Do house prices quadruple every 20 years?

by Alistair Helm in


No sooner had I written the article "Do house prices double every 10 years?" than I get the question posted on LinkedIn as to whether house prices quadruple every 20 years?

My first reaction was - No Way, if they double in 10 years, how could they possibly quadruple in 20 years? - to be clear $100 doubling in 10 years becomes $200 and within 20 years quadrupling to $400. But then I remembered the good old adage of compound interest. The annual rate of growth to double a sum of money in 10 years is 7.2% and that same 7.2% annual growth rate compounded will quadruple the original sum within a 20 year timespan.

The next question for me was to Google the question, just as I did with doubling house prices, not 339 million results this time just 8 million. But top of the results from The Telegraph in the UK with a 2003 article stating just that fact. Between 1983 and 2003 average house prices went from £29,993 to £121,742 – a quadrupling. As an aside I bought my first house in the UK in 1984 for £22,150 so I can confirm that is what a typical house cost back then. I sold that house in 1985 for £20,650 so clearly I should have waited!

Anyway I digress. Back to the question posed on LinkedIn. Given the fact that NZ property prices have doubled during some 10 year periods, have we seen quadrupling over any 20 year period?

The answer is yes for Auckland but not for the rest of the country in aggregate. I have only been able to assess the period from 2012 as the available data from REINZ of sale price data only goes back to 1992. Here then are the same charts I used in the prior article adapted to track each 20 year period from 2012 to 2018.


NEW ZEALAND - ALL PROPERTIES

Analysis_of_NZ___Akl_pricing_since_1992_HPI___Median.png

So for the period from 2012 onwards the 20 year rise in house prices across all of NZ was an average of 237%, that is over a three fold increase but at no time has a quadrupling been experienced. Of note is the fact that the current period June 1998 to June 2018 at 271% is the highest ever 20 year rise.


AUCKLAND

Analysis_of_NZ___Akl_pricing_since_1992_HPI___Median.png

In the case of Auckland the average 20 year period price rise has been 296% between 2012 and 2018. In 31 of the 78 months the 20 year rise was more than quadrupling of prices in that 20 year period. The highest ever rise was for the period from August 1995 to August 2015 which saw a 329% increase.


NEW ZEALAND EXCLUDING AUCKLAND

Analysis_of_NZ___Akl_pricing_since_1992_HPI___Median.png

For the rest of NZ excluding Auckland the average 20 year price growth has been 197%, so just under a trebling of prices over a 20 year period. Of note though is the steady rise in the price rises since 2015 with the latest month of June recording a 240% increase in prices since June 1998.

 

 


Do house prices double every 10 years?

by Alistair Helm in


It's a fairly commonly held belief that house prices double every 10 years.

Is is correct? can it be guaranteed? and is there fact to back up the assertion? In researching this question, I found that asking the question on Google "Do house prices double every 10 years" provides a pretty comprehensive pedigree of search results, 339 million to be exact.

Among the top results I found that, an Australasian report by Core Logic which analysed the two 10 year periods from 1996 to 2006 and from 2006 to 2016. The earlier period did see consistent doubling (or more) of house prices across the major metros, whilst the later period only saw a doubling in Melbourne whilst Sydney managed a 78% rise.

The UK has similarly experienced doubling in house prices over 10 year periods with an excellent analysis by Alex King providing facts adjusted for inflation covering many decades.

Before diving into the NZ data, it is worth reminding ourselves of the mathematical fact that for a sum of money to double in 10 years requires an annual compound interest factor of just over 7%.


New Zealand - Total All Properties

Using the REINZ House Price Index as the measure of house sales price tracking back to 1992 I have created this chart below to best answer the question - do house prices double every 10 years? Simply viewed each bar represents the rise in prices for a 10 year period.

The black horizontal bar shows the 100% increase threshold. It can be very clearly seen that from October 2003 right through to November 2011, (with just a short period in 2009) property prices doubled, comparing a single month with the same month 10 years ago. The peak rise in any 10 year period was around mid 2007 (just prior to the GFC) when 10 year price rises topped out at just below 120%. 

The period since the end of 2011 though has refuted the claim of doubling prices every 10 years. Over the past 7 years, 10 year growth has been well shy of doubling, achieving around an average of 65% growth in each 10 year period.

