New Zealand Real Estate Market: Is it a Unicorn? Prices Keep Rising While Other Markets Fall

House Prices in New Zealand continue to rise. In the first quarter of 2019, it rose 3.5% year-over-year.

This is in sharp contrast to its next door neighbor, Australia, where house prices in the first quarter of 2019 have dropped 7.7% year-over-year and are down 8.27% from their peak in the fourth quarter of 2017.

In real terms, New Zealand's uptrend in home prices seems to have accelerated and verges on the parabolic, vastly outpacing real disposable income.

The ratio of real house prices to real disposable income seems to have reached a permanently high plateau. The ratio is now 2.29 standard deviations from the mean of 76.82%, implying a probability of only 1.10% that the ratio will go even higher. In other words, it's firmly in bubble territory and seems to be staying there.

How Far Does the Canadian Housing Market Have to Fall to Reach Equilibrium?

In 2017, the Canadian Housing Market peaked in the second quarter of 2017. Since then, prices have declined modestly, by just 5.28% as of the first quarter of 2019. So, the housing market has slowed down and not quite reached correction levels of a 10% decline.

House prices could still fall by 28.00% to align themselves with the growth in personal disposable incomes. In terms of the ratio of real house prices to real personal disposable incomes, house prices have fallen even more: 7.70% from Q2 of 2017 to Q1 of 2019. The  ratio is now almost within two standard deviations from the historical mean. In other words, they less extremely overvalued and are just starting to enter merely overvalued territory. The probability of house prices being any higher is now only 1.35% instead of 1.30% the last time we looked. The improvement is infinitesimally small.

 If the ratio does revert to the mean, house prices could fall by 31.56%. 


How low can Canadian Property Prices Go?

How Overheated are the Real Estate Markets of Canada, Australia, and New Zealand? 

When Does the Overheated Real Estate Market of Australia Reach Equilibrium?

Last year, the real estate bust hit Australia. Prices have declined 8.27% since they peaked in the last quarter of 2017. But the decline is still a shade below a 10% correction and has not yet reached bear market proportions of a decline of 20% or more.

House prices could still fall by 38.56% to reach their inflation-adjusted levels. In relation to incomes, the ratio of real house prices to real personal disposable incomes have fallen significantly. That ratio is now within two standard deviations from the historical mean. In other words, they are now just overvalued and not extremely overvalued.  The probability of house prices being any higher is now a healthier 5.22% instead of 1.4% the last time we looked.

If the ratio does revert to the mean, house prices could still fall by 30.67% in real terms. 

How low can Australian Property Prices Go? Let Me Count the Ways  

How Overheated are the Real Estate Markets of Canada, Australia, and New Zealand?  

How low can Canadian Property Prices Go?

Eight months ago, we speculated that the Canadian Property Market was due for a bust. Today, that reality has come ever closer. So far, as of the third quarter of 2018, property prices have declined by 4.24% since they peaked in the second quarter of 2017.

Property Prices have also leapfrogged incomes so much that the relationship of Property Prices to Income is way out of whack. On average, the ratio of Real House Prices to Real Personal Disposable Income (data from the International House Price Database maintained by the Dallas Federal Reserve) since 1975 has been 95% of Real Personal Disposable Income with a Standard Deviation of 19%. As of the 3rd qtr of 2018, Real House Prices now stand at 142% of Real Personal Disposable Income. This represents more than 2 Standard Deviations above the historical mean. Assuming a normal distribution, there is only a 1.3% probability that the property market could go even higher. If Real House Prices revert to the mean, as they often do, Canada could be in for a property decline of 33.58% from current levels. But markets always tend to overshoot to the downside. If the real estate boom of the past two decades caused prices to surge way past anything that reflect fundamentals, a panic could set in on the downside and cause prices to drop to levels not seen in a generation.

How Overheated are the Real Estate Markets of Canada, Australia, and New Zealand?

How Overheated are the Real Estate Markets of Canada, Australia, and New Zealand?

Just how overheated are the real estate markets of Canada, Australia, and New Zealand? This famous chart from The Economist shows that real estate gains in all three countries plus Britain have substantially outpaced the gains in the United States which has experienced both a housing boom, bust, and recovery within the last two decades.

According to the International House Price Database maintained by the Dallas Fed, the growth real house prices in all three countries began to surpass the growth in real incomes sometime in 2005 and have never really looked back, despite the advent of the Financial Crisis in 2008.  After 2008, house prices in New Zealand dipped below income growth but have gone parabolic since 2014. 

In terms or House Price to Income Ratios as of year-end 2016, all three countries are two standard deviations above their historical averages since 1975 - a 41 year period.

Anyone who remembers their college statistics knows that this happens only 2.5% of the time. Ninety-five percent of the time, the ratio is within two standard deviations of the mean and 2.5% of the time, the ratio is two standard deviations under the mean.

At no point in this 41-year cycle (1975 to 2016) have the ratios gone outside the +/- two standard deviation range. It was only in 2016, when the ratios in all three countries went above this range.

The probability of this occurring is much lower than 2.5%. According to this calculator, the probabilities are around 1% for Australia and around 1/4 of 1% for both Canada and New Zealand.

Country	RHPI/RPDI Ratio 2016Q4	Mean	Standard Deviation	Standard Deviations from Mean	Probability
Canada	138.09%	92.30%	15.99%	2.86	0.21%
Australia	125.81%	79.05%	20.23%	2.31	1.04%
New Zealand	129.79%	74.54%	19.29%	2.86	0.25%

So, without a doubt, this is not a normal real estate market in all three countries. The question is, when will it all crash?

Source:

Mack, A., and E. Martínez-García. 2011. "A Cross-Country Quarterly Database of Real House Prices: A Methodological Note." Globalization and Monetary Policy Institute Working Paper No. 99, Federal Reserve Bank of Dallas.

Related Post: Looks like Australia's Housing Market is about to go Bust!