1. Home
  2.  / Myth Busted?

Myth Busted?

It’s a commonly held view that property values double every 10 years – but is it true? Joanna Jefferies investigates the myth.

By: Joanna Jefferies

1 August 2020

It’s an old wives’ tale that has persisted for, well, decades – but is there any truth in the popular opinion that property prices double every 10 years in New Zealand? It’s long been held up as a reason to invest in property, rather than in another asset class, but is the evidence only anecdotal?

To find out how much weight to give the popular myth, we took a look at the CoreLogic value growth data over the past 30 years (that’s as far as the data goes back) and spoke to investors who’ve invested in residential property through multiple property cycles across New Zealand.

The data and opinions were mixed, and that’s because there are, naturally, very diverse economic drivers for growth in different parts of the country, and at different times over the past 30 years.

However, the national average increase shows that the data doesn’t exactly reflect the myth: from March 1990 to 2000 the average increase was only 51%, while in the following two decades the value increases started to roughly double: at 115% from March 2000 to 2010 and then 85% from 2010 to 2020.

Yet, while the national average roughly begins to see a trend, when we drill down into the 72 territorial authorities over the same period, we start seeing a range of different stories.

That’s because the economic drivers for each location are unique, explains economist Tony Alexander. “If you look at somewhere like Auckland – with an 89% increase on average every 10 years, as opposed to 67% in Waitomo. Does that mean Waitomo is due a big catch up? Or is there something fundamental underlying it? The difficulty when you’re doing a comparison like this, is you need an understanding of why the lag is in there.

Alexander sites the removal of protection for farmers and for the manufacturing sector in the 1990s as a key reason for underperformance in some rural locations, such as Invercargill (-2% growth) and Kawerau (-1% growth) over that decade. Interestingly, Invercargill experienced an exceptional “catch up” in the following decade – at 218% growth, while Kawerau saw comparatively average growth of 108%.

“I remember investors going down to Invercargill in the late 1990s and early-2000s because they could get such good yields on rental properties,” says Alexander. “[Regional towns] may not see as much population growth as in the cities, but there are always people looking to live there and there tend to be some good yields that attract the investors, who bid up the prices.”

Christchurch Catch-Up

So, Invercargill bounced back due to attractive yields, but can we extrapolate that phenomenon, to pick future growth locations? In the past 10 years, Christchurch has lagged behind the rest of the country, with only 41% growth. There are obvious reasons for the lag, but does this mean it’s now due a catch-up?

“One of the factors restraining a price catch-up is that there is high availability of land. So, while I do believe that one day Christchurch is going to have a catch-up, I don’t feel I can find a model which tells me when that is likely to occur,”
says Alexander.

However, affordability is currently comparatively good in Christchurch compared to the other main centres, and that makes it an attractive proposition for both new homeowners and investors, says CoreLogic senior property economist Kelvin Davidson.

“Mortgage servicing percentage is definitely pretty low in Christchurch compared with where it has been in the past. So, it could be that over a five or 10-year horizon that Christchurch does pretty well, because It was starting from a point where things looked affordable.”

Local investor Claire Wilson, who has held investment property in Christchurch over the past 20 years, says the CoreLogic data for average percentage of gain recorded for the past two decades aligns with what she has experienced in the market.

She says a supply shortage is starting to put pressure on rents and prices, which she believes represents an indicator for growth. “Rentals are sitting at 1,100 on Trade Me usually there’s 1,400 available. We’ve got 99% occupancy in our portfolio, which we haven’t seen for years.”

Wilson says yields are excellent, too, which like in Invercargill, will potentially attract investors and push up prices. “You can get a 6.5% yield any day of the week – on a new build even. This is the year to buy in Christchurch – people need to go hard.”

Structural Changes To Economic Drivers

While Davidson agrees that Christchurch is showing signs of having experienced a lag, he warns that when looking at property values across the country, it’s important to note that some of the key drivers that have pushed up property values in the past 30 years have already played out and will not be repeated.

“The long-term fall in interest rates, a shift to two income earners per household – those are things that are done now. Some of those key drivers that have caused big rises in house values over the past 10, 20 or 30 years, they just can’t apply to the same extent from here on. The best guess of long-term future growth from here is that it will be lower than it has been.”

Alexander says improved land availability is another structural change that won’t be repeated. Consequently, it’s important to pay attention to the current drivers for growth, unique to each location.

