New Zealand homes increased in value by an average of $22,652 last year, with the average dwelling value rising 4.9% to $488,674 in December, from $466,022 in December 2013, according to Quotable Value (QV).
However housing values in Auckland rose at twice that pace, with the region's average dwelling value rising by 9.8% last year to hit $761,848 at the end of the year.
The biggest increase in values was in north-west Manukau where they rose by a scorching 12.6% for the year, and 5.8% in the last three months of last year, to hit $529,243 in December.
Other areas where house value increases were in double digits were the southern suburbs of Central Auckland, up 11.3%, its eastern suburbs 11%, Waitakere 10.7%, Papakura 10.6%, and the Onewa district of the North Shore 10.4%.
The smallest increase in value in the Auckland region was for homes on the Gulf islands such as Waiheke, where the average value rose by 3.8%.
In the other main centres value rises were much more modest, with average values in Wellington City rising 1.4% for the year and declining by 0.8% in Lower Hutt, while Christchurch homes posted an average value increase of 3.2% and Dunedin was up an average 0.7%.
In the provincial centres, average housing values rose 3.2% in Hamilton, 3.7% in Tauranga, 1.6% in Napier, 3.5% in new Plymouth, 0.5% in Palmerston North, 2% in Nelson and 4.7% in Timaru.
Outside of the Auckland region the biggest annual increases in average value occurred in the Western Bay of Plenty where they were up 7.7% and the Queenstown Lakes District where they were up 7.2%.
QV national spokesperson Andrea Rush said average housing values in Auckland were now 39.4% above their previous market peak in 2007
and nationwide they were 17.9% higher than the 2007 peak.
"The prospect of further interest rate rises in the lead up to the election seemed to cause some uncertainty as to whether the market had peaked and this led to a slowdown in the market during the middle of the year," Rush said.
"However, once the election was over and interest rate rises were put on hold, there was a surge of new listings and activity with the coming of spring and values began to tick upwards again in most main centres," she said.
No chart with that title exists.
35 Comments
Auckland property owners react to latest QV report: http://spamusement.com/index.php/comics/view/13
It might be the rule of thumb but it is completely unsustainable in the long term. Rents are not going up that fast because they keep pace with income. Which means yields are going down further. We are probably currently in the "speculative" phase of Minsky's theory of debt but a few more years and we'll definitely be in the Ponzi phase. Quote from wikipedia:
"Minsky argued that a key mechanism that pushes an economy towards a crisis is the accumulation of debt by the non-government sector. He identified three types of borrowers that contribute to the accumulation of insolvent debt: hedge borrowers, speculative borrowers, and Ponzi borrowers.
The "hedge borrower" can make debt payments (covering interest and principal) from current cash flows from investments. For the "speculative borrower", the cash flow from investments can service the debt, i.e., cover the interest due, but the borrower must regularly roll over, or re-borrow, the principal. The "Ponzi borrower" borrows based on the belief that the appreciation of the value of the asset will be sufficient to refinance the debt but could not make sufficient payments on interest or principal with the cash flow from investments; only the appreciating asset value can keep the Ponzi borrower afloat."
based on those definitions auckland property on average is in the ponzi phase as net rent does not cover interest expenses (on average, auckland property represents a negatively geared investment that only makes sense if prices continue to rise, i.e more fools jump on board).
Read Benjamin Graham's securities analysis also, amazing how relevant it is to the auckland property market even though it was written a very long time ago. He talks about people starting to ignore historical multiples and consider current multiples (eg price to income) as 'the new normal', but by using this logic even at a billion dollars one could not rationally say the price was too high as the blanket statement 'new normal' applied to the multiple covers it. And always the historical norms will resume once the human behavioural aspect of the buying is removed.
Buffet still rates this book and his other 'the intelligent investor' as the best books ever written on investing. So if you wanted to know what such an authority on investing would be doing with regard to auckland property it would be a definite SELL.
You're not considering that most rentals are at the lower end of the market so your rent figure doesn't include many high end properties but your sales figures include all. And the price to income ratio is antiquated because it assumes everyone starts from $0.
I can buy positively geared properties in Auckland today, where does that put us on Ben's scale?
Yip, a minor should cost you about $165k for a nice 3 bed one with angled roof, nice bench tops, etc. About $121k of that is the build cost the rest is building consent charges, network growth charges, stormwater contribution, development levy, stormwater discharge, etc, etc. Gives you an idea of why Auckland houses cost so much....
Anyway $165k will cost you $8,250 per year to service assuming 100% borrowing and the last one I did rents for $450 per week. Mix that in with the $650 from the main house, total rent $1,100 per week on $730k total spend add in rates, insurance and maintenance total cost per year $40,300 (with 100% gearing).
Positively geared by $16,900 per year at 100% borrowing.
I'm not a trader so not too concerned about a year from now.
I'm mostly interested in the ROI I will achieve over the next 30 years. The property I just bought will be negatively geared for 5 years. Over that period I will contribute $15k, taking my total investment to $600k. Then it will be positively geared for the next 25 years over which time the rental income will pay off lending against it - and I'll have an ever - increasing income stream. Whatever the property is worth above the purchase price in 25 years will be a bonus.
