According to a recent press report, Wellington in the past year has seen historic value increases in the region with some areas over 25%. Big increases have affected most areas but interestingly the high rates that were initially seen in inner Wellington have now rippled out to the outer locations such as Upper Hutt, Hutt City and Porirua.
The region overall appears to be past its peak increases with gains in Central Wellington dropping back to a relatively modest 20.8%. All areas have seen an increase in the number of sales for this time of year, and selling times remain fast, but there has been a slow increase in the number of listings and stock available for sale. Significant price increases can be expected over the next year but the rate of increase now appears to be moderating. Over the region the constraint appears to be the availability of properties for sale as selling times are much faster but the number of sales is steady. This is in sharp contrast to Auckland with falling sale numbers and faster selling times.
The number of sales taking place and the number of days to sell have in the past provided a guide to market trends, prior to price changes. The most obvious trend is the rapid decline in the days to sell from about 39 in Oct 15 (when the new LVR restrictions were applied) (LVR= Loan to Value Ratio lending requirement imposed on trading banks by the Reserve Bank), down to about 28 in Oct 16 when the figure settled at around this level.
The number of Wellington sales peaked in October last year but have remained relatively steady close to 800 per month. In October 2015 prices in the region suddenly jumped and this coincides with the sudden drop in selling times.
Auckland is almost the opposite. Time to sell started increasing from Oct 15 and the number of sales started to decline. The relevance of this is that Wellington would normally be expected to follow Auckland possibly not to the same extent and with a significant time lag.
However, there are a few points of contrast that could see Wellington continue on a growth path for some time. Population is growing because of business expansion. Also, we have a relatively high income and more limited ability to increase housing supply.
This is now showing in the data referred to above. The other element to add to the mix is Political. Government policy has been to constrain public sector spending as they managed the GFC (Global Financial Crisis) since 2007 as well as the Christchurch earthquake.
This has meant less staff by reducing and eliminating jobs where possible. With Government finances in a healthier state and an election in about 6 months, we can expect an increase in government services which will mean more staff and further growth in Wellington which keenly felt the contraction post 2007.
Interest Rates Will be a Significant Influence on the Market.
They have already increased over the last year and this trend is expected to continue over the next 12 months. This will dampen price increases, but for the reasons given above, increasing property values will be with us for most of the year, and a decline in prices is only expected if interest rates increase rapidly, or there is a significant change in the national and/or local economy or there is another GFC type event.
Does the Residential Property Market Deliver Appropriate Outcomes for Our Housing Needs?
Recent public and political discussion about the housing shortage implies that the current big effort to increase supply which will alleviate the housing shortage. But will this work?
Supply and demand is the mantra of economists that explains how market forces deal with change in the need and supply of goods and services. An increase in demand will increase price which will signal an increase in supply. Also an increase in price will reduce demand and hence supply. However housing is not an ordinary commodity or service. It has a social element and a speculative element (acquired for capital gain).
Both these elements make its economic behaviour very different, complicated further by being impossibly slow to respond to the need for more supply and being less than an ideal open market. Housing needs start with the basic requirement for shelter, this usually means rental accommodation. Cost is significant and income has a direct bearing on the rental that can be paid. This is very different from home ownership where there is much wider choice, less immediacy and part, if not all of the decision, is about the speculative element (getting onto the property ladder). The difference in ownership and rental markets is highlighted in the modest increase in rental rates compared to property prices. It also suggests the housing needs are not being reflected by house prices. Two recent news items highlight the gap between needs and supply. Elham Bahmanteymouri, who has an interest in the link between psychology and economics, recently completed her doctoral thesis examining the influence of “neoliberalism” on urban planning and found the focus on achieving lower prices through greater supply had caused affordability problems across the world. She discovered that more land and more houses does not mean more affordable homes and pins most of the blame for unaffordable housing on policies encouraging the supply of more land and houses. Significantly she notes that “Land and housing are not normal goods, they are speculative.”
Recently on RNZ’s morning report, John Tookey, the head of Auckland University of Technology’s (AUT) built environment department, said the free market was not building the kind of homes the city needed, and that the push to free-up more land for new housing was simply delivering large and expensive standalone homes. Also, that only half of the estimated 14,000 homes needed annually are actually being built. He said the shortage and affordability of homes was a social issue, and if the market was not delivering then more compulsion was needed.
Persistent price increases have spawned the growth of property speculators, that have now accumulated resources that allow them to drive the market. Wellington prices have increased over $100,000 in the past year and in Auckland it is over $200,000.
This scale of profit available creates aggressive buying behaviour not only from the speculators but also from home owners that are forced to compete to “get on the property ladder”. This demand for property is not related to the need for shelter. The more prices increase the more it encourages buyers from the profits being made thus further increasing demand – the exact opposite to the standard supply demand theory.
On the supply side, property has barriers that limit response to change. The increasing requirements for; health and safety, environment, planning consultation and process, nimbyism, and infrastructure, all add enormously to the cost of supply not to mention creating extraordinary delays in responding to the changing needs. For Auckland the delay in responding to increased demand and price has taken over 3 years and required government intervention. The increased need for housing, both ownership and rental, has arisen from an increase in population that on average would struggle to afford to rent or buy the new houses being built at over $700,000 or $540/week.
For markets to work effectively and for the supply demand dynamic to be effective, they need to be fair, open and with all relevant information available to both buyers and sellers. It is interesting to compare the property market to the stock market that has a wide range of requirements ensuring buyers and sellers have all the relevant information and limit participants from obtaining an unfair advantage, such as insider trading and the need for accurate and timely information and disclosure.
There is no equivalent in real estate that ensures the same standard of a fair market. One example is the tendering process where the buyer has very limited information to find out what to offer, and is reliant on the real estate agent. In a rapidly increasing market that we have just been through the buyer is forced to make offers higher than necessary. Real estate agents are very influential on the buyer, in the information and advice given to the buyer, but they act for the seller.
There is no equivalent for the buyer and this passes the advantage to the seller. Obtaining up to date information about prices is limited by delays in the information being published and delays in settlement. Also, property information is not always clear and easily available and requires a due diligence process that the buyer is often unable to complete because of cost and the limited time frames set by the real estate agents and sellers.
The conflict developing is that land and building supply has substantially increased but will be at price levels that are not affordable by those with the most need. This raises the prospect of oversupply, falling prices and hew homes being unable to sell, yet there still being a critical shortage of accommodation.
The price level for new homes and the effort to increase the supply, does not appear to address the need for those that cannot afford to buy. Traditionally, first home owners brought; in the more remote suburbs, poorer buildings or low cost basic houses. They then traded up as their lives developed, to the more central areas and higher values locations. These moves allowed the next generation to take over the lower priced property. The speculator effect has made even the budget suburbs out of reach for those on lower income, and unable to now contemplate home ownership. They have to settle for the speculator landlord.
My conclusion is that the property market is not a fair platform to meet housing needs. The rise of the property speculator class has changed the housing landscape making it more and more difficult for first home buyers and those with lower cost housing needs. To meet these needs we have to go well beyond increasing supply and relying on land developers and traditional builders. The “more compulsion” John Toomey refers to must inevitably be larger scale government projects.