Auckland house prices has moved 100% in just last 4 years. Many reasons were provided and discussed by the scholars. Some of those reasons were high immigration, low interest rates, favorable tax laws, overseas buyers etc.
I think, the main reason for the price increase is overseas money in New Zealand market. This is in the form of overseas buyer buying New Zealand property and overseas banks providing funds to New Zealand Banks.
Overseas buyer
New Zealand is English speaking country and offers good quality of life. There are many wealthy individuals around the world who love to purchase a piece of land in New Zealand. They often pay higher price, and once the price is paid the neighboring houses also demand the same price. It pushes the prices up. Of course, if we get higher price for our asset we would sell to the highest payer.
Overseas funds
The financial institutions in overseas countries provide funds to New Zealand Banks. It is a prime objective of the banks to keep earning money, and produce better profits than last year. Banks generally earn major income from residential mortgages. And if they lend us more money to buy the asset they will earn more interest from us. Their willingness to lend pushes the house prices up.
Is downfall coming soon
It is very hard to determine. As it is currently happening in Canada we could expect similar results in New Zealand. I think, over the next few years there will be stronger attempts from the New Zealand Governments to curb the house prices. They may consider Ban on foreign buyers buying New Zealand land, introduction of capital gain tax, making harder to borrow money from the bank.
We have already seen many mortgage reforms, the latest being 40% equity for investment property in New Zealand. There could be more reforms in future such as higher interest rates, changes in tax laws, tightening the lending applications, compulsory mortgage insurance etc.
With changes in Auckland Unitary plan, I think over the next decade we will see lot of new dwellings in the market. And if developers are unable to sell these dwellings, there will be a drop-in price.
We also have election in New Zealand this month. It would be a major challenge for a newly formed government to fix the Auckland housing prices. There are many hurdles for them, for example we have free trade agreement with China, and when we ban foreign buyers buying New Zealand land, we may be in a breach of the agreement.
Correction in house prices has happened before and many cities around the world have experienced it.
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