Between 2007 and 2010 house prices in Dublin fell by 56% and had a devastating effect on the banking system in Ireland. Is there going to be a correction in the Auckland housing market of a similar ilk?
Brian Gaynor touched on this in his column in the NZ Herald on the 16th May. Today there are some similarities to the boom in Dublin house prices and that of Auckland. These included:
1. The media painted a picture of escalating house prices and a property boom
2. Purchasers queuing overnight to buy a section or a newly built house
3. Banks offering cash incentives on home loans.
4. Very low mortgage interest rates
5. Auckland’s house prices have increased by 12.4% in the last 6 months. By comparison Dublin’s house prices never increased by more than 12% in any six month period during the boom.
6. Mortgage debt in New Zealand is now above $200 billion – doubling in 10 years. The majority of the debt being in the Auckland residential region. Consumer mortgage debt to disposable income in 2012 was 147% as compared to 58% in March 1991. In Ireland Bank lending it was 175% in 2008. Graph below shows a graph highlighting Ireland’s exposure to debt.
Bank lending to households and non-financial firms as a percentage of GDP for
Eurozone economies and the UK, 1997 and 2008
What is a property bubble?
Property bubbles grow as long as buyers are willing to borrow increasingly large amounts in the expectation that prices will continue to rise. This process inevitably hits a limit where borrowers become reluctant to take on what start to appear as impossibly large levels of debt, and the self-reinforcing spiral of borrowing and prices starts to work in reverse.