Property cycles – how NZ stacks up against the UK
Much comment has been made as to the tracking of the NZ property market as compared to other markets most notably the US and the UK. Whilst comparisons to the US market have been made in the past the reality is there are some fundamental differences (some very well observed comment was make to this effect by Bernard Hickey on the Rates blog as part of his traveling blog series made during his road trip over the new year across the great wasteland of the USA). It is for this reason that this analysis here tracks the NZ to the UK market to highlight past trends and sets some perspective of forecasting the future.
The chosen data sources are the objective data from the Real Estate Institute of NZ Median Price (source data from 1992) and the UK Halifax House Price Index (source data from 1984). I have analysed these two markets over the key period of the last 10 years to look to see the similarities and differences in the index of property price appreciation and then decline.
Starting with the boom times and the priming of the bubble. Based on an index of Jan 2000 the graph below tracks the indexed price appreciation of property through until the peak of the market in 2007. The UK peaked in August 2007 whilst NZ lasted until November 2007.
Clearly over this explosive 7 year period property prices appreciated in the UK by over 140% pushing the median from £83,175 to £201,081. During the same time period the NZ median price appreciated from $170,000 to the peak of $352,000 an increase of 107%.
Given the slightly different months of market peak I have looked at the subsequent decline in prices on a monthy basis where month 1 is the first month post-peak. The data utilises the January 2009 data from both sources in the compilation of the latest trend. The % decline is measured as % decline from peak price month.
The tracking of the UK property price decline in red clearly shows the current property price level off 20% from the peak as that market heads towards 18 months since the peak market price month. For NZ the decline measured utilising the latest January 2009 median price of $325,000 shows a 7.7% decline from the peak of just 14 months ago. The UK price for January did show a single month improvement, however as the Halifax report states “It is always important not to place too much weight on any one month’s figures. Historically, house prices have not moved in the same direction month after month even during a pronounced downturn”.
The desire whenever compiling such data is to see if prior history can provide any indicator of future trends. In the case of this data set, the NZ market over the period of 1992 to date does not include another period of such sustained and significant appreciation. However the UK market data does cover a very similar period during the years 1983 to 1989 which showed for 6 years a sustained and significant appreciation of prices of the order of 128% over that period.
Mapping the 6 years prior to the peak UK market in 1989 against the 6 years that followed could provide some valuable insight. The graph below presents this data represented by the blue line which tracks that 12 year period. Overlayed on the same axis is both the UK (red line) and NZ (green line) property market for the 6 years prior to the peak in 2007 and then the subsequent 14 to 17 months following that peak.
This graph certainly shows the extent of the fundamental difference in the scale of decline in UK prices following the peak in 2007 – the 1980′s bubble and correction looks relatively tame in comparison. As for NZ; to date the scale of the correction does not show as yet such a significant decline now into its 14th month since peak pricing. The remainder of this year will provide a clearly picture for how these 2 markets will trend in the longer term.