By Bernard Hickey
If you are reading this and you don't own Auckland property, then it would be a good idea not to read any further because it will probably ruin your Sunday.
Figures released this week by Barfoot & Thompson, Auckland's biggest real estate agency group, confirmed everyone's worst fears (or biggest hopes if they owned property in the city). Auckland's housing market has officially floated off its New Zealand moorings into its own orbit. The Reserve Bank can now have no doubts or caveats around the seasonality or size of the trend -- the housing market in New Zealand's biggest city is booming.
The average three bedroom house price on the isthmus of Auckland that used to be the old Auckland Council rose over NZ$1 million for the first time in March. The average house price in West Auckland rose 20.5% over the last year to NZ$632,032. Barfoot sold 420 homes worth more than NZ$1 million each in the 31 days of March, while selling just 300 homes for less than NZ$500,000. Barfoot's agents would have collected almost NZ$1 million of commissions each day in March as they sold over NZ$1.2 billion worth of houses over the month.
Auckland house prices are now rising at double digit rates on an annual basis, while the rest of the country is growing at less than 5%, or not at all. Even in Christchurch, house price inflation is subdued as a wall of new houses hits the market to soak up demand and replace quake-damaged buildings. Prices are still falling in some regional cities where populations and work are drying up.
Unfortunately for the Reserve Bank, taxpayers outside of Auckland and Auckland's renters, there is no relief in sight. Net migration is rollicking along at record highs and at least half of new migrants end up in Auckland, or just as importantly, aren't leaving Auckland. Longer term fixed mortgage rates are low and falling. Employment growth is strong and rental property investors are stocked up with plenty of fresh equity to gear up with much bigger and often interest-only mortgages. New mortgage lending is growing at over 20% per year.
But most crucially, housing supply in Auckland is nowhere near catching up with the shortages built up over recent years. There were just 7,745 building consents issued in Auckland in the 12 months to February, well below the 10,000-plus needed to keep up with population growth, let alone catch up on the shortage of 20,000 dwellings accumulated over the last five years, according to MBIE estimates. That shortage is expected to be 25,000 by the end of 2015.
If the current trends continue through the rest of 2015 and into 2016, economists are forecasting another double digit increase in tax-free capital gains for Auckland home owners. Renters are now in all sorts of strife because rents are rising by 5-10% per annum, which is double or quadruple income growth, not to mention more than 5 times faster than broader inflation. Rents are jumping over 40% of disposable across the city.
This rent inflation is rapidly becoming a fiscal issue for the Government, given it spends more than NZ$2 billion a year handing out accommodation supplements to private landlords and Income Related Rents to Housing NZ. Taxpayers throughout New Zealand already provide subsidies for more than half the rental market, and that proportion is higher in Auckland. Taxpayers in Gore will be subsidising landlords in Mt Albert at an even greater rate and rents and prices surge.
By any measure, Auckland's housing market is now officially an issue for the Reserve Bank in financial stability terms, it's a fiscal problem for the Government and it's an affordability problem for first home buyers and renters. Finance Minister Bill English also rightly describes it as a major driver of inequality and child poverty.
So what might be done about it in the short term?
The Government is expected to announce within a few weeks it will ramp up its Tamaki Re-Development of Housing NZ land in Glen Innes into a NZ$1 billion project with hundreds of new affordable homes. It is also looking with the Auckland Council at how to free up Government land for new affordable housing, given it owns 7% of all land on the isthmus. There is more than 80ha of empty Crown land in and around Auckland that could be turned over to new housing within a year or two.
But at some point, the Government and the Auckland Council have to consider more aggressive measures on both sides of the ledger, including supply and demand. Prime Minister John Key has always left open the option of tweaking migration settings if the pressure on infrastructure and the economy generally becomes too much. Auckland's housing pressure cooker is getting closer to that point.
The Reserve Bank is likely to force banks to progressively hold more capital to back rental property mortgages within a few months, which could push up interest rates for landlords. It is also expected to keep agitating quietly behind the scenes for more Government action to reduce the tax advantages for rental property investors. A brave Reserve Bank would be much louder.
Ultimately though, the bigger fixes on the supply side will take much longer. They could include introducing new types of leasehold agreements and long-term tenancies that make long term rentals more attractive for tenants and institutional investors alike. They could include removing many of the restrictions around building heights, parking and view shafts that reduce the density of housing in the 'leafy' suburbs around the centre of Auckland such as Grey Lynn, Ponsonby, Mt Eden, Remuera and Parnell.
