By Gareth Vaughan
The Auckland housing market will slow over the next 12 months with prices potentially even falling, says New Zealand Institute of Economic Research (NZIER) principal economist Shamubeel Eaqub.
Eaqub told interest.co.nz in a Double Shot interview Auckland housing doesn't make sense. He also says the Auckland Accord, designed to address a shortage of houses, could lead to an over supply, and outlines three key issues he'd like to see debated during the election campaign.
Eaqub says trying to forecast house prices has been a mug's game.
"But everything that we see on the fundamentals is that Auckland housing does not make sense relative to incomes, relative to rents, and the downside is in the order of up to 30%."
Yesterday's March quarter Consumer Price Index noted a 2% year-on-year rise in rents, with Canterbury up 4.9% and Auckland up 2.3%.
The Auckland housing market, which had been New Zealand's hot spot for house price inflation, seems to be at a turning point, Eaqub suggests.
"It may be too early to judge whether it's from the (Reserve Bank's) LVR policy, or it's other things like rising interest rates or banks becoming more cautious," says Eaqub.
"But it feels like the (Auckland) housing market, which had been just rising very, very strongly and almost without any stop, is now taking a breather. And with the Reserve Bank raising interest rates, it feels like there are some big concerns around whether house prices can keep rising in Auckland. And they may even start to fall."
'A huge amount of speculation'
Outside of Auckland and Canterbury Eaqub says he expects New Zealand house prices to do "practically nothing" this year, continuing the trend of the past three years.
"So real house prices outside of Auckland and Canterbury, they're fine, they haven't really done much. In Canterbury a lot depends on whether the supply comes on and there's a lot of uncertainty around that."
"In Auckland there is a huge amount of speculation that's driving up house prices. And I say this because when we look at what's happening with the cost of housing through rent versus the cost of houses, rents haven't really done much. They're very subdued, growing at a gradual pace, but house prices were rising at a very fast pace," says Eaqub.
"That means that there's no shortage of actual houses, physical houses, but a shortage of investment properties. And that dynamic can turn very quickly. And when you run out of investors, house prices can't sustain the levels they have achieved in the last few years. So our prediction is that over the next 12 months we are going to see housing markets slow in Auckland, but it's hard to tell by how much."
The latest Quotable Value figures show an annual increase in residential property values of 14.3% for Auckland in the year to March. And the latest Real Estate Institute of New Zealand figures show a record high median price for Auckland of $637,000 in March, a rise of 13.3% year-on-year. Recent data has led to a confusing picture of what's going on in the housing market as outlined here by David Hargreaves.
QV said: “The LVR speed limits and the Reserve Bank signalling further interest rate hikes is likely to be contributing to a levelling off in the growth of property values in Auckland and for the first time in more than two years we are seeing a decrease in some areas of that market.”
'Short-term migration impact'
Immigration, seen as a major influence on the Auckland housing market, is running strong. Statistics New Zealand's latest figures show a seasonally adjusted net migrant gain of 3,500 in February 2014, which was the highest monthly gain since April 2003.
Eaqub, however, says migration only causes short-term dislocations if housing supply doesn't keep pace.
"Those disruptions can usually only last 12 to 18 months. We tend to supply houses one way or the other. So the migration flows can give you a little bit of cyclicality around house prices, but the fundamentals really have to be around incomes and rental price," says Eaqub. "And those things have detached to a level that are quite frightening."
"And what we have seen in the provinces of New Zealand is very similar to what we saw in the US or in Spain where, once the investors ran out, those marginal buyers, speculative buyers, prices go back to a level that's more sustainable. And in Auckland that's really the big concern. That even with immigration the prices don't stack up because it is getting so expensive now that a small shock can really make a big change on house prices."
His views on immigration's impact on the housing market contrast starkly with those of former Reserve Bank chairman and senior fellow at public policy research institute Motu, Arthur Grimes. Grimes last year co-authored a report that said it takes up to nine years for housing supply to catch up to demand after an unusually strong population increase.
