Is the property cycle peaking? It’s hard to avoid the hype, hyperbole and anxiety of the property boom. Whether you’re a frustrated first-home buyer, a renter, or a property investor – everybody is watching the Great Housing Spectacle – like a magnificent multidimensional, coloured rocket soaring to dizzyingly, unchartered heights.

Yet the fuel propelling all of this is potent and potentially explosive. Surging migration, housing supply restrictions, low interest rates, aggressive bank lending, and access to cheap money.

The Reserve Bank's latest macroprudential measure - 40% equity requirement for investor lending nationwide - brings yet more uncertainty to an already unsettled market.

Most economists don’t believe this equals an impending crash – yet are agreed a downturn in prices to varying degrees is coming between 2017 and 2020.

Financial advisers are urging caution to investors to check their portfolios to make sure that if in the event of a 10% to 15% drop they will have enough cash-flow on which to live.

House Prices Impact

Milford Asset Management’s Brian Gaynor says housing bulls should keep a close eye on the rising housing supply figures.

“Supply is now increasing and any reduction in immigration and/or bank lending is likely to have a dramatic impact on house prices,” Gaynor says.

Consents have picked up dramatically and it won’t be long before the annual consents exceed 30,000. In the four years to 2012, an average of only 14, 850 consents annually were issued compared with 26, 218 consents in the four years to 2008.

He says he doesn’t know whether there will be a crash, but says there will be a downturn, probably between 2017 and 2019.

No Impending Crash

Property Institute of New Zealand chief executive Ashley Church isn’t of the view that there is a horror price spiral on its way.

“When Auckland does peak, it will do what Auckland markets always do and taper off 5%,” Church says.

Mr. Church says the RBNZ’s LVR announcement would make little difference to house price inflation.

“Many investors will already have close to, or over, 40% equity and this will be little more than a slight speed bump."

The last ‘crash’ was the 1970s, and it’s very unlikely that the market will crash based on empirical data going back 30 years, Church says.

Kiwis behave differently to other markets in downturns. “We tend to wrap our arms around ourselves, rather than panic and rush out and sell. The banks have changed and are much more careful to let people hold on to property even if they have negative equity,” he says.

Church is concerned, however, about a dive occurring in regional New Zealand, in areas without strong drivers of growth such as population growth.

He thinks a dramatic change in migration figures could be the catalyst for a price drop – whether that is a pick up in the Australian economy, and a drop in Australians coming here, or rise in New Zealanders going to Australia.

Church urges investors to make sure they are not sensitive in their portfolio, as change in interest rates could upturn them.

Low Growth On The Horizon

Westpac’s acting chief economist Michael Gordan says they expect the official cash rate to be cut once more this year, and then that’s it.

“There is limited room for fixed term mortgages to fall from here… the Reserve Bank is becoming concerned to the degree they are inflaming the market,” Gordan says.

The economy is past its peak growth, driven by high dairy prices and the Christchurch rebuild; the rebuild has plateaued and will move to its wind-down phase, he says.

“We expect below average growth from 2018 onwards. It’s not on the immediate horizon. We have population growth, construction outside Christchurch is on the ramp-up side and tourism is doing reasonably well,” he says.

Auckland houses are pretty close to fully valued, Gordan says, but this is not the case in some regions.

Strategic Risk Analysis managing director Rodney Dickens says this current cycle has run longer than a number of past cycles, and looks like it will be protracted because of the way monetary policy is handled.

“Signs are emerging in the labour market that interest rates are too low, confirming what the housing market has been saying for some time,” Dickens says.

The biggest threat to an upturn in prices is the tightening labour market, he says. The June BNZ confidence survey showed that employers are finding it difficult to source skilled staff, especially construction and engineering.

“In my assessment Governor Wheeler will let the labour market tighten too much causing a mini wage-price spiral just as Bollard allowed to occur last decade, meaning more than token OCR hikes will be required to fight it (i.e., enough to eventually end the upside in prices),” Dickens says.

The bank economists, like the Reserve Bank, are acting oblivious to what is happening at the coal face of the labour market, which was exactly the same last decade, in that none of them predicted the 13 OCR hikes Bollard delivered between 2004 and 2008 says Dickens.

No End To Price Rises

Barfoot & Thompson’s Peter Thompson says subject to a major government initiative or Reserve Bank change, the current cycle will continue for years. He says the new increasing of equity requirements will have some impact but will also put pressure on rents.

He did say, however, that the Auckland Unitary Plan could impact the property cycle. The leafy inner suburbs of Auckland could be rezoned for more intensive housing under the plan.

A panel is providing its full recommendations on the proposed plan to the Auckland Council by July 22 this year and the council must notify its decision on whether it rejects or accepts them in part or full, by August 19 this year.

Growth Not Sustainable

CoreLogic's Nick Goodall says it is difficult to quantify the housing situation, yet he believes the strong price growth is not sustainable.

Auckland has become an international city, and the demographic make-up of Auckland is far different than what it used to be, and with that brings different expectations around living standards.

At the moment, Auckland’s apartments make up 7% of properties, compared with 28% in Sydney.

The Auckland Unitary Plan could be quite interesting and will go some way to slow things down.

“It requires a change in mind-set, in that for a major international city, you can’t get a quarter-acre within 10 minutes of the city,” he says.

Lisa Dudson, owner of Property Ladder, which sources properties for investors, says she isn’t one to talk about the market, but is concerned about practical matters.

“I tend to focus on what clients can do to manage a potential downfall,” Dudson says. “Can you afford it? Does the deal work? Does it look like a good investment opportunity? Have you considered risk minimisation factors?”

It’s prudent to consider what happens if your property’s value goes down by 10% to 20% and what that does to your personal financial situation, she says.

“Do you have enough cash-flow to ride that through for 12 months?” she says.

Dickens says investors should look mainly outside of Auckland, and if investing in Auckland, use more equity to avoid the negative impact of higher interest rates on cash flow.