All of these will require plenty of political will and bureaucratic heft from both the National Government and the Auckland Council.
Auckland's Generation Rent and taxpayers north of Warkworth and south of the Bombay Hills can only hope the politicians and bureaucrats can find these qualities from deep within. That's if they haven't read this far and given up in disgust first.
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A version of this article was also published in the Herald on Sunday. It is here with permission.
64 Comments
Thats true, a lot of people took their EQC payments up to Auckland and put it to good use there. You never know, a volcano could errupt in Auckland, that'd cool the market down real quick. Excluding that however, the chances of another recession within the next few years is pretty good, and a massive building project in Auckland would be just the ticket to give things a bit of a boost.
Chch had a different set of problems, houses were vacant because they were damaged and extra housing was needed while people's homes were repaired.
As homes have been repaired, supply of homes increased and demand decreased (fewer people needing temporary rentals while repairs were down).
The fact is that there never would have been so much demand if habitable red zone had been utilised rather than demolished.
Chch's housing shortage is being fixed simply because it never really existed and was only a timing issue that was so poorly managed by the Government/Cera (Brownlee, Sutton and co) that it created a temporary shortage while repairs and rebuilds were underway.
Auckland can not learn any lessons from Chch except that Government intervention only makes things worse.
You have no idea. 90% of the flat red zone house had no habitability issues. The shortage only started once red zone demolition and voluntary eviction started in late 2011.
Chch lost enough residents immediately after Feb to outweigh the loss of houses.
In late 2011 we were having to cut rents to find tenants (3 bed homes letting for under $275pw ish), last year the same were $420 ish, now dropping back under $400 to get good tenants.
Mismanagement caused the crisis. Now the crisis in Auckland is being caused by mismanagement of migration and rules on foreign investment.
Maybe part of the reason Auckland has unmoored from the rest of the Country ...is because it is a "global City"....
Not quite a Global super city.... but I think the principles can be appied to Auckland
http://www.nber.org/digest/mar07/w12355.html
http://www.straitstimes.com/news/opinion/more-opinion-stories/story/hom…
The bottom line is that Aucklnad will probably never fall back into line in regards to affordability metrics..
And the other part of the reason could be a Government with anti regional development policies. Just last week they announced the closure of three regional prisons with the staff and inmates to be re-located to a private institution in South Auckland. These are "bought and paid for" buildings, with taxpayer trained staff, close to the local offenders and their families being shut down - the only benefit is to the foreign so called PPP owners and another boost to the insane Auckland property market. The regions miss out again. It's hard to believe this is anything but part of a deliberate policy to destroy what is left of regional prosperity.
From your link above:
" the evolution of superstar cities has important implications for the future of urban areas. For example, it raises the question of whether a metropolitan area that becomes affordable only to the wealthy can maintain its cultural or economic vibrancy. It also raises the question of what optimal public policy should be - and whether it should lead to an outcome where lower income workers cannot afford to live in superstar markets. For example, existing superstar cities and towns could moderate their housing costs by allowing increased density, but have chosen not to"
I believe that this Government are happy to see the regions wither and is part of the reason I voted for Winston in our recent by election.
I don't think that tells the story you think it does Mortgage Belt. Stable house prices benefit the locals. Auckland house prices are screwing the locals. And look at Aucklands Zombie suburbs. Soaring house prices, impoverished renters, huge social problems. Actually ghettos.
It wasn't me, but it makes sense that innovators/entrprenures are looking for opportunities and capable of thinking outside the box, they will probably among the first to leave (didn't one of the bloggers from here just shift from Auckland to Tauranga with a goal of starting her own business?). Along with those who don't have the incomes to live there and have families elsewhwere.
I heard from an IT guy in Vancouver (another top liveable city) that retaining skilled staff is hard because once they get a bit of experience they are leaving the area for a more affordable lifestyle elsewhere.
I think the rise in cost of living has risen so fast that people are only now begining to realise what has happend. When the cow cocky down the road starts talking about the cost of housing in Auckland I think people have begun to wake up. It takes time to think about leaving, then find somewhwere else to go, then actually decide to move there.