What a perfect storm for the Auckland housing market would look like
Meanwhile, Eaqub says the "perfect storm" for the Auckland housing market would be increasing supply, rising interest rates, and an economic shock along the lines of a slowdown in China that hits Auckland jobs.
"A more likely scenario if we don't have the kind of fairly risky scenario, would be that house prices don't do anything for a period of say 10 years," says Eaqub.
Eaqub and NZIER have also been critical of the Government and Auckland Council's plan to build 39,000 houses over three years to solve a perceived housing shortage in the City of Sails. Basically he argues this is many more houses than needed. He says the Auckland Accord targets relied on assumptions that were wrong.
"People were assuming that 2.6 people lived per household in Auckland. That's just not true. Auckland's young. We tend to live in bigger households, more like 3.1 people per household. It sounds like a small difference, but that can shave off tens of thousands from your estimates of shortage," says Eaqub.
"But the real kicker has been that the population growth in Auckland hasn't been nearly as strong as the previous estimate suggested. With the latest census we've seen that we were growing at a much slower rate in terms of household formation."
He does acknowledge, however, there have been pressures on housing supply.
"But the shortage is probably in the order of 5,000 to 7,000 rather than the order of 30,000."
And if the Housing Accord meets its targets, "we're talking about moving from a small under supply to an over supply of about 10,000-12,000."
'Education system not working in the provinces'
With it being election year, Eaqub says he'd like to see good discussion and debate on superannuation, health and especially education.
"I've been doing a lot of work in regions over the last three to six months, and one of the things that I find is this massive disparity of economic opportunity and outcomes in many of our provinces. And the biggest failing, and the biggest weakness is our education system is not making people work ready and future ready for the changing economy," says Eaqub.
"And it has to be about education, it has to be about our young people. Because if we can't create those opportunities for young people, we are going to have this divide across New Zealand of the haves in the urban centres and the have nots in the provinces. And I don't think that's the future of New Zealand. We must be far more inclusive than that."
In the video Eaqub also talks about yesterday's Consumer Price Index, the "opaque" tool of the Reserve Bank's loan-to-value ratio (LVR) restrictions, and NZIER's outlook for the Official Cash Rate and mortgage rates.
No chart with that title exists.
55 Comments
No xingmowang, it's not as simple as that. If the NZD even looked likely getting materially above RBNZ's expectation (on a TWI basis rather than NZD/USD) the RBNZ would not be hiking to 4% within a year. It's the combination of tightening through interest rates and the currency that the RBNZ is concerned with - they'd hope for exporter relief by having a lower NZD, and higher a OCR, but if that's not the way it pans out, and the TWI escapes on the upside, then we'll have a more modest OCR track higher. Currently the TWI is above what the RBNZ forecast so at this point of time their modelling would suggest a slightly lower track than what they forecast in the March MPS. Conversely if it was an MPS on the 24th rather than an OCR review, and the RBNZ was signalling that change to the market, the NZD would correct lower immediately because of that lower OCR track.......see it's a balancing act and anyone including the RBNZ can not be confident about the way it does pan out as the opposite can also occur, if the NZD sits lower at any point below expectations, we'll see a higher track from the RBNZ.
But the RBNZ almost always cops out, and pretends to "look through" the currency effects when the currency is too high (Which by the by seems to me to have been 100% predictable given our passive approach to currency management compared to nearly every other country), as though the currency somehow doesn't really count. If on the other hand the currency even sniffs at going lower than the RBNZ might have thought, watch the OCR being laid on thick and fast.
I'm not so sure about that Stephen - in the 2003-06 period itwould seem to have almost been opposite in than they hesitated and were too slow and timid in hiking the OCR, hence an eventual 8.25% OCR that should never had been needed to go that high if they'd act early and appropriately. They may well have over rated the currency effect, but the guts of it was, they under rated the inflationary impact of the housing boom then, and later admitted they had.
