Mark Lister, 23 July 2020

There’s a long held saying in real estate circles that house prices double every ten years.

Has that really been the case, and if it has, can we rely on this rule of thumb to work in the future? Before I have a go at debunking that idea, lets get one thing straight – I’m no property hater.

Housing has been an outstanding investment for many New Zealanders over the decades, and I would advise any young person to try and get on the property ladder as soon as they’re able.

Not only does it put a roof over your head and introduce some stability into your life, but you permanently neutralise any future rent increases and you have an asset to borrow against for any other endeavours.

Having said that, I do think many New Zealanders have a rose-tinted view of the housing market, overestimating the returns and underestimating the risks.

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For something to double in ten years, it needs to rise by 7.2 per cent annually. The Reserve Bank has house price data on its website going back to 1962, which provides a pretty good sample of how the market has performed over the long-term.

At first glance, the numbers are good. New Zealand house prices have increased 8.2 per cent per annum over that 58-year period, so they’ve in fact doubled every nine years.

However, the strongest period for the housing market was in the 1970s and 1980s, when inflation was rampant at 11-12 per cent a year, and interest rates higher still.

Since we tamed the inflation beast in the early 1990s, its been a very different environment and the gains have been much more modest.

That backdrop makes comparing these different eras apples and oranges. It’s more useful to look at ‘real’ house prices, which means the change in price after inflation is accounted for.

Since 1962, ‘real’ house prices have grown at an annual rate of 2.8 per cent. That’s not nearly as exciting as the statistics your friendly real estate agent will give you, but it does line up nicely with the economic indicators you’d expect it to.

Real GDP in New Zealand has grown 2.5 per cent annually over the last 30 years, and annual population growth has averaged 1.3 per cent.

To be fair, real house prices have been running hotter than average over the past 20 years, in the 4-5 per cent range.

house prices

I’d argue that’s mostly a function of falling interest rates, which I believe have been the single biggest driver of rising house prices in recent years.

Forget about migration, tax dodges or bad policy from successive governments. If mortgage rates fall from more than ten per cent in 2007 to less than three per cent today, we can all afford to borrow and pay more so that’s what we do.

Interest rates aren’t going up anytime soon (if anything, they’re going lower), but they also can’t fall a whole lot more either, given the much lower starting point. That’s a tailwind the housing market has had for more than a decade, which it no longer has to the same degree.

Looking ahead over the next few years, inflation is likely to be in the zone of 1-2 per cent per annum. If you take the long-term real return of 2.8 per cent, round it up to three or four just to be generous, then add that to the inflation rate, there’s a good chance you still might come up a little short.

The old saying is accurate. House prices have indeed doubled roughly every ten years. However, it’s also based on some periods in our history when inflation was exceptionally high. This makes the rule of thumb much less useful, and potentially a little less accurate, from here.