This is a gross, disgusting situation made grosser and more disgusting by a government's total inaction. Their clinging to the free market-open immigration-non resident foreigners having carte blanche ideologies has now sentenced a whole lot of kiwis to life long renting where there are virtually no controls. It will take a brave govenment now, to right what has gone on now for years and it WILL have to come from government. It will take closing the immigration doors for quite some time, it will take much building of affordable houses for which the govt will have to be hands on, it will take banning non-resident foreign owners and it will take a complete re-working of the tenancy act so that if people are forced to rent, they can make where they live a home. As it stands that is not possible, people are paying enormous proportions of their income to people who then have the temerityto turn around and tell them how to live their lives, all the while knowing that this "home" could be sold out from under them at any stage. I am disgusted with the way this country has gone!!!!!!!!!!!
Putting restrictions on non-residents buying property would not be a good look for the countries like China where we have signed free trade deals. We want them to buy our produce but thy are not allowed to buy property.
I think allowing Auckland prices to increase is a small sacrifice in return for multi billion $ free trade deals, the export dollars and jobs they create.
It is not just house prices Del. Look also at the pressure on health, education and traffic. If we keep bending over soon we will be grabbing our ankles. Looking at National policies I would say Key's instructions to his troops is "Smile and bear it" We are basically prostituting ouselves and our chidrens future for short term trading gains as China runs its long term plan and Key plans his legacy.
Yet another Hickey story where he has interviewed his keyboard rather than be bothered with the facts.
As at this moment there are 2534 houses, units, town houses, and apartments for sale in the Auckland region for under and affordable $600K.
Every day there are new ones coming on as fast as they get sold .
Readers should take Hickey's scribblings with a grain of salt until such time as when there are less than 1000 for sale on any particular day.
Then, and only then, will there be a genuine shortage.
600K at 5.5% gives a weekly interest repayment of 687.50
That's interest only
as an owner/occupier I don't think banks would entertain interest only mortgages. So add another third = NZD916.67. Per week.
And that's not even taken into account the deposit you'd need on a property like that.
Given that half the population earns under 60K a year, then even with 2 people earning 60K a year, prices like these are unaffordable.
.
Anyone who thinks they are is deluded or has way way too much money.
a stopped watch is right twice a day
an economist that doesn't update his opinions might eventually be right...after all he's not betting with his own money :)
Like the sports betting scam.
Send a large bunch of people "sports results from your guaranteed system" - except you tell half of them team A wins, and the other half that team B wins.
Then after the game, you send the winning group the next results, half saying team C wins, other half saying team D wins.
Do this several times and you will get some suckers who see "that you've got every game right so far" and are willing to purchase or bet on the future picks.
One modification of this scam is to encourage people to "buy in early to be big winners, and offer "discounts" to early birders". That way some people will come in early and give you their money; others will wait and watch your "system" but when they see they keep getting results they will be time-pressured into parting with larger amounts.
I will grant that there is one unsettling statistic to be considered that I have just discovered.
There are less than 900 houses, apartments, and units avalable to rent under $500 pw on Trademe in the whole of the Auckland region at present.
This IS a worrying trend and I may be obliged to eat my words one day.
If so I shall do it with grace.
The Reserve Bank is likely to force banks to progressively hold more capital to back rental property mortgages within a few months, which could push up interest rates for landlords. It is also expected to keep agitating quietly behind the scenes for more Government action to reduce the tax advantages for rental property investors. A brave Reserve Bank would be much louder.
An outcome not observed in another anglo saxon jurisdiction.
Buy-to-let landlords have hit the investment jackpot by earning returns of almost 1,400% since 1996, leaving the performance of shares, bonds and cash trailing in the wake of Britain’s property boom. Read more
After all, prolonged Credit Bubbles and attendant resource misallocation, mal-investment, maladjustment and wealth redistribution ensure fragility and debilitated economic systems. Bubbles as well strike a heavy toll on social and political stability. The upshot is mounting stress and divisiveness between social classes, political parties, nations and global economic and security blocks. Accordingly, it is absolutely essential to ward off Bubbles prior to them becoming powerfully ingrained. This is the great lesson global policymakers doggedly refuse to learn. Read more
Rents are the fundamental measure that shows a shortage. People don't sign up to a rental offering 20% extra price because they want to lock it in incase rents are even higher next year; they'll just get a rent hike if that happens.
