. the continuing fall in sheep numbers in the eu, and residual anxieties about bse and cjd in britain, have pushed lamb prices to new highs. at the same time, the bse outbreak in the us, which was traced back to a canadian herd, has resulted in north american beef being virtually shut out of the world market. with demand for beef from north asia continuing to be strong, world beef prices have risen sharply. while the outlook for agriculture remains positive, it is too early to say that prices for the commodities that we produce have shifted up a level and will stay there. it can be argued, for example, that increasing demand for dairy products from china means that our dairy prices will move to a higher level. even if this was the case, it would be unwise to think that commodity price cycles would disappear altogether - prices will continue to cycle, even if they cycle around a higher level. the national bank, in its rural report of march 2004, suggested that even now rural land might be too expensive. the national bank notes that the value of an asset in economic terms is the present value of future expected income discounted at the required rate of return. the national bank estimates that for the future income stream to equal the current price of rural land a discount rate of around 4 per cent is required, which is very low. provided that the future income stream is being estimated correctly, this suggests that rural land is currently overvalued. analysis that we have undertaken at the reserve bank indicates that the ratio of rural land prices to agricultural operating surplus is now above its long run average value. however, the ratio is not yet out of line with the values that it reached in the mid 1990s. whether there will be a downward adjustment in prices presumably depends on whether market participants also reach the conclusion that rural land is overvalued. rural dwellers often remind us that non - economic factors - lifestyle considerations in particular - are also important reasons for wanting to hold rural land. industrial and commercial property the prices of industrial and commercial buildings rose sharply in the mid 1980s during the growth surge that followed the first moves to deregulate the economy. by industrial buildings i mean factories, cool - stores, warehouses and the like. by commercial buildings, i mean offices, retail buildings, hotels, and other similar places of business. looking back, we can see that we had a price bubble. ( bubbles are often difficult to identify when they are occurring, but are clearly

. the value of the building stock that a firm uses can be large relative to the annual output that the firm produces. hence a rise in output can result in a change in demand for building stock that is even larger, in value terms, than the initial rise in output. we know that the amount of new building work that can be put in place in a short time period is limited. for one thing, new buildings, and even alterations, involve design time, and time to get through the planning process. second, there is always a limit on the building industry ’ s ability to meet demand. such bottlenecks have been in clear evidence over the past couple of years as the demand for new housing and apartments has accelerated. because supply often lags demand in the property market, there is the potential for a mismatch between the supply and demand, and this can work in both directions. when demand for property cools, due to a slowing economy, it ’ s hard to switch off new supply in the pipeline. so a rapid rise in prices can be followed by quite significant declines later on. all property sectors tend to exhibit price cycles, with these cycles reflecting this mismatch between demand and supply. demand for most kinds of properties over recent years seems to have outstripped increases in supply - prices and rentals across most property classes have generally been moving upwards and vacancy rates downwards. we can attribute much of that strength directly to developments in the broader economy. whilst it hasn ’ t been all plain sailing, this year the new zealand economy entered its fifth year of unbroken growth. just as that expansion has drawn heavily on the economy ’ s surplus labour and productive capacity, so too has it fuelled the demand for property. when you consider some of the causes and consequences of that growth, it ’ s not hard to see why the property sector has fared pretty well over this period. some of the following statistics may help to put some perspective around the demand for property. since 1998 / 1999, when the business cycle caused by the asian crisis and drought bottomed out : • the total output of the economy has expanded by about 20 per cent ; • the volume of retail sales has expanded by about 25per cent ; • export volumes have risen by nearly a third, driven heavily by the primary sector ; • the annual operating surplus in the agricultural sector has risen, in real terms, by around 35 per cent ; • the number of people employed, either full time or part time