Grant, Fair enough up to a point. All these variable are of course interconnected with cause and effect relationships. E.g. a higher and expected to be rising OCR attracts foreign capital so raising the currency, and house and other asset prices, and inflation from the capital flows. Conversely there is lower inflation from domestic demand due to higher interest rates, and from imported pricing through the exchange rate. So one variable is fighting the other counter productively. Best to short circuit some of the capital flows; especially the easy ones like funding the Treasury, which is totally internal.
In the meantime, I actually agree with you in that the RBNZ should miss a rise or two, err on the side of NZ traders, and not raise the OCR until other countries have started to follow suit.
It will be interesting to see if they do what you and I seem to agree they should do, or whether they pull the "look through" PR stunt and raise anyway. One tool, one target, (with an apparently implied view that undershooting 2% is for some unknown reason more acceptable than over shooting it) means I'll be pleasantly surprised if they do not raise again very soon.
I'm not totally of that mind yet Stephen, they will definitely go on the 24th, but agree that July isn't a certainty now after a slightly lower than expected CPI, and especially if the currency continues to hold these levels or higher. They will continue to weigh up these factors each time but I wouldn't be totally influenced by what other countries are doing. Certainly the emerging economies who have had to dramatically increase rates in the past few months because of their specific factors impacting them (lower currency and much higher inflation) hasn't been influenced by others or they'd have an inflation spiral that they'd struggle to contain and hugely damage their people and exporters. We don't live in a vacuum but we all have our own issues. No doubt the RBNZ would darely love to see the USD rally as the resulting lower Kiwi would assist in an economic rebalancing, but they have to live with what they got and respond accordingly.
How would a rallying USD help our exporters?
I can only see it helping us compete against americans, either exporting into the US domestic market, or competing in a third country against american exporters.
Bit for the vast majority of our exports, i don't see it helping. If we are competing against say a european milk supplier into China, assuming the milk is priced in USD, the european exporter is 'helped' by the change in fx rate just as much as we are, and in any competitive market we should see the USD price of the goods fall an equivalent amount as the fx rate rose.
This Shamubeel Eaqub chappy is obviously an acedamic and even more obviously in the pay of Cunliffe and his bunch of Left Wing losers.
Blaming "property speculators" for house price rises just echoes the envy politics of the Left and is errant nonsense - and he knows it.
The biggest speculators are the Mums and Dads buying and selling houses to each other totally tax free and who make up a whopping 90% of the market.
Property traders (or speculators) have always paid tax.
If they try to evade paying the IRD with its big teeth, will do them like a dinner.
I suspect he defines as a speculator any person who buys an asset primarily for a capital gain, rather than merely to use the asset for which it was designed- or even just to rent it out at a reasonable rental compared to the asset price.
That would certainly include many Mums and Dads, many of whom I believe are getting in not out of greed, but in realising they have to get on the ladder in our current economic paradigm. So I wouldn't take it personally.
"Auckland house prices are set to stop rising, despite demand pressures, as fewer people become able to afford houses in New Zealand's biggest city." Shamubeel Eaqub March 1, 2012
Acting on that advice would have cost a central Auckland homeowner at least $100K. Mind you that's a small loss compared to acting on Mr Hickeys advice 8 years ago so Mr Eaqub must be a pretty good economist.
Economists should be ranked on how much money one would lose by following their advice.
Perhaps we should rank property investors/speculators in a similar vein. We measure how much money they get for nothing out of the economy and when they pass a certain threshold we hang them from a lampost. Might bring some fairly rapid sense into the housing market.
Rather than say he's wrong ignore all he says, which frankly is silly, look at why he was wrong.
So 3 components, FHBs, speculators and foreigners looking to huge large quantities of $s.
FHBs, highly emotional, illogical taking on ever incraesing debt and longer terms in order to get what they want. NZ banks happy to oblige as they get a % abnd bonueses, think NINJA loans.
Lets look at the effects of the LVR as a reason. The RB introducing it shows that FHB's are now shunted out of the market en mass. As a result it looks like property prices are flat if not dipping in the FHB market. Quality end? still rising it seems.
