Between September 1977 and March 1991, Japanese house prices rose 83% in real terms, or at an average real rate of 4.6%pa. Then things got ugly and the bubble burst. By 2009 real house prices had lost 45% of their value and were back at 1978 levels. This collapse also marked a turning point for economic growth, which had averaged 4.5%pa between 1970 and 1990, but has managed just 1.0%pa since.

Graph 1

New Zealand’s run of real house price increases averaging 6.2%pa since 2011 has not yet been sustained for as long as Japan’s boom. But some of the recent similarities are unnerving: sluggish economic growth prospects and a lack of productivity growth; very low interest rates but seemingly ineffective monetary policy; and a population that is aging and is set to grow more slowly.

New Zealand is not alone in experiencing these pressures – most Western economies are facing a similar situation. But perhaps the performance of our property market over the last 25 years should make us feel more nervous than most.