BY GORDON EDGINTON, DIRECTOR AND REGISTERED VALUER
Although Auckland’s price growth slowed somewhat through the winter months, it still hit a new all time median price high of $771,000 in September. Much of the past annual gain of 25% was seen in late 2014 and early 2015 and prices are possibly looking to plateau. Octobers median price drop to $748,250 and declining sales volumes may be a case in point, and reflects in part some effects from recent Government and Reserve Bank changes.
Prices are very stretched at their current levels and risk of a correction looms. The current median is almost the highest worldwide, nearly 10 times the median salary. Average yields on residential investments (representing the return on rental income relative to price paid) are now extremely low.
Lower cost areas of Auckland have seen the largest percentage gain in prices over the past year. Papakura as a region had the highest with an almost 30% increase, with Waitakere not far behind at over 26% and Manukau at 25%. This trend mirrors past cycles where the more affluent central suburbs and the North Shore saw the greatest gain in the earlier part of the cycle to eventually be overtaken by the lower cost outer suburbs as the ripple effect of the upswing played out.
In recent months, clearance rates at auctions have fallen to low levels as buyers see the housing market at current levels as over-priced. Attention from investors is shifting away from Auckland to the regions, with a strong surge in activity in the Waikato, Bay of Plenty and Northland. Prices in these areas have risen in recent months in response to this increased demand, whereas in Auckland the prices have remained constant. Despite this, sales volumes remain high in Auckland with 3,158 transactions in September, although have slowed to 2,546 in October.
A figure above 3,000 sales per month indicates a booming property market and volumes have sat around 3,000 each month for most of this year. The length of time it takes to sell a house is also an indicator of the strength of the market. The lower the figure, the more buoyant. In Auckland this year the days to sell has ranged from 29-32 days and currently sits at 29 days.
Population growth is an obvious factor influencing the housing market. The latest net annual gain of 61,200 is at record levels, up 40% from a year ago. The stimulatory effect on housing demand and resultant pressure on prices is huge, particularly as the majority of the net inflow (around 60%) settle in Auckland.
A large proportion of this population gain (20%) is from Australians coming to live in New Zealand which is a reversal of historic trends. A big chunk is also from returning Kiwis.
The migrant inflows show signs of peaking but are expected to stay high for some time, thus supportive of housing demand remaining strong. Migrant flows can change quickly and at some stage a shock will be felt when they reverse. But given the current strength in immigration, the property boom is likely to continue. The early 1970’s, mid 1990’s and mid 2000’s booms all coincided with large net migration inflows. This current boom is no different.
RESERVE BANK AND GOVERNMENT EFFECTS
The low interest rate environment is also set to continue for a long period as inflation remains extremely low and the Reserve Bank has signalled further cuts in the Official Cash Rate (OCR) are likely in an effort to stimulate the economy. The OCR currently sits at 2.75% and is likely to drop to 2.5%. The Reserve Bank has acknowledged the resulting current low mortgage rates are unlikely to increase for some time.
Low interest rates are another key driver of the property market as they make debt servicing easier. Average floating rates are around 5.75% and fixed rates are 1.0% below this. The improved affordability this has created, with ability for borrowers to service a higher level of debt, has simply been transferred into higher asset prices and is part of the reason prices have risen so much. Debt growth has accelerated this year to 6%, showing the surge in housing activity and of course the large rise in prices.
There are some signs of Chinese off shore buyers pulling back from the market as a result of the new government regulations requiring NZ IRD and foreign tax identifiers from 1 October and a two year capital gains tax where a house is re-sold within two years. Furthermore, the 30% minimum deposit requirement for an investor in the Auckland market aimed at curbing speculative behaviour and investor enthusiasm should have some effect. But this loses relevance when buyers have cash or high equity in other assets which can be leveraged against.
INVESTMENT FOR CAPITAL GAIN
Much of the demand is being driven by investors looking for capital gain from an investment asset than by demands for actual homes to live in. Real demand for housing itself as somewhere to live would have seen an equally large rise in rentals. This has not occurred. Rentals have risen but at a much slower rate than house prices. Hence yields keep falling. The demand for a house asset is thus outstripping demand for housing as a place to live. It is driven by investors seeking a capital gain from their investment, rather than a rental return.
This comes as no surprise. Capital gain is untaxed and currently at such high levels it makes property investment an obvious choice. Furthermore, returns from leaving your money in the bank are paltry by comparison and thus investors are chasing return through other forms of investment. Property gives both – a rental return (albeit low, but still more than the bank) and a capital gain, currently extremely high and untaxed. Property thus gives capital preservation, growth and good returns.
Capital growth is supported in part by the steady rise in rentals, giving some underlying support to house prices. If capital gain was fuelled solely by a speculative bubble rents would not be increasing – but they are – showing the demand for housing as a place to live is partly underpinning prices. Except yields fall lower as prices outstrip rental growth – part of this yield compression is speculative capital gain and part is investors chasing a yield return on their investment. Hence why many investors are looking beyond Auckland in search of yield return.
ARE WE IN A “BUBBLE”?
The Reserve Bank is warning of an over priced housing market in Auckland and risk of a major correction – a “bubble”. The Government is making similar noises but on the margins. The Auckland market is certainly more risky at current prices, however, official measures to stem the market should have some impact on slowing the rate of increase and speculative demand, as will the eventual slowing down of migration.
There probably is a bit of a bubble but it will correct itself and when it pops it is unlikely to cause mayhem. Past booms like this have resulted in, at worst, a 10% to 15% price correction. On Auckland’s current median price of $771,000, this would take the price back to just under $700,000 or at worst $650,000 – pretty much where it was in 2014. Yes, there will be an increase in mortgagee sales from highly geared investors, developers will fall over and some home owners will be burnt from negative equity.
But we are not in a “mega bubble” of the type Japan experienced prior to its crash of the 1990’s and still feels the legacy of 20 years later, nor of the type China is experiencing now.
The current upward phase of this property cycle has lasted nearly four years now, having commenced in early 2012. It is likely nearing its peak at current levels. Typical cycles from boom to bust seen over the past 50 years last around seven to eight years although the last cycle and this current one are lengthening by at least a year. I expect this one will be no different but will potentially have longer legs given the lingering housing shortage. This will likely be corrected soon as building consents continue to rise. When population growth stalls and falls, a housing over supply will result. It has happened in all past cycles and this time should be no different.