Foreign ownership, no one knows the %s in NZ but when you look at many other capitals around the world, eg London you see a similar scenario. ie the bottom end of ppl are stuggling yet quality is selling well, rinse and repeat.
Then you have the speculators here in NZ also buying like crazy for capital gain, not to live in.
Really all the LVR has done is brought forward what was likely to happen anyway...
So Eaqub's timing is a bit off....its not wrong.
More fool you.
regards
Eaqub is right when he says there will be an over supply. There is actually already an over supply. It's called an over supply of unaffordable over priced houses. Its funny a perfect storm is one where a series of events that are out of our supposed control cause prices to drop ie bad luck, but when prices rise by the same opposite series of events, aren't we the clever ones.
This phenomenon's been very well-researched in psychology (http://en.wikipedia.org/wiki/Self_serving_bias). It's how we protect our egos.
1) My success is because of my skill.
2) My failure is your fault, or because of a difficult environment.
If there really is a housing bubble-pop coming, then watch closely those who are gloating now, and you'll see them change (or hear their silence).
I think Eaqub is touting for National party business because this article fits Nations current problem. How to backtrack out of its commitment to housing accord's solving the unaffordable housing problem.
There hasn't been much coverage but National's housing accord for Christchurch supplies only 188 new homes! Remember this is a city that actually has a shortage of housing because 10,000 of them were shaken, liquidified or generally buggered by earthquakes. Rents have increased and if Auckland needed 30,000 houses then Christchurch being 1/3 the size would need at least another 10,000 new homes.
The problem for National being that if they allowed 10 to 20 thousand sections to be created on geotechic stable greenfields around Christchurch then the sudden increase in land supply would lower section prices, then rebuild costs and maybe existing home prices might lose their recent gains.
That of course cannot happen. Key will not allow it. He wants modest gains to house prices. His job is to protect property owners from loss. What a joke. What a caring government we have.
So that is why National needs nice sensible sounding economists like Eaqub to say that the problem is no longer under supply (actually inelastic supply I wish people would learn the difference) but is actually over supply.
Having now watched the video, I think I was a little harsh on Eaqub. I think it would have been helpful if Gareth had asked more questions about Canterbury and the housing supply response. Eaqub thinks the Auckland housing accord could over supply the Auckland market. What about the Christchurch housing accord? Will 188 new housing accord homes over supply the Canterbury market? Eaqub said that construction inflation was spreading from Canterbury and domestic inflation is getting higher. This in his opinion will lead to the RB raisng interest rates to 4% and mortgages rising to 7%. So Canterbury is having a big nation wide effect but how long did Gareth and Eaqub talk about it? One sentence.
Common guys NZ does not start and end in Auckland....
Sorry Gareth and Eaqub, I was a little pissed off that day and I just read the interview not watched the video. I read it like it was a considered written article not a live interview process. When I watched it I realised I had over reacted.... Sometimes these housing issues make me so mad I over react....
But having said that I think serious questions need to be asked about the housing accord process. 180 houses for Christchurch is a joke compared to the scale of the problem. Both in the sense of number of houses lost to the earthquakes and in the massive bubble in NZ's house prices.
FYI Brendon, David H has now written on the Christchurch Accord here - http://www.interest.co.nz/opinion/69561/opinion-new-christchurch-housin…
Forbes on NZ.
"New Zealand has the world’s third most overvalued property market"
New Zealand’s mortgage bubble grew by 165% since 2002
Mortgages account for 60% of banks’ loan portfolios
New Zealand has the fourth worst household debt-to-GDP ratio among advanced economies, surpassing even the United States:
etc
http://www.forbes.com/sites/jessecolombo/2014/04/17/12-reasons-why-new-…
Perhaps. Of course, it may just be that the forbes article makes quite a few valid points that blinkered property speculators in New Zealand are unable or unwilling to see. No no, you see its different here, really....
They mention they are going to do a more detailed piece soon though, you should feedback to the author directly, I'm sure they would love to take your input on board. Be sure to throw in the usual twits and traitors remarks for extra credibility.
