House prices are rising across New Zealand amid warnings that the property up-turn could become a fully-fledged boom. We find out what this means for buyers and sellers and offer some helpful purchasing tips.

Much has been written recently on New Zealand’s remarkable property up-turn. House prices are rising at their fastest rate in almost 10 years. The quantum and pace of growth has led some (including international observers) to warn of a boom-bust cycle.

Deutche Bank Senior Economist Darren Gibbs recently told The New Zealand Herald: “What started as an Auckland boom has spread to become a national boom. The risk is that it could get out of control. . . when it’s driven by debt, it can all come crashing down.”

Certainly, the factors driving New Zealand’s property market are similar to those in other parts of the western world. Over recent years, house prices in Britain and Australia have boomed at or above the current rate of growth in New Zealand. However, whilst other nations talk of a boom-bust cycle, observers in New Zealand are more optimistic. Sure, prices in some areas are rocketing but the underlying fundamentals remain pretty positive.

Buying conditions still favourable
Just because house prices are rising does not necessarily suggest that now is a bad time to enter the market - in fact quite the opposite. While house prices are rising, so too are incomes and rents. Furthermore, given New Zealand’s comparatively low fixed home loan rates, potential owner-occupiers and investors are generally in a stronger position to enter the market than they would have been at any time over the last few years. Even though interest rates are beginning to rise again, it is still possible to fix for three years at around 7.0% p.a. (interest rate information current as at 22 September 2003).

Property cycle still has some way to go
A look at who is actually buying in today’s market gives further credence to the argument that the cycle is set to continue apace. While the market is undoubtedly busy, recent government data indicates that home ownership is actually at an all time low. This suggests that the vast majority of interest in the property market is from investors. With more traditional investments such as shares and superannuation hit by recent global events and disappointing returns, bricks and mortar have seldom been so popular. Whilst house price growth is tipped to moderate next year in line with a generalised pick-up in international share performance, the underlying fundamentals supporting the current strength of the housing market look set to remain steady into 2004.

Triggers for a bust absent
A number of key economic conditions can trigger the end of a property cycle or boom:

• rapid and large interest rate rises
• slowing economic growth
• rising unemployment
• falling population
• over supply (supply exceeding demand)

When house prices last bottomed in 1998, it was on the back of higher unemployment, lower net immigration and higher home loan interest rates. Even if current immigration levels fall slightly due to stricter immigration criteria and a slight decline in interest from the Asian student market, fewer and fewer Kiwis are actually leaving the country. Hence population growth is forecast to remain strong for some years to come.

With demand for housing exceeding supply, a slight drop in net immigration will have little effect on the property market. Furthermore, the country’s two major cities are literally running out of available land on which to build – placing those who own it in an enviable financial position. Even New Zealand’s smaller cities are witnessing intense interest in local property on the back of growth in regional business and tourism.

What it means for buyers
Nobody wants to buy at the peak of a boom only to see the value of their investment stagnate or decline as the cycle turns. However while certain major cities are showing the early signs of a property boom, the triggers for a bust are largely absent. This means house prices are more likely to ‘plateau’ rather than dip sharply as a new property cycle begins. The outlook for buyers, therefore, demands caution and careful planning but those buying for the long term are unlikely to be disappointed.

1. Be prepared. Get loan pre-approval, do your research and be ready to buy when the opportunity arises.
2. Be flexible. If you are priced out of your first choice neighbourhood, consider an adjoining area with similar architectural style, amenities and infrastructure.
3. Stick to the fundamentals. Choose the best suburb and street you can afford, look for unique features such as water views and make sure the house is sound and in good repair.