Immigration and effect on rents will show greater and greater over next couple of years in auck. the longer the auck boom/bubble runs the more likely and more significant the regional/welly house price catch up will be. U simply can not have a country were 1 city has prices 3-4 times higher than other cities where incomes are only prehaps 10% higher before equilibriums and balancing effects (hard laws of nature) kick in.
No rentals in auck will be the main driver of immigrants seeking better living in regions. Has only started with recent rents spiking in auck. Don't need policy to get them to move, just don't have places to live and see how quickly they get sick of getting turned down by landlords offering places for 500+ a week
the problem is people have thrown out the rules when it comes to investing ,
there are plenty of houses for sale, banks are giving the money away and houses are getting resold after six months or a year for good profits.
and dont get me started on the IRD trying to catch people at it, that is a massive joke so many holes
Yesterday Deputy Mayor Hulse called for a cross-party approach to delivering affordable housing in Auckland.
The timing is significant as AC and MBIE will be in the process of compiling the latest quarterly report for the Special Housing Accord (covering Jan-Mar). Bearing in mind that this report takes us to the half-way stage of the Accord there is every sign that this report will make for ugly reading.
We have been able to track building consent numbers during this quarter and they have been nothing flash and certainly show no signs of ramping up. We haven't been able to track sections being consented as resource consent stats are not published.
The sub-text of Hulse's statement was that AC have done their bit and it's now up to everyone else. This indicates to me that the numbers of sections being created could be shrivelling. And actually the sections are really only consented - there is no hurry for a developer to actually put bulldozers on the ground once they have got their consent. There was every indication of this trend in previous reports. The last report was so desperate for good news it started counting pre-application consultation as a success.
So rather than take responsibility for the failure of Auckland to significantly ramp up housing supply Hulse is taking the coward's way out and trying to deflect blame onto others. And she is trying to get in first and frame how the city and the country interpret the report when it does come out. Nothing noble in that course of action.
immigration is all heading Auckland because thats the best chance to get a job, same reason aucklanders dont take the mil for the house and move to another part of the country mortgage free.
most of the people i know that move to aussie do so for that reason, dont want to live in auckland but want a good job, so go to brisbane, melbourne or perth.
pretty soon we are going to have a country with 1/2 the population living in one city,
myself would love to move out of auckland but choices are limited as in my industry 90% of the jobs are in Auckland
But job availability is relative to population also.
is auck growing jobs at 50k p.a ? Or is it exactly the same situation as property..
Just as immigrants will give up competing for expensive poor quality rentals, they'll give up competing and missing out on jobs in auck as nothing can keep up with this sort of rate of immigration.
Hence other regions, relative to auck, become a lot more attractive
or maybe its a sign of too many high paying public service jobs?
But that may not last too much longer. There seems to be an unreported but increasing shift of Government jobs out of Wellington - to Auckland following the population and business base (and a lesser extent Christchurch).
(Maybe the RBNZ will move one day too - they already have a bit of a staff shift, like many other public service organisations.)
That might change the 'earnings' levels of both cities.
And don't forget, the Devonport Naval Base is the planned relocation point if there is a big shake in Wellington. Would they go back in that case? Hard to see them spending the type of money needed after the Christchurch experience.
Demographia reports almost identical median household income in the two cities. You would expect the Auckland standard of living to be lower because of high accommodation costs. But that pain will not be evenly distributed; so, tough in some households, not so bad in others depending on when they bought their house and how much of the mortgage is paid off.
Statistics NZ have done analysis on internal migration patterns in NZ. We have a very similar pattern to the US where foreign migrants flock to the name cities (Auckland, New York, Los Angeles). But there are also strong internal migration outflows to other locations (New York has the highest rate of outwards migration of all US cities). I have only skimmed the report but it turns out there is a drift South with the Sth Island being the main beneficiary of internal migration (counter to everything I always believed).
Also be careful connecting net migration numbers and employment impacts. In calendar year 2014 only 46% of those who entered "long-term" on visas held work permits.
If a 4% increase in one month for Auckland house prices from what can only be described as stratospheric levels is not sufficient to precipiate harsh RB actions then you have to accept nothing will.
The Govenor is asleep at the wheel. Where When and How will this end ?