The risks don't even register on the radar of most property speculators in New Zealand. The blind belief that property values can only ever go up is endemic. That Forbes article is quite rightly pointing out that the pre-conditions for a correction are present and real.
I'm sure you are well aware that the RBNZ aren't targetting today's inflation but the forecasted inflation for 18 months down the track. And I'd wager they have had pretty good think about the interest rate rises the rest of the world also has coming down the line. But don't let that get in the way of a good straw man rambling.
Anyway, don't tell us, write to Forbes and let them know how they have got it all wrong.
Yep xeinaga, some have made such short sighted decisions in the past that they're so over-leveraged (or worried about what the over-leveraged may do that hurts their asset) that for them any suggestion that record low interest rates can't stay forever is frightening. And the frightened often respond by name calling people who carry that responsibility, and attacking anyone who dares to suggest that rates might not stay there forever. They will ignore economic reality, twist "facts" to try to suit their argument, and generally be totally illogical in any debate on the subject...forgive them for they know not what they do.
Video of the apparent thought processes of the property speculator when assessing risk.
Agree with Zanyzane. Eaqub is a smart operator of pseudo-economics gobbledigook and nothing more. His "analyses" lack substance and intellectual depth. Must be a very comfortable life in an economics thinktank rara.
Btw, a general NZ problem that talk artists like that actually manage to get exposure and influence public opinion to some degree.
Can NZIER please appoint zanyzane to its "principal senior chief economist executive vice president" position?
Happy Easter!
No, What I said was peter pen didnt attack the argument, but the writer. And here you do it again. I didnt even especially say who was right either.
That is a failure of logic, none was demonstrated in peter pen's comment and none in yours as you attack me and not the argument.
Ive questioned the so called housing shortage issue for many months, ergo I have thought about it. I read the Qs he's asking here, the other side of the argument has none.
a) This looks like a bit of tulip mania influenced by speculators both domestic and foreign.
b) The effect of the LVR shows that demand and hence price can be effected.
c) On top of that we see no rising rents, if there was a true demand for a home, both owuld be going up aka Chch.
So tell you what put up and counter-argument.
regards
No, you and others seem to be speculating and dump on anyone who says, oh wait a minute things dont add up. eg we have Chch where both rent and prices are rising, so a genuine shortage. Yet Auckland where rents are not. On top of that Chch is pricing itself into obscurity so sure for a few years its probably pretty safe to buy....within your paradym anyway, then some losses are on the cards.
The fact that there is a speculative component in Auckland above the actual need is indicated by rents being flat. I wont disagree that there is an upward speculative demand and thats bubble and pop risk.
regards
What the Eaqub fellow is saying has been regurgitated many, many times over. IF we would live in a market economy, in which e.g. interest rates are set by the markets, THEN Eaqub may have an all too obvious point. BUT, we all know by now, that not the markets but central banks upon instructions by politicians and bankers set the interest rates to serve the purposes of the latter.
House prices in NZ and and many other countries are the way they are because politicians want them to be that way. And when those prices correct thru left over market mechanisms, then the central bank money printers stand by to "help the economy".
I also remember older contributions by young Eaqub. Talking people into renting rather than buying when the prices were at their recent lows. Wonder how many peoples lifes he has wrecked with his self-gratifying, thoughtless yarn.
Eaqub better fix the fences out in the paddocks to help this country's GDP and stop his counterproductive ranting.
A correction in prices will come, eventually, just as communism collapsed, eventually. It will take a lot of people realizing that they are being made fools and e.g. shift their capital for such a disruption. Until that day the money printers in the globe's cnetral banks will do whatever it takes to protect the status quo of power and money.
I think if we lived in a truly free market we'd see a run on the market, pressing borrowing limits ever higher, bailing out "Greece-style" previous borrowers, with corresponding price rises across the market hoping to catch a little rain (revenue).
Many of the advertising sponsored service would boom-bust cycle
IF that "true free market" included that anyone could subdivide a lifestyle block into sections and homes for their family or church members or subscribers to some legal body, and/or for any developer to buy a farm anywhere and build a new master planned community on it, it would be impossible for house prices to do anything but crash.
