That doesn’t mean that Kawerau house prices are about to crash. And keep in mind that in small areas like Kawerau, there’s going to be a wider margin of error because not many house sales take place.
But it does suggest that house prices might underperform the rest of New Zealand over the medium term.
And this is because things can be low-priced but still expensive. For instance, a $300,000 car is expensive. A $300,000 house is cheap.
How do you figure out whether a region is particularly cheap or expensive? That’s what this model is for.
Does this really predict if house prices are over or undervalued?
There is this concept in investing that things tend to move towards their long-term average.
If you want to be fancy, it’s called mean-reversion. That’s just a nerdy way of saying that markets tend to get ‘back to normal’.
Because property prices in a region can get ahead of themselves during a boom. And get out of whack. The opposite can happen too in a downturn.
But, over time, they move back towards that long-term average.
For instance, in Christchurch, property prices really lagged from 2015-2020.
Property prices were going up in other parts of New Zealand, but Christchurch was lagging behind.