Written by Vicki Holder
November, December, January and February saw a cooling of demand and the number of houses sold dropped. The 40% deposit that banks required quietened the market, especially around the fringes. Prices fell 5% to 10% in Auckland. But as economic commentator Bernard Hickey points out, they’re still up 80% on the previous 4 years.” Which means prices are up 75% on 5 years ago.
“We’re among the 5 most expensive cities in the world – up there with London, Hong Kong and Sydney. There’s still lots of demand and not enough supply supporting prices.”
Due to the strength of our economy, migration showed record gains to January 31 this year. New Zealand’s population rose 71,300 and 44% or 56,231 headed for Auckland. While the Unitary Plan finally moved through the courts a few weeks ago and it’s now in place to provide 410,000 extra houses over the next 23 years, supply and demand are not likely to come into line in the near future, says Bernard.
“We’re building 10,000 and need at least 13,000 a year to keep up with growth in population – not just through migration but more people being born here and not dying. There’s a gap of between 3000 and 5000 a year, adding to a shortage that existed in 2012 or so.
“There is a huge housing shortage in Auckland. It’s generally agreed from 30,000 to 40,000 houses are needed. From the point of view of home buyers thinking prices are high and they surely must fall – be sceptical.”
We take it for granted just how stable and attractive Auckland is, he says. “We’re just one long haul flight from the worlds’ most populous and fastest growing economies of China and India. “They’re full of extremely wealthy people eager to move their capital around the world and to diversify. They are nervous living in their own countries and don’t have the same protections as we do here.”
People are living in small two bedroom concrete boxes that could be taken from them any day. “Come to New Zealand. It’s functional, warm, we’re nice to people, we have a good legal system. It’s a pretty good place and we tend to forget it.”
“There were predictions that growth would drop off but it hasn’t happened. It’s put incredible pressure on house prices. Things are getting more intense.”
In the last two or three years, the outflow of Kiwis going to Australia or UK for their OE has also reversed. Lots of New Zealanders living in Australia are coming back.
He warns not to get too excited about the Unitary Plan, “because the business of supplying extra houses requires a bunch of other things.”
On the other hand, Andrew King, executive officer of the New Zealand Property Investors’ Federation says the Plan is good news as it will bring opportunities for better returns for property investors. “They can achieve better utilisation of sections which will provide a better level of accommodation for tenants which is good.”
The question is, when will it happen?
“Our demand is volatile and we are slow to react. It takes a while to get things going. Then when demand falls, we are already in the pipeline. This accentuates the boom and bust cycle.”
But even if migration went down, says Andrew, house prices usually simply plateau.
“The thing that would make them go down would be if the Government responded to demands and built a lot of homes then people no longer came here. They overbuilt in the US, Spain and Ireland and they had a real crisis. It’s unlikely to happen here so long as we don’t force the Government to build more houses.
“Everyone blames the property investors or the Chinese immigrants for our lack of housing supply. But it’s the slowness. There are now so many appeals. We all want to have a say in everything.”
On the one hand, this makes politicians accountable. But it holds up development, like subdivisions which take years and years to get through the process. “It makes it difficult and risky for developers who want bigger profit margins to account for it,” and that keeps prices high.
Affordability, or the lack of it, is something many people are talking about. Some say it is the worst it has ever been and first home buyers can’t afford to property any more. Andrew disagrees and the NZPIF is about to publish a survey which shows it’s not different to any time in the last 30 years.
“There is always a time when it’s easier or harder to buy property. The price to income or price to rent ratio, doesn’t take into account lower interest rates, rent as a portion of income falling, lower tax rates and all the first home buyers’ incentives like the home grants, Kiwisaver and first home deposit withdrawals. It’s not actually as difficult to buy for first home buyers compared to in the last few decades. It was harder in 2005 than in 2015 to buy your first home.”
The biggest risk to the current situation, says Bernard, is a change of government which might impose a capital gains tax. “Andrew Little has promised a review of the land tax.”
The Reserve Bank started talking about debt to income controls and limiting the size of mortgages to multiple incomes. “This would potentially cause a lot of grief. They’ve asked for a cost benefit analysis before any party starts using that deal. And they have to consult with banks. So, it’s unlikely to happen this year for the election. The Reserve Bank won’t use it because it’s pleased with its house price moderation. But that’s a potential risk.”
That and the possibility of banning foreign buyers along with rising interest rates – unlikely because inflation is low; Trump’s planned tariffs and infrastructure spend haven’t happened and the RB is planning to keep the OCR on hold for all of 2017, 2018 and not increasing it until the second half of 2019.
“Fixed rates might nudge up but the outlook for interest rates is benign.”
Andrew is also confident the election won’t have much impact on housing. “Parties promising major Government-led developments still have to go through the same processes. They promise a lot but I’m not sure if they can deliver.
“We don’t really want them to either. We could already have too many houses in the pipeline and a sudden drop in migration might cause problems. Some people want prices to come down but most don’t as it has a major impact on everything. A lot of small businesses are funded by residential property.”
The big question is, will we see the same gains we’ve seen in the last 5 to 10 years? It would be hard to imagine Auckland house prices rising another 80%. But who knows.