Property Bubble or Boom Approaching?

As proponents of investing for the long term we spend a lot of time thinking long term. We’ve been looking pretty closely at what might trigger the next boom and what that boom might look like.

One of the interesting issues that we’re pondering is around whether the next surge in prices will be a boom or a bubble. A bubble is something that eventually pops and deflates, so in a property sense, if there was a bubble we could see prices lift significantly, but then give up a lot of the gains.

What drives a bubble? From what we can tell looking around major cities is that highly prescriptive land use rules seem to result in property bubbles. Highly prescriptive means there are very tight controls on what you can do with a piece of land, and where you can do it. In Auckland and NZ we have quite restrictive policies. The way the Resource Management Act has been interpreted and applied restricts a lot of activity and paves the way for public protest. Auckland has the added issue of very restrictive urban limits. So these issues, especially in Auckland, mean we have a restricted supply of land.

At the moment this is not a huge issue as the level of demand relative to supply is not high. But what happens when we get a significant lift in demand, which history tells will happen again? Will Auckland experience a property bubble? Cities that avoid bubbles and instead experience solid booms have looser land use controls. They effectively have rules that allow the city to respond to demand – i.e. they can meet demand because they can supply the wanted property.

In Auckland we have a new super city that has just come in to power. What will this council do to ensure there are appropriate land use policies in place to ensure that inthe next property cycle Auckland experiences a boom and not a bubble?

Published on Tuesday, January 18th, 2011, under Directors Market Commentary

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