Double Trouble: The Long-Term Outlook for House Prices

The idea that house prices double every 10 years has been a core belief for property investors for a long time. But, as Prendos Valuations Director Matthew Edginton explains, it looks like those days are over.

Over the past 30 years, Auckland’s median house price has climbed from $180,000 in December 1994 to exactly $1,000,000, according to the latest REINZ statistics. That works out to an average annual growth rate of about 5.9%. Not quite doubling every 10 years, but not far off.

But the rate of growth is slowing down. Over the last 10 years, the median Auckland house price has increased at just 3.8% per annum, or 45% overall, since 2014. Over the last eight years, since December 2016? A lousy 1.98% growth per annum, underperforming inflation, which has averaged 3% over the same span.

What these numbers mean in real terms (i.e. adjusted for inflation), is that Auckland houses have lost value over the last eight years, and only beaten inflation by around 1.3% per year since 2004. Not a great result for those looking for capital gains. But good news for affordability, which continues to improve, helping those trying to get into the market.

What to expect for the next decade then?

Are prices likely to return to doubling every 10 years, like they did for decades prior?

Or is the rate of house price growth likely to slow even more?

The rampant price growth we saw up until around 2016 was fuelled by three factors:

1. Falling interest rates
2. Double income households
3. Restricted land supply

Are any of these factors going to fuel further price growth over the next decade?

I would argue none of them are.

1. Falling interest rates – it’s true the Official Cash Rate (OCR) is currently sitting above where it spent most of the 2010s, and it’s likely rates will move lower this year. What is not possible is the same kind of downtrend that took mortgage rates from the 20% range in the 1980s, to the 3-4% levels we saw in the early 2020s. Rates may well stay low, but the downward trend that consistently made mortgages more affordable in previous decades has played out.
   
   Having said this, there are plenty of periods where interest rates were flat, or even moved up, whilst house prices also increased. From 1999 to 2008, for example, the OCR was in a consistent uptrend, from 3.3% in 1999, peaking at 8.25% in 2008, yet median house prices over the same period went from $235,000 to $430,000 – call it a double.
   
   So, interest rates being unable to move too much lower isn’t necessarily going to stop prices from going a lot higher.
   
   
2. Household income – over the last several decades, the number of women in the workforce has increased dramatically. More women in the workforce has impacted family and household incomes by essentially adding a whole extra income earner to hundreds of thousands of households. Those households were able to afford more for housing and compete for that housing, in turn, pushing up prices.
   
   But this trend has likely largely played out. Unless we find a way to create three-income households, the housing market is not going to get the boost of adding an extra income again.
   
   
3. Land supply – this one is complex. It’s not just land that is the issue – we have plenty of that. It’s also the infrastructure to service the land – the water, the roads etc. Watercare’s announcement late last year that they essentially can’t support new development in massive areas of Auckland, could put upwards pressure on prices down the line, as it limits supply.
   
   But the Unitary Plan supplies plenty of residential land in Auckland. And the government seems very keen to promote further land supply for new housing throughout the country. There are also a range of incentives for construction that have not existed before. The chart below, courtesy of CoreLogic, shows Building Consent numbers, including projections for the next couple of years.
   
   Yes, Building Consents are down from the peak. But look how much higher this current trough is compared to the previous trough in 2011! Even in the current building downturn, we are still consenting around three times more houses than in 2011 – more than almost any year in the 2000s or 2010s.

Source: CoreLogic

This means means we are not going to get the critical housing shortage that we experienced in the second half of the 2010s and early 2020s, which drove up prices. The building hasn’t stopped this time, like it did after the financial crisis.

And if you were still in any doubt, here is another chart from CoreLogic that shows just how much slower prices have been to recover from this downturn, compared to the last.

Source: CoreLogic

After the GFC, it took around 5 years for prices to recover back to the old peak. This time, we are 3 years in and still a long way off. That “current cycle” line doesn’t look like it’s getting back to even any time soon.

So, will house prices double in the next 10 years? Do I see the median price in Auckland hitting $2,000,000 in 2035?

No, I don’t. The forces that have driven the growth for the last several decades don’t seem to have much juice left. If there is going to be huge growth again, it would need to come from other sources, which is of course possible. Sustained high inflation would probably do it, but we really don’t want to see that. A big lift in productivity, in turn increasing household incomes, would be positive for house prices. Maybe interest rates can go negative?

Short of any of these happening, my guess is, house prices will grow at a rate similar to rental price growth over the long-term, around 4% per annum. Which means it’ll take around 18 years for prices to double again.

Prendos’ professional Registered Valuers provide bank-approved valuations of residential, commercial, industrial and rural property. We have the experience, databases and networks to accurately value any type of property quickly and cost effectively. Fill in the form below for a quote, or contact us on 0800 PRENDOS or prendos@prendos.co.nz to discuss your valuation needs.