Here is the sort of thing that can be done 30 km from a major city on land purchased at $10,000 per acre:
https://www.youtube.com/watch?v=imqWdNQOWGw
Yep, it's called "option values".
Here's how it works.
If you can build stuff on $10,000 per acre land 30 kms from a major city, the land 20 kms away from it will probably be around $20,000 per acre and the land at the fringe will probably be around $30,000 per acre.
The land right in the CBD itself will be around $200,000 per acre.
The above is literally true in the affordable, median-multiple-3 US cities.
This is classic economics of "consumer surplus" - stuff gets to market at whatever competitors can get it to market for, trying to under-cut each other.
Impose a growth boundary, and the land immediately inside it, in Auckland, is now selling for $2,000,000 per acre. The land immediately outside it is fetching a few hundred thousand in anticipation of the UGB being moved one day. Even 30kms away there are some effects of speculation due to the distortions - some developers do manage to spend years getting special plan changes and so on, at millions in legal costs and finance carrying costs.
But there is land around NZ for under $20,000 per acre on which a master planned community like "The Woodland's" could be built. If you watched the video above, you should have picked up that jobs-housing balance was achieved right from the start, minimising ultra-long-commuting requirements.
In fact there is no correlation in commute time data, with urban density by urban area. UK cities are typically 5 times denser than affordable US cities but average commute to work times are roughly the same in both. This is because employment is dispersed, congestion is far worse in higher density, and systemically unaffordable housing (as in the UK) results in more people being "priced out" of location choices near any one job they might get.
Affordable US cities (all low density) function largely as a whole lot of small towns superimposed on each other. Most people can afford a home relatively near to any particular job they might get. If they get a job in "The Woodlands", they can move to "The Woodlands". If they get a job working in one of the many Fortune 500 companies head offices based in Houston CBD (more there than in any other US city), they can move to near the Houston CBD.
http://www.realtor.com/realestateandhomes-search/Houston_TX/type-condo-…
Zip Codes beginning 770-- are inside the ringroad in Houston.
Can you get anything in any equivalent location in Dorkland for those kinds of prices?
Peter - real interest rates are generally calculated by what an investor gets above inflation. In NZ that's some where between 2.5 - 3.00% currently. Fortunately a real economist knows this. But if indeed any half decent institution is current paying 6.5% - 7.50% as suggested, I love to be made aware of it coz I'll be heading down there to tomorrow with my money.
The big mistake that Eaqub and most mainstream economists are making, is that they fail to see that the speculation only comes after inelastic housing supply has created the conditions for speculation.
Most first world countries have had decades of sufficiently elastic housing supply to prevent speculative bubbles of the kind that have broken out all over the place ever since urban planners decided they needed to start saving the planet from humans building houses for themselves.
The following papers all find that it is impossible to formula-ise US cities housing markets without making the "speculative" element in "demand", ENDOGENOUS to inelastic housing supply.
"The Role of Speculation in Real Estate Cycles", Stephen Malpezzi and Susan Wachter (2002)
"Housing Supply and Housing Bubbles", Glaeser, E.L., J. Gyourko and A. Saiz (2008)
"Distortions Resulting from Residential Land Use Controls in Metropolitan Areas", Brian N. Jansen & Edwin S. Mills (2011)
"Supply Restrictions, Subprime Lending and Regional U.S. Housing Prices", Andre Kallålk Anundsen & Christian Heebøll (2013)
Interest.co.nz seems to be largely contributed to by several archetypical slow learners on housing bubble economics.
I don't think it's a big mistake. It's too obvious, the maths too clear. I seriously doubt any professional could be that incompetent and hold down a job, let alone be company frontsperson.
I think they're talking a long game....bit like the folks on many of the crypto-coin chat rooms.
Talk crap, keep noice and attention high, pump the market in the direction they want, bottom feeding what they can. Things go poorly then they get to say they're right. Things go against them, they cash in. Makes a lot more sense
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