Why the Kiwi and Canadian property bubbles burst and what we can learn

If it’s a glimpse towards a possible future you’re after, it’s always worthwhile taking a peek across the Tasman.

For, when it comes to the economy, the Kiwis don’t do things by halves.

They were the first to raise interest rates in the aftermath of Russia’s invasion of Ukraine, and they lifted them at a cracking rate, among the quickest on the planet, in what appeared to be a deliberate bid to drive the economy into recession.

As for real estate, whether up or down, the Kiwis go hell for leather.

New Zealand’s property boom left Australia in its dust. And the resulting bust has been far greater than anyone expected to happen here.

But it is worthwhile examining what has driven the slump and what we could learn.

Canada too has never recovered from its pre-COVID property market records. And just like New Zealand, its real estate has been on a steady decline for the past four years.

Australia, meanwhile, has only just begun its descent. Sydney and Melbourne have been in decline for several months, while, at a national level, the trend has turned negative as growth in even the tearaway cities like Perth, Brisbane and Adelaide has evaporated.

Research group Cotality argues that the sustained growth we’ve experienced over the past five years has left Australian households with enough reserves to weather a storm.

But what made Australia different to its Pacific neighbours?

The obvious contrast was in interest rate policy.

Both New Zealand and Canada hiked interest rates far more dramatically than Australia, curbing demand for housing finance from 2022 onwards. Unemployment was also far higher than here.

Immigration also played a major role. Australia has maintained levels of arrivals that far outweighed dwelling construction ever since the pandemic — ensuring shortages — while Canada imposed heavy restrictions to limit arrivals, including students.

In New Zealand, net migration came to a standstill as the country’s high unemployment rate prompted an exodus of Kiwi workers across the Tasman to take advantage of a more buoyant economy.

Meanwhile in Canberra, the immigration debate is only just beginning.

It is playing out as buyers have already begun a retreat from Australian real estate, sparked by interest rate hikes and a fundamental shift in tax policy as incentives for investors have been wound back.

Diverging paths

Australian housing may be among the world’s most expensive, but New Zealand and Canada did their best trying to catch up after the global financial crisis.

From 2010 onwards, New Zealand real estate surged an incredible 164 per cent until it peaked in early 2022.

That’s after accounting for inflation. In nominal terms, the price movements were even more extreme but, when comparing different countries, stripping out inflation provides a more accurate reflection.

Canada experienced a similar surge, up about 150 per cent.

On this side of the ditch, our property prices, while coming off a higher base, rose just 40 per cent after inflation over the same period.

But after the invasion of Ukraine, our paths diverged quite radically. Canada and New Zealand began a long slide into property losses.

Canadian housing prices have shed about 20 per cent since then, while the Kiwis have dropped close to 30 per cent once inflation is included, in one of the longest property market downturns in its history.

Australian real estate, on the other hand, began a gentle U-turn in 2023, even as interest rates were being pushed higher, accelerating back towards record levels as rates were cut last year.

But that is about to change.

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Why the difference?

Interest rates played a major role.

The New Zealand Reserve Bank set a blistering pace in its quest to kill inflation, sending the official cash rate to 5.5 per cent, way above its Australian counterpart, which restrained interest rate hikes with a 4.35 per cent peak.

The Bank of Canada pushed interest rates far higher than Australia’s too, pushing its official rate to 5 per cent.

And that played through into the broader economy.

New Zealand retreated into recession several times as the rate hikes stifled growth. Unemployment, meanwhile, only avoided surging to embarrassing levels because of the number of Kiwis who fled the country.

While the country’s population has grown since 2022, a large number of residents, many of whom are younger and highly educated, left for higher-paid positions in Australia.

That has helped take pressure off the housing market.

Meanwhile in Canada, the unemployment rate climbed to 7 per cent in 2023 and since then the economy has been hit hard by the imposition of US tariffs under the Trump administration.

In some cities, including Toronto, unemployment has surged to 9 per cent, dampening demand for housing and accelerating declines.

Negative wealth and population

In New Zealand and Canada, the housing downturn is beginning to ricochet through the broader economy, highlighting the challenges the RBA and the federal government may face in the near future.

Household spending is restrained, and retailers are struggling in both countries, hindering efforts to revive economic growth.

Australia’s economy is already sluggish, with growth expected to come in at less than 2 per cent this year, giving the RBA little wriggle room to use interest rates to keep inflation in check.

A string of retailers has shut in the past 12 months, and even market darlings like JB Hi-Fi have been under fire from investors as difficult trading conditions are expected to weigh on performance.

Given the extent to which property is ingrained into the Australian psyche, the political blowback from an extended downturn is likely to gather pace.

Australian households are among the world’s richest, coming in third behind Luxembourg and Belgium, according to a UBS study.

That’s down to our booming property market. And while that incredible rise in wealth has driven consumption on the way up, a prolonged or steep drop in housing values is likely to undermine demand across the broader economy.

Canada, which embraced immigration curbs two years ago when it slashed net overseas migration, is now examining ways to put a floor under the housing market, including bailing out property developers.

Many cannot sell without realising enormous losses, but can’t afford to sit on finished properties indefinitely.

That has prompted Prime Minister Mark Carney and his British Columbia counterpart to initiate a plan to buy up unsold apartments and convert them into affordable housing.

The great Kiwi real estate slump, meanwhile, has begun to steady but shows little sign of a turnaround.

Housing here is still in short supply. But demand has dropped sharply.