I can imagine it getting a little messy - but then I look at the buyers and figure many actually don't care what they pay - they are siimply getting rid of some truly massive ill-gotten gains to grab a bolt hole in a rule of law environment with no death penalty or extradition treaty that allows that before the very active tiger catching program catches up with them.
Wheelman asleep at the wheel?
What would you have him do?
Wheelman spends half his days skulking around corners at the arrivals lounge at Auckland International Airport, shaking his head at the number of Tigers and Foxes tripping through the Sky Net
The rest of his days are spent trying to field a team that can and will stand up to the NZ Bankers Association's First XV who have had there way with wheelman for the last 2 years, pleading poor-mouth and how much extra effort it will cost them to implement commerical loan rates on investment borrowers with multiple properties. They've put up enough flack and achieved 3 post-ponements
Of course, that won't hamper the Tigers and Foxes and Sky-Flyers and any other bolt-holers
Time for a beer, and crank up some Metallica.
Careful what you wish, careful what you say
Careful what you wish you might regret it
Careful what you wish you just might get it
And it all crashes down, you lose your crown
You point your finger but there's no one around
A global bubble. If ECB, Fed, BoJ, BoE etc would not create thousands of billions on their Excels from thin air, NZ banks would have a much harder time getting cheap funding. Ergo no AKL house bubble.
NZ, both through govt and the RBNZ are in my view relatively well governed, trying to at least temper credit excess. Contrast that with the heads of the OECD, IMF, EU etc irresponsibly calling for ever more money printing which eventually also spills over into the AKL housing market.
Want to say, it is not even a local problem any more. Key and Wheeler would have to stand up at their G-something junkets and be critical of global money printing policies. Well, not going to happen. Whatever placebo they come up with instead will not change anything fundamentally - until the bubble pops and everyone is once again innocent and did not know it could happen.
"........Taxpayers throughout New Zealand already provide subsidies for more than half the rental market, and that proportion is higher in Auckland. Taxpayers in Gore will be subsidising landlords in Mt Albert at an even greater rate and rents and prices surge....."
Can somebody explain to me the reasons the accommodation supplement amount is structured in the silly way it is. It gives all the wrong signals.
I think everyones getting too upset about, its not the government's faulty, or planning or regs or any other external factor. Markets are bubbleicious because people are; let the cycle of greed and fear take its own merry course. Some will win, some will lose, but most will be left with their heads spinning, wondering what happened. China is just in the throes of finding out you can't permanently base the bulk of your GDP on property speculation, they will have othert things to worry about shortly than a takeover of NZ. Anyone remember when we were all supposed to learn Japanese? 20-odd years of property price declines later, Japan still isn't out of QE.
Auckland is a big scam whereby wealth produced in the regions is capitalised in Auckland house prices. National had it coming in Northland, maybe they will learn from it, maybe not.
How does the wealth produced in the regions end up in Auckland?
Firstly, the RBNZ run a wealth transfer scheme by subsidising those with high paying jobs and mortgages in Auckland. They do this by adjusting the mortgage rate to a level that over-indebted Aucklanders can afford. Where does this subsidy come from? From elderly people who lend money to banks. These are not wealthy people, they are ordinary people with very modest savings built up over a lifetime of work. Where do these elderly savers live? In the regions. The house price boom is largely caused by interest rates being too low for long.
Why do the RBNZ keep interest rates too low? Because inflation is low. Why is inflation low? Because the government is targeting a surplus while the RBNZ is targeting 2% inflation. A surplus implies falling consumer prices. When will they figure this out? Who knows, they are bright people doing stupid things because they think it is clever. One answer is for the government to run a deficit of 2% (by taxing less or spending more as they see fit) and keep the RBNZ target of 2%.
So we have the RBNZ stupidly draining the regions of income on savings which would otherwise be spent on necessities, and giving money to people in Auckland with well paid jobs, in order that they can bid up the prices of each other's houses. The $200,000,000,000 of household debt takes priority over all else simply because it is so very, very big.
If only the stupidity stopped there. Wealth is created by the producers in the regions, but they need services as an input. Services are based in large port cities where the finance and legal and transportation and change of ownership primarily takes place. That's why finance is mainly in places like Hong Kong, Singapore, Sydney, Shanghai, London and New York. The producers in the regions get to keep what is left after literally thousands of beaks have been wetted in the cities. The worst thing for NZ would be for the government to move to Auckland as the regions would be totally invisible there, just as they are to Aucklanders now.
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