Across the 26 years (198 months) the average 10 year rise was 88% with the median rise in any 10 year period 97%. Over that 26 year period just under half the time (43%) saw prices doubling or more


Auckland

So what about Auckland, the leading metropolitan region of the country? - most of the media portray the Auckland market are constantly bubbling and among the most expensive cities to live in. What does the data show?

This chart is certainly illuminating and somewhat surprising. Compared to all of NZ, Auckland has sustained a relatively consistent higher 10 year growth in prices with an average 10 year growth of 98%, well ahead of the NZ total at 88%. However the periods during which a doubling was seen were fewer and not aligned to those of those of total NZ. In just 72 of the 198 months was a 10 year doubling witnessed - less than the 85 for total NZ and the highest 10 year rises where in early years of the new millennium and the recent boom cycle.


Total New Zealand excluding Auckland

If you extract the Auckland price rises from New Zealand in total you get a very different answer to the question - do house price double every 10 years?

During the period of 2005 and 2008 in the run up to the GFC the 10 year respective rise 10 years later as seen between 2015 and 2018 property sales prices outside of Auckland would be barely 40% which is an equivalent rate of 3.4%, certainly ahead of inflation but probably below the prevailing mortgage rates for the period.

So can it be said that property prices double every 10 years? - clearly not; as to make such a statement is always made assuming the past is the best indicator of the future which we all know is wrong. However it would be true to state that in the case of Auckland that over the past 20 years property prices have pretty much consistently doubled every 10 years as the median 10 year rise is 96%. 


Subsequent to writing this article I was asked via a question on LinkedIn as to whether property prices quadrupled over a 20 year period. I had not heard such an assertion, however upon Googling I found it was quoted as a fact. So I naturally went and did the analysis and then wrote this article - Do house prices quadruple every 20 years?


The property market cycles of the past 25 years

by Alistair Helm in


When property prices are on the rise, the commonly asked  questions are usually based around how long can this bull run last?; are we in a bubble?; or have prices become disconnected from reality?

All are fair questions. However what is really interesting is the fact that these questions tend to float to the surface of the media precisely at the end of a property cycle. Property cycles are a historic part of the property market, here in NZ and globally. These cycles tend to last around 5 years and represent periods of either stagnant growth, accelerated growth and in some case declines.

In an article I wrote a few months ago I isolated the key periods of the property market identifying 5 periods tracking the median price data provided by The Real Estate Institute for over 25 years. Those 5 periods comprised 3 periods of rising prices and 2 of plateauing prices. The chart below reflects this perspective.

Interestingly I was sharing this insight the other day to a group of real estate colleagues as we reviewed the state of the current market. We are currently in a plateau phase - certainly in Auckland. The question I was asked of this chart, was as to the relative rate of increase during each of these periods as there is a perspective that property prices grew faster in the recent 5 years as compared to the 2002 to 2007 period and certainly as compared to the 1992 to 1997 period. I pointed out that this chart can be deceptive. The representation with a vertical axis of the actual median price can be misleading as a 100% increase from $100,000 to $200,000 as was the case in the 90's represented a dollar rise of $100,000; however a dollar rise of $100,000 in say 2008 from $350,000 to $450,000 only represents a 29% increase.

This got me thinking as to whether there was a better way to represent the trends of these cycles.

A couple of hours work has brought me to this new analysis of the property market cycles of the past 25 years.

Firstly I have chosen to use a different data set from The Real Estate Institute of New Zealand for analysing the market. I have chosen to use the House Price Index (HPI) - this data set is probably the most reliable and accurate data set for property sales prices in NZ. The Index which was developed by REINZ in cooperation with the Reserve Bank of NZ ensures that this price data set is not effected, as it can be by composition changes. That is to say if in a month a higher proportion of sales occur in a relative price band or suburb set this can skew the median price which is the most common and trusted method of sale price calculation.

I also decided that I would analyse two data sets namely Auckland, and NZ excluding Auckland. The fact is a single NZ data set is itself a compositional skewed data set as Auckland being c.40% of the market heavily skews the National picture which then becomes irrelevant for properties outside of Auckland. (More of this is a future article).

