OPINION: Kudos to Dominic Stephens and the economists at Westpac for admitting they got it wrong earlier this year when they predicted that house prices would drop by seven percent in the wake of Covid-19.
Westpac wasn’t alone, of course. All of the major trading banks expected the market to drop. We now know that the opposite has proved to be the case. House prices were largely unchanged during the first lockdown because it was almost impossible to buy and sell a home – and once that ended, the market simply shook it off and powered away.
Of course, not everybody was predicting a drop in prices. Economist Tony Alexander and myself have taken a much more upbeat view of the market over the past few months – and, in my case at least, have attracted a bit of criticism along the way from those who felt that such views were out of step with the major banks who were, supposedly, more credible in their predictions.


I’m not privy to the methodologies that the banks use to make their predictions – but the basis of mine is pretty straightforward. I look at the history of the market over the past forty years and particularly at what it was doing at any given point in each of the ten to eleven year cycles that it’s been through over that time. That told me that prices in the Auckland market should be flat (not increasing or decreasing) and that most of the rest of the country should be at the tail end of the last boom. The difference is due to the fact that Auckland goes into booms earlier than the rest of the country and comes out of them sooner (the last Auckland boom finished in 2017).
This approach doesn’t ignore other factors such immigration, inflation, housing shortages, foreign buyers, the state of the economy and now, Covid-19 – but it treats these things as having much less impact on the housing market than is claimed by the economists at the major trading banks and economic forecasting agencies. Why? Because the long term history of the market tells us that these things don’t matter nearly as much as we think they should. Immigration numbers, inflation, foreign investment, and the economy have been all over the place over the past forty years – but house prices have reliably doubled (more or less) roughly every ten years in each of the decades over that time.
In fact, the only thing that we can say has been consistent over the past forty years of the New Zealand property market is the downward trajectory of the cost of money. Since the mid 1980s, when mortgage interest rates got as high as 20 percent, these rates have been steadily tracking down to today’s historically low levels with indications that they will go even lower over the next two years.
Frankly, you’d have to be blind not to see this correlation between reducing mortgage interest rates and rising house prices – and while it doesn’t explain all aspects of the behaviour of the market over the past forty years, it’s clearly a major factor.
Which brings us to today. Under normal circumstances, the Auckland market wouldn’t be expected to take off again until mid to late 2021, and the housing market in the rest of the country would be coming off the boil and starting to cool – but there’s no doubt that the rapidly declining cost of money means that all bets are out the window for now.
In my view, short of another prolonged level four lockdown, this is no longer a blip. We appear to be seeing the first signs of the next Auckland property boom a year sooner than we would have expected which means we’re in for another five or six years of strong growth in our Queen city. For the rest of the country – including locations like Queenstown, Wanaka and Central Otago which had been expected to drop – it means an extension of the boom they were already in, possibly for another year or two.
Banks take note: if you were rationing credit in the expectation of a price drop, you need to stop doing that and start taking a more...

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