Nicely put, Microhydro.

However, you are comparing rental yields of less than 4% with NZ bond rates of 7.5%. Let's say you can get 8% at a decent NZ bank. That's today's rate. What's it likely to be in 2012?

Gail is suggesting that banks will become more and more risk adverse, and thus presumablly will also being offering higher interest rates in order to attract cash to shore up reserves.

I recall that in Australia in the early 90s you could get 12% on a term deposit. Suppose those days come around again? If your choice is between 12% interest from a bank or buying a house and then trying to find good tennants in the middle of a depression, you are probably going to want a 12%-15% gross rental yield. Which would suggest house prices at a quarter of today's level.

To those who say it can't happen - look at Japan. A country giving a good impersonation of a market that will stay dead for a generation.