The chart below tracks the House Price Index from 1992 to date, for the data set of Auckland and Total NZ excluding Auckland. The Index is centred in 2003 at 1,000 points with dates before that being below 1,000 and dates afterwards being above 1,000. A figure of 1,100 represents a 10% increase over the base month in 2003. A figure of 2,000 being a 100% increase over the base month in 2003 and so on. The latest HPI data from REINZ for May 2018 had an Index of 2,883 for Auckland and 2,554 for all of NZ excluding Auckland.

This chart is very illuminating as it shows very clearly the plateau the Auckland market has been experiencing since reaching 2,800 in August 2016 - nearly two years ago. It also very clearly shows the extent to which the Index for NZ property sales price excluding Auckland shot away in the 2003 to 2007 period. The index to 2003 though in someways confuses the visualisation. I therefore decided to recalibrate the index it back to 1992, as the revised chart shows below.

Now back to that opening question - what are the key cycles of the property market of the past 25 years and how similar or different are they?

Here is a more detailed analysis of the price index data I have concluded upon for which I have identified not 5 but actually 7 phases of the property market over the past 25 years.

Now before you email or call me to ask what on earth I have created, let me explain. I have taken the HPI data and broken it up into these 7 periods or phases of the past 25 years which are tracked along the horizontal axis from 1992 to 2018. For each of the 7 phases I have identified the inflection point and recalibrated the start point to zero. So let me walk you through the 7 periods to help explain.

Period 1 - January 1992 to February 1993

Just a one year period which saw the price index grow by just 7% for Auckland and 7% outside of Auckland. This is subjectively an odd data set as there is no record of what happened pre-1992 and especially from the after affects of the stock market crash of 1987. Best to disregard this phase.

Period 2 - March 1993 to March 1996

Now this was a period of significant price growth. Auckland price index leapt 68% in just 3 years whilst outside of Auckland the price index went up 22%. This 3 year rise of 68% in Auckland is the fastest rise that has ever been seen over the past 25 years.

Period 3 - April 1996 to January 2002

This period of close to 6 years included the Asian Financial crisis and saw property prices stagnate. By the end of the period Auckland price index had risen by just 10% and the rest of NZ excluding Auckland 12%. Twice during that period Auckland prices dipped. By 5% in the first few months after April 1996 and then again late in 1998 dipping by 3%.

Period 4 - February 2002 to November 2007

This would be viewed by many as the most explosive period of property price growth. In the five and a half year period the property price index for NZ excluding Auckland more than doubled, rising 116%, far outpacing the rise in Auckland of 89%. All of this of course foreshadowed the GFC.

Period 5 - December 2007 to December 2009

For a full 2 year period the property market went into a funk. Prices went down. A scenario that many thought would never happen just a few years earlier, however property prices will at some point, just as with all assets; go down in value as much as they may go up. For Auckland the price index slipped 12% in the first 12 months before easing back to be down 3% by the end of the second 12 month period. For outside of Auckland the level of price fall was less severe, down 9% in the first year before clawing back half of that to be 5% down after 2 years.

Period 6 - January 2010 to January 2013

A full 3 years in which property price index rose just 2% outside of Auckland, spending the first 2 years underwater adding to the prior 2 year period making a full 5 years when properties collectively outside of Auckland failed to recover the peak they had attained in late 2007. For Auckland the recovery from the GFC came earlier with this 3 year period seeing a modest sustained growth up 18% over the 3 years.

Period 7 - February 2013 to date (May 2018)

This current 5 year period may in later years be revised to a 4 year period ending in August 2016 when Auckland's property price index peaked up 70% in that period of three and a half years, close on the same rate of growth seen back in the '93 to '96 period. At the same time for properties outside of Auckland the price index keeps rising, up 49% over this 5 year period, the second highest rate of growth of the past 25 years.

So in conclusion, property markets move in cycles and these cycles lead to price movements. It is likely, based on historical evidence of the past 25 years that we are in, or will be shortly be entering a plateau phase, typically these periods can last from 3 to 6 years dependent upon the background economic circumstances. As to when this period started, in the case of Auckland we may already be 2 years into it. In the case of the rest of NZ it maybe that we are about to see this plateauing start very soon. If there is any silver lining it should be seen that a correction that sees property prices fall is less likely and with a strong economy we are likely to see property prices take off again within the next decade. The only certainty is that it is almost always impossible to identify the infection point until after the event !