Hot property in New Zealand: Empirical evidence of housing bubbles in the metropolitan centres

Abstract

Using recently developed statistical methods for testing and dating exuberant behaviour in asset prices we document evidence of episodic bubbles in the New Zealand property market over the past two decades. The results show clear evidence of a broad-based New Zealand housing bubble that began in 2003 and collapsed over mid-2007 to early 2008 with the onset of the worldwide recession and the financial crisis. New methods of analysing market contagion are also developed and are used to examine spillovers from the Auckland property market to the other metropolitan centres. Evidence from the latest data reveals that the greater Auckland metropolitan area is currently experiencing a new property bubble that began in 2013. But there is no evidence yet of any contagion effect of this bubble on the other centres, in contrast to the earlier bubble over 2003–2008 for which there is evidence of transmission of the housing bubble from Auckland to the other centres. One of our primary conclusions is that the expensive nature of New Zealand real estate relative to potential earnings in rents is partly due to the sustained market exuberance that produced the broad-based bubble in house prices during the last decade and that has continued through the most recent bubble experienced in the Auckland region since 2013.

Keywords:

• bubble
• exuberance
• collapse
• contagion
• dating methods
• house prices
• property market
• sup test

JEL classification codes:

• J61
• R23
• R30
• C33

Acknowledgements

We thank Siu Yuat Wong for his excellent research assistance, QVNZ for supplying the real estate price data, and the editor and two anonymous referees for their helpful suggestions. P.C.B. Phillips acknowledges support from a Kelly Fellowship and from the NSF under grant no. SES 12-58258.

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

1. http://www.interest.co.nz/property/house-price-income-multiples.

2. The Economist, August 29 2014.

3. Demographia, 2015.

4. North and South (April, 2015): ‘House Price Insanity: Why Auckland's Mad Property Market Affects All New Zealanders’, 34–43; ‘Running on Empty’, 44–49; ‘Generation Rent’, 50–53.

5. Retrieved from: http://nzdotstat.stats.govt.nz/wbos/Index.aspx?DataSetCode=TABLECODE 7464# March 20 2015.

6. The figure is inexact because we lack rents for the entire Auckland region. Instead, we obtain an approximate average rent by weighting TA rents with population weights, as calculated by the authors based on Statistics NZ subnational population data for 2014. The weights were as follows: Auckland City: 0.3; Franklin: 0.05; North Shore: 0.2; Manukau: 0.24; Papakura: 0.05; Rodney: 0.05; Waitakere: 0.14.

Additional information

Funding

NSF [grant number SES 12-58258]