a second property and becoming a landlord is no longer a sure-fire path to wealth, at least not via capital gains.
The overall effect of the boom, bust and this long malaise could drive a cultural change in how we look at property investment.
Painful, but good for us in the long run… a long-overdue rebalancing.
Super debate
A: Hi Liam,
I read your podcast piece about raising the age of eligibility for New Zealand Superannuation – and I reckon everyone’s looking at the eligibility issue wrong.
It’s not age but income that should count for getting NZ Super. Keep it at 65, but income-test.
My dad, a small-town lawyer, was pulling in six figures while getting the pension from 65 until he retired at 72. He didn’t need it: he called it pocket money. (I gave him a hard time about it but he was always very generous with us kids and I can’t blame him if people like Winston Peters are, presumably, getting NZ Super while pulling in big paycheques, right?)
No one who’s earning six figures needs the pension. And just consider the poor old manual workers, the builders, the cleaners etc who would be forced to work beyond 65, after a lifetime of labour … it just wouldn’t be fair to make them work any older than 65.
I reckon it needs to be called income-testing. Means-testing is a red herring: it’s a distraction as it’s income, not assets, that should be tested.
Test the income! If you make, say, $100k or whatever, then either decrease NZ Super on a scale like other benefits – which NZ Super most certainly is – or get nothing at all after that mark (or whatever number). Can’t be that hard to income-test, the Government does it for the Jobseeker benefit, right?
But the term “means-testing” gets bogged down in the idea of testing assets, which don’t necessarily make income. Lots of over-65s will be mortgage-free but income-poor.
Bruce R.
A: Thanks Bruce,
I’ve had a lot of feedback on the NZ Super issue.
What I’ve picked up in this debate is split between New Zealanders who view the pension as a benefit and those who view it as an entitlement.
Clearly, it is nuts to be paying a benefit to anyone who has an income over $100,000.
But many older New Zealanders view the pension as something that they have earned by paying tax for their working life.
The universal nature of NZ Super was part of a deal that they signed up to when they started paying tax. It was sold by politicians that way for many years.
In reality, no specific portion of taxed income was quarantined for future pension payments.
But it seems that many people who came of working age before the mid-1980s feel a promise was made with regard to the provision of a universal retirement pension.
I don’t think younger people see it that way.
Income v assets
But I think it should be noted that income-testing isn’t straightforward either.
Super is already taxable. A retiree on NZ Super plus $60,000 of other income gets pushed into a higher tax bracket and pays more tax on that Super than someone with no other income.
So if the goal is redistribution, you could just change tax rates or thresholds rather than creating a parallel clawback mechanism with all the administrative costs.
You could set a high bar for income testing – say $150,000 or $200,000. I think we probably should.
But that’s not going to deliver the savings we need on its own.
In the end, I still favour raising the age slowly to 67.
It is the cleanest fix.
National was talking about lifting it, starting from 2044, in the last election campaign.
They might push that out even further when they release campaign policy later this year.
Biologically, 65 is an arbitrary age. If you are fit to work at 64, then there isn’t any obvious reason why you wouldn’t be at 66.
If you’re not, then you should be entitled to a benefit.
And there is no question that people are staying fitter and healthier longer.
We’re going to need older workers to stay in the workforce.
I think any changes we make to Super should encourage that.
Don’t forget to check out the Herald’s new podcast, The Economy of Everything, with Liam Dann and Tamsyn Parker – thanks to CMC Markets.
Liam Dann is business editor-at-large for the New Zealand Herald. He is a senior writer and columnist, and also presents and produces videos and podcasts.
He joined the Herald in 2003. To sign up to his weekly newsletter, click on your user profile at nzherald.co.nz and select “My newsletters”.
For a step-by-step guide, click here. If you have a burning question about the quirks or intricacies of economics, send it to liam.dann@nzherald.co.nz or leave a message in the comments section.