Property Puzzle: Why Prices Continue to Rise Against the Odds

September 6, 2021

With house prices peaking and residential development in Auckland booming, valuations expert Gordon Edginton looks at whether the market surge is sustainable – particularly when many signs point in the opposite direction.

Despite experts’ predictions, the New Zealand housing market is experiencing one of its biggest growth periods ever. Since the arrival of COVID in early 2020, house prices have risen a staggering 25% and building consents are at their highest levels ever. This growth is even more peculiar given the fact that two of the market’s key drivers – population growth and a lack of supply in new homes – have gone.

“Net migration gains have fallen dramatically since the pandemic,” says Gordon, “with only around 6,000 people a year arriving now, compared with the more than 60,000 that were arriving prior to the pandemic. In addition, house construction is at record levels, so the old supply issue is also being seriously eaten into. In fact, if migration gains stay this low, there’s likely to be a housing oversupply in some areas and sectors of the market. With this in mind, it’s extraordinary that house prices have risen so much in the past 18 months.”

Gordon says the growth can largely be put down to the incredibly low interest rates New Zealand has been enjoying, as well as the relatively free availability of money. 

“All this cash has been looking for a home, and both the property and share markets have boomed as a result. Throw in the strength of the New Zealand economy, a strong under-resourced labour market, inflationary pressures and no overseas travel, and the result is a lot of savings being spent on housing, shares and consumer items. Investors are also chasing better returns from property as money in the bank delivers next to nothing.”

An acute shortage of listings across most of New Zealand has meant buyers have little to no choice when shopping for a home – one of the biggest problems facing the market at present. It has kept competition fierce, with the number of days to sell at a low 30 nationwide, compared to the historical average of 39 days, further demonstrating the tightness in the market.

“When there are less houses available, the result is competitive bidding, and this has pushed up prices and vendor expectations,” says Gordon. “After all, when you sell, you still have to buy in the same overpriced market. Compounding this in Auckland is the fact that developers are willing to pay more for land that has any development potential, thanks to Auckland’s more intensive building and development rules under the Unitary Plan. The new zoning rules in most areas allow far more intensive multi-unit construction than has been seen in the past, and developers are seeing high profits when building these projects. As a result, land values have skyrocketed.”

Rising construction costs are also pushing up prices. Some building components have risen 20% in recent months and there are well-reported supply problems for timber and other building materials – with some firms stockpiling building products ahead of this growing problem. On top of this, Gordon says FOMO is also still alive and well in the market.

“The fear of missing out on owning a home has always been present in the New Zealand market, driving demand and prices. It’s now possibly waning, but there are still many disappointed buyers looking for a home. First home buyers in particular would be feeling this pinch, and what bothers me is that they’re competing head-to-head against the Government for new housing. Many new housing projects have been partially or fully sold down to Housing New Zealand to meet their housing demands – and it’s the exact same stock that should be available to first home buyers.”

As a headwind to all this, the pressures for a slowing market are growing thanks to rising interest rates and LVR changes, government legislative changes, and prices already being at record levels.

“The Reserve Bank has signalled that higher interest rates, at least 1.75% above existing rates, are inevitable. Inflation has spiked to 3.3% on the back of strong economic activity and our supply/logistics issues, which have resulted in a shortage of the things we want and long delays waiting for goods. It’s also likely the Reserve Bank will introduce debt to income ratios in order to slow the market. 

“Higher interest rates should result in a re-pricing of housing and other investments. Affordability will reduce thanks to lower debt servicing ability and a decrease in the amount able to be borrowed and serviced. Bank policies have already hardened and become more prudent as a forerunner to this move.”

Government intervention and legislation has been directed at the investment market, with the aim of dampening and curbing enthusiasm. 

“Things such as loss of mortgage interest deductibility, ring-fencing losses, fewer depreciation benefits, the extension of the Brightline test to 10 years (a defacto capital gains tax) all make property investment less appealing. Then there’s the additional landlord requirements that have come through the Healthy Homes legislation and numerous tenancy related changes in favour of tenants. Add this to the much weaker population growth, reduced demand for housing and boom in construction, and a turn in the market seems likely.”

Housing in New Zealand is overpriced against all metrics. Gordon believes the recent surge in prices over the past year is unjustified and simply propped up by extremely low borrowing costs. As this ends, he says a stall in the house price spiral should come. “The market should react to the pressures being applied, and when we couple this with weaker population growth, a housing supply boom, and the latest round of COVID lockdowns creating further uncertainty, I believe the market is poised to turn and soften. However, predicting just when this will happen is anyone’s guess.”


Gordon Edginton - Director + Registered Valuer
Gordon Edginton – Director + Registered Valuer

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