Another Property Bubble Brewing Where You Least Expect It

Hands holding a piggy bank and a house model
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These days, Kiwis are keeping more than just cars in their garages. In the city of Auckland, it is becoming common to illegally rent garages for people to live in.

Yes, that’s right, without bathroom or kitchen facilities.

You see, there is a homeless crisis brewing in New Zealand. The number of people without a home is rising faster than the population. That is, while the population between 2006 and 2013 increased by 4.9%, the number of homeless increased by a whopping 25%.

Why? Not because they can’t find work. Half of the people homeless are either working or studying. And unemployment is at a low of 5%.

The homeless crisis, believe it or not, is being caused by a housing boom.

House prices in New Zealand have been spiralling up in recent years. And many Kiwis are now forced to rent improvised accomodation in garages, or live in cars and tents.

The crisis is not only affecting lower income families, but anyone who doesn’t own a home.

Houses are selling so quickly that people renting are getting evicted at a fast pace. And as more people look for a place to live, rental prices are going through the roof.

Take a look at the chart below; rental prices have increased 25.7% in the last five years.

5 Year trend in rental price

Source: Trade Me

And property prices are soaring.

You see, 10 years ago, the average house value was NZ$500,000. By next year, average values are expected to reach NZ$1 million. In other words, property prices will have doubled in the last 10 years.

House prices and value of housing stock

Source: rbnz.govt.nz

In the last three months alone, house price growth has sped up. National house prices rose by 5.6% during that period, and 13.5% in the last 12 months.

Two factors are driving prices up migration and cheap debt.

Since 2008, with Europe in trouble during the global financial crisis, New Zealand has increased net migration. In Auckland in particular, an increase in work and student visas are pushing the property market up.

So, who is buying all these properties? Almost half of every sale in Auckland, 46%, is going to a foreign investor.

Housing in New Zealand is becoming a challenge. And the country is in danger of becoming a society of haves and have nots.

And even though salaries have increased, the risk of a housing bubble is also growing. Salaries have not kept pace with rising housing prices. The minimum hourly wage has grown around 44% in the last 10 years.

The unsustainable price growth has cut off first home buyers from the market. Most locals are now priced out and they cannot afford to either rent or buy.

The large gap between house prices and incomes is also increasing household debt. According to the World Bank Household, debt-to-GDP is a whopping 142% — higher than Australia’s 124.3%.

The government is now considering putting restrictions on investors, such as making them pay 40% of the purchase in cash.

The New Zealand dollar has also been appreciating quickly, and could soon reach parity with the Australian dollar. A high New Zealand dollar could deter migration and investment in the near future.

The housing price growth is unsustainable. And if interest rates or unemployment rise, people will lose a lot of money.

Regards,

Selva Freigedo,
For The Daily Reckoning

PS: Most people think great deals in Aussie property are already all gone. This is the worst attitude to have. Why would you take financial advice from some self-proclaimed guru? Instead, why not do your own research and take control of your financial future.

But where do you start?

If you’re interested in investing in property, check out The Daily Reckoning’s property expert Phil Anderson’s report ‘Why Australian Property Is On The Verge Of A Decade Long Boom’. In the report, Phil reveals the eight letter word that really drives property values. It’s the ultimate guide to help you start your future property plan, and it’s free!

To get your copy of Phil’s report, click here.

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