AUCKLAND PROPERTY MARKET REVIEW

by Grodon Edginton

Market Still Solid

The residential market through 2006 has performed strongly in the face of predictions of a downward slide. Sales volume this year has consistently hit 3,000 sales per month which is similar to the past two years’ average monthly volume but somewhat below the peak of the market seen in 2003. As the graph shows, there has been a gradual easing in activity and the market has benefited from a “soft landing” rather than a collapse.

Prendos Total auckland Area Graph

Forecasting house prices and volume has been problematic in the past two years with far greater strength in turnover, prices and construction than anyone had expected. This long period of growth has outlived all market commentators’ expectations, however it is becoming clearer to understand the reasons why the market has proved so resilient.

These include very low unemployment (3.6%), high job security, good wage growth, easy availability of finance and discounting of fixed interest rates. This year has seen improving net migration in-flows, continued rising inflation plus house purchase subsidies being put forward by the Government.

There seems little likelihood of a collapse in the housing market now, particularly with the tight labour market, improving migration and probability that interest rates are now peaking. For a collapse to occur, there would need to be a sharp rise in interest rates, sharp rise in unemployment coupled with negative migration outflows. The first two are not going to happen in this stage of the property cycle and migration is remaining at above average levels. Therefore, without any major international crisis (i.e. oil shock, Asia economic meltdown etc) there will be no sharp correction, but more of a flattening out of the market.

Sales volume is slightly down from a year earlier at some 9% less overall but still holding very well at an average of just under 3,000 sales per month. Cheap borrowing of low fixed-interest rates have continued to underpin the market together with job security. We discussed the tight labour market and ramifications in our newsletter last year, with the benefits of job security leading to a willingness to take on higher levels of debt and the improving wage growth leading to a willingness to buy bigger and better houses. Also investors see relative safety in property investment as they can “ride out” any vacancies.

House Prices

The long term view for house prices remains sound. Long term house price inflation has kept ahead of the normal rate of inflation broadly by at least a 2% to 3% margin. In other words, currently the Consumer Price Index is averaging around 3% per annum where house price inflation currently would be sitting at a minimum of 6% but has been much higher.

Recent data released show Auckland prices increased by 0.7% for the June quarter and 8% over the year. If the current trend continues we will be looking at an annual rate of house price inflation of between 4% to 5% as a maximum by this time next year. Auckland’s median price currently sits at just under $400,000 where it has been for much of this year. In fact, this time last year the median sat at $390,000 so has moved very little over the past 12 months.

Prendos Auckland Location

It is of some interest to follow the New Zealand dollar exchange rate and relationship with house prices. There is a broad correlation between annual changes in the exchange rate and house price inflation. A weakening dollar from a year ago correlates with an easing in the rate of house price inflation. Expectations over the next two years are for a further downward slide in the dollar and house price inflation is also now stalling. Simply put, a strong economy usually feeds to an increasing exchange rate and buoyant house prices. A slow or poorly performing economy the opposite, with a falling dollar and house prices.

Migration

There has been an upward trend in migration inflows. Population growth remains at levels above the past ten year average of close to 11,000. Net migration inflow has increased from 6,000 in October 2005 to 13,200 in September 2006. There is a close relationship between annual net migration and the property market. Migration gains in the past have been one of the primary catalysts to each successive property boom. The 40,000 population gain in 2003 lead to a massive boom and skyrocketing prices. We see the present improvement in migration as giving renewed confidence to purchasers and investors alike. Migration gains will continue to support the housing market and country’s growth rate as migration is a strong contributor to the economy and growth.

Net Migration vs Actual % Change in House Price - 10 years

To summarise:

Scales

The Positives

þ The long term view appears sound.

þ We are cyclically heading to a low point in the 7-8 year cycle (i.e. 2007-2008).

þ There has been strong historic capital gain over the last four years. Prices are still increasing albeit at a much slower level. Current trends indicate house price inflation of around 4% per annum this time next year.

þ The trend in the falling New Zealand dollar will attract more overseas investment especially from Australia as there is no capital gains tax in New Zealand.

þ Migration is steadily rising from a low point in 2005 of 6,000 and we are now at 13,200 year to date to September 2006.

þ There is continuing strength in employment in New Zealand although this is likely to slow. Unemployment is currently at 3.6%.

þ There is a large amount of money “looking for a home” (investment) with easily available finance. The share market is not a preferred choice as it is seen as being too risky (who bought Feltex shares?).

þ Fiscal policy from the Reserve Bank may ease in 2008 which would signal the next phase of the upward leg of the property cycle.

The Negatives

ý Interest rate risks remain. Another rate rise has not been ruled out by Dr Bollard due to medium term inflation risks. Monetary policy pressure is therefore likely to be maintained.

ý Capital gain is likely to remain at low levels over the next two years (i.e. only 4% compared with past four years average of 15%).

ý There has been negligible residential rental growth and this will remain the case. Rentals remain a relatively high portion (30%) of average take home income therefore there is little room for increasing rents.

ý Low returns from rental income are being achieved for investment property.

ý There is a risk of higher vacancies, particularly in the apartment market where there is rapidly escalating apartment stock – much of it poor quality, small rental units.

ý High house prices mean low affordability.

ý Increasing local authority/statutory costs and requirements on development.

ý Employment growth is likely to slow.

ý Growing housing supply stock could pose some constraints on house pricing in a flatter market.

ý Construction costs still remain at high levels.

Overall in the near term the dampening aspects are likely to dominate causing price growth to be weak but unlikely to be negative. Capital gains will be harder to come by. Sales activity at the current levels of 3,000 per month should continue as there is good demand for homes in the market place.

Prendos Median Sale Price Percentage Cahnge- actual

Gordon Edginton, the author of the Residential and Commercial Property Review, is a Director of Prendos. He is a Registered Valuer and has a Bachelor of Commerce degree from Lincoln University. He has been the author of this newsletter for the past fourteen years and is the principal compiler and analyst behind the graphs produced. Gordon regularly makes presentations and advises various major lenders on the state of the Auckland property market. Gordon completed a Certificate in Plant Machinery Valuation which he passed with distinction.