‘You can get a 6.5% yield any day of the week – on a new build even. This is the year to buy in Christchurch – people need to go hard’ CLAIRE WILSON
“Someone might be attracted to a region because it looks like it’s due a catch-up, but then you need to start looking at things like quality of housing, population – underlying rate of growth there, infrastructure, and connections to the nearest large centre.”

“In my experience, you can’t really pick the timing of when a region may be going to do a catch-up. It’s a real guessing game.”

Population Growth

While Covid-19 and border closures will have their impact on the supply and demand equation nationwide, there is an interesting new immigration trend occurring currently, which could indicate that the supply and demand equation won’t loosen sufficiently to soften house prices.

The changes to immigration rules in the late 1980s and again in the 1990s meant we saw more foreign people migrating to New Zealand – a structural change that created higher buyer demand and higher house prices. In the past 10 years we’ve seen an average net migration gain for New Zealand of about 29,000 per annum, and in the decade before that it was 25,000 per annum.

On average since 2001 we have lost 19,700 Kiwis overseas per annum. However, a new phenomenon started occurring from the middle of last year, says Alexander.

“The net flow had been sitting at around minus 6,000 from about 2015, but in the year to December 2019 it got to plus 306 before we’d heard of Covid-19. And now in the year to April it’s plus 11,100. We’ve never seen these numbers before, ever.”

Alexander usually cites high immigration as a structural change that has played out and will mean house price inflation will be slower than in the past “but I’m pulling back on that because of the Kiwi flow – there’s a million of us overseas.”

Growth Outlook

High net immigration has meant huge population growth in Auckland over the past three decades, and a revived CBD. Auckland Property Investors’ Association president Andrew Bruce has experienced this first hand, with his central Auckland properties roughly doubling.

He purchased a three-bedroom central Auckland property in June 1996 for $230,000 and with little improvement since then it is now valued at $1.38 million.

“We bought that as our very first property and didn’t know what we were doing. After a while we replaced the kitchen – so that’s probably a realistic example of that area.”

Equally, a studio apartment Bruce purchased in Central Auckland in October 2011 for $125,000 is valued today on CoreLogic’s Property Pro at $245,000. Bruce believes that due to the difficulty in gaining consents and the risks associated with development, that the supply and demand imbalance will keep a seat under values in Auckland into the near future.

And despite current challenges in Central Auckland’s apartment market due to a lack of visitors, Bruce says he’s still confident in investing there for longterm growth.

“In the longer term the central city will be good – you just have to look at the amount of infrastructure that’s in place – Commercial Bay has just opened; at some stage the convention centre will open; and the Inner-City Rail Link.

Equally, in Hamilton, investor Nancy Caiger is confident. Her properties have increased in line with or above Hamilton’s average increases over the past 30 years.

A property she purchased in 1993 for $71,000 was worth $135,000 in 2003, while another property she purchased in 2002 for $510,000 increased about 92% in the following decade. She puts the success of these purchases primarily down to buying well, which she says investors can do in any market.

“I think the proposition, on balance, is true. Each 10 years it has more or less doubled. It’s not an exact science, because it depends on the property, on the area. “But it’s by the by really, because if you’re a long-term investor it’s just paper gain. The beauty of it, of course, is that you can use it to make further purch
ases. That’s why property is an interesting investment, because of the ability to leverage off of it.”

Caiger is confident of value increases in the future, but won’t project an estimate she says the Government’s response to ever decreasing affordability may have an impact on future property values.

Davidson echoes concerns around affordability: “You can’t just have properties doubling over 10-year periods – that implies ever decreasing affordability, so mathematically it can’t stand up to logic.”

“The big key property drivers over the past 10, 20 or 30 years may not apply as much in general, as they have done. The future may be characterised by less capital growth than we have seen in the past. But I would suspect that there would be places that do see 100% gains over a 10 -year horizon – it’s not going to be flat everywhere.”

The Verdict

So, does property double every 10 years? Clearly not. While some places have roughly doubled every 10 years, there isn’t a single location in New Zealand that has done so consistently over the past 30 years. However, if you average out the rate of 10-year growth over the past 30 years, some have done better than double.

Moreover, the industry participants we spoke to all agree that just because some locations have in fact come close, this is not an indicator for them doubling again in the next 10 years. Rather, it is far more important to pay attention to the specific economic drivers of an investment property’s location as a way of predicting future growth.


Related Articles