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Over the last week I have had a few people tell me that Auckland is currently in a boom. I want to clear a few things up. First let’s explore the definition of a boom or for want of a better word a bubble.

“A run-up in housing prices fuelled by demand, speculation and the belief that recent history is an infallible forecast of the future. Housing bubbles usually start with an increase in demand (a shift to the right in the demand curve), in the face of limited supply which takes a relatively long period of time to replenish and increase. Speculators enter the market, believing that profits can be made through short-term buying and selling. This further drives demand. At some point, demand decreases (a shift to the left in the demand curve), or stagnates at the same time supply increases, resulting in a sharp drop in prices – and the bubble bursts.”

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So now let’s explore the Auckland market in a little more detail. In the recent global financial crisis – house prices dropped and a large number of properties came onto the market with few buyers. People stopped spending money and concentrated on reducing their debt, trying their best to avoid a mortgagee sale. As the market settled and we hit the bottom, those that could not afford their houses had lost them and those that could afford them were happy to have held on; and still focussed on debt reduction. The investors had been waiting to see what would happen and slowly started to come back into the market.

So now we are at the point where most people are glad to be through the recession and still owning their houses hence there are very few properties for sale. The increase in housing prices at the moment is a simple supply vs. demand equation. Not a boom. When a lot of houses are selling at very high prices then we will be in a boom. However in saying that, we are in the lead up to a boom. As speculators start buying up property with the idea that property prices will go up, then the average Joe’s will start buying houses speculating that house prices will go up and at some point demand will decrease (usually from over supply ) and the bubble will burst resulting in a bust.

As per the economic clock, we still need to see an increase in construction. There is a lot of talk in the Herald, particularly in relation to commercial development. However it is my belief the majority of the big residential development companies will hold off until the council has released its unity plan in September 2013.

Therefore this rising in prices is likely to cause a mini boom by speculators that will be popped by the over supply of developments in coming years.

If you are going to buy property to profit from the upcoming boom, some things to take into consideration are:

  • Do not cross collateralise your properties. If you want to use one as security, you are best off releasing enough equity to use as a deposit on your next house.
  • Make sure that the properties are able to cover the majority of their own expenses. Maybe head out of the best areas into somewhere more affordable, just in case you do end up having to service the mortgage yourself. This does not mean a decrease in profits – remember a rising tide floats all boats.
  • You are looking for above market returns. This does not necessarily mean Remuera and Ponsonby, but rather suburbs that are low now, but will become popular soon. Look at how Grey Lynn has changed over the last 10 years; imagine if you had invested $1 million in Grey Lynn and $1 million in Remuera; where do you think you would have made the most money?