I know smart people will say I can make better returns elsewhere but I'm just a simple man. If you can direct me towards an easier / better investment I'll happily pursue it.
Well, you've just confirmed Simon's contention that we are in the Ponzi finance phase for Auckland property - you meet its exact definition. Would be interesting to see what assumptions you had to make to claim that it will be positively geared in five years. I wish you all the best, but have you thought through what happens if interest rates are 10% in five years time? Not saying it will happen, but it is certainly one possibility.. Just putting that $15K into the bank each year seems like more likely to pay off to me, although personally I favour overseas stocks as an investment (and yes, I know they come with lots of risk and are not for everybody).
I think that reasonable Machiavelli. But only if - repeat only if - you already have really good substantial equity overall in your entire portfolio. And if you have really good positive cashflow overall as well.
Otherwise you are skating on very thin ice. A person with good other income (eg Salary) might be able to extend a bit on just one or two properties, because if prices plunge then they might be able to take the hit. But an average earner with say 20 properties highly geared will be ruined in the same circumstance.
if you have followed the course of continuing to buy property to the maximum, as much as you can cashflow manage at the time, it simply means you have continued to stay in the danger zone. That only ends badly.
I note the calculations made in your post above are precise about what the future values will be. I hope you have considered the variables and that it might not be so. I am not saying you are wrong and others here are right. But the view that prices will plunge is often expressed here, with good reasoning provided. I hope you have considered that possibility.
Thanks KH. I am quite risk averse. 50% equity is comfortable for me. Also I try to balance things so that properties previously purchased that are now positively geared can mostly cover any negatively geared ones. I am relatively young so it is a good time to be investing. Fortunately I am in a fairly high income bracket and the contributions I am making on all investment properties amount to just 4% of my income. I have worked hard to pay off a sizeable revolving credit facility and could comfortably not work for a year or two - this is my safety net.
This is not to gloat. There are plenty in Auckland in similar or better positions than I. I want to demonstrate that not all property investors have their backs to the wall as some would suggest. Many of us are risk averse and very careful in our approaches.
I don't see a big property market crash in the near future. I feel for first home buyers. I started out nine years ago with a $10k deposit. Who can do that now? The RB in all it's wisdom has rigged the market in the favour of the investor.
"which history suggests will double in capital value every ten years, that will give me an ongoing and ever increasing income stream"
And there lies the flaw to your investment approach.
When this sort of thinking becomes widespread, and gains are almost assumed as if a near certainty, thats when I tend to run for cover.
Benjamin Graham details over investment in bluechip stocks (considered the 'biggest and safest' but also the most expensive (P/E over 30 on S&P500 in late 1920s, i.e 3.3% yield), see any similarities here?) during the roaring 1920s on the basis that capital appreciation of the companies would almost certainly continue. When the human behavioural aspect is halted, you get a correction and reversion back to historical multiples, often with some overshoot on the down side as sentiment turns negative towards the asset class.
A few years is a blink of an eye in investment terms. This trend could easily continue for 20 more years or it all could come crashing down this year. If your IPs are all positively geared then no biggie - it's the negatively geared and overextended who often don't realize the risk they're taking on. Property has been positive for so long here that it's seen as a "sure thing" - actually there is no such thing in investing.
Yes CM you are correct. That is an assumption that has been made by many investors for the 22 years that I have been interested in house price inflation. I try to be more conservative with my forecast by assuming a doubling in value every 7 - 10 years. And yes I know the past is no indication of future prospects but I also heard that term 20 years ago.
Median house price now about $700k, median household income is $100k giving a 7:1 ratio.
If house prices go up at 7% and wages at 3% per year then in 20 years time, the house price will be $2.8m and the income wil be 180k, giving a 15:1 ratio.
In the last 22 years, this doubing can be paid for by adding another salary in the household (more women joining the workforce). This is the equivalent of runningf faster to stay still as all the extra income has gone to paying the bigger mortage. To make your predicted future barely affordable, each household would 4 full-time wage earners.
Prices keep going up and people keep finding new ways to fund it. Some recent trends are increases in the number of people living in a property and perants assisting funding the house. Smaller houses / apartments isn't widespread yet but it will happen. These approaches are common in other countries and when combined will support much higher prices for existing properties on sections in good locations.
'this doubing can be paid for by adding another salary in the household (more women joining the workforce).'
Kiwimm, you have just given away Nationals solution to housing affordability, apparently they are looking to open up immigration to more Muslim and Mormons and make bigamy legal so to allow us to add another salary to the household. Adding another 2 or 3 working wives (or husbands) to the household should get the household medium income to price back to 3x again. Brilliant.10% of the value of a few Auckland houses is a major amount of cash in most peoples vernacular. More than many people could save through years of hard work.
Especially good returns when you consider the asset class is too big to fail, propped up at all costs by the govt and RBNZ.
And highly tax efficient on top.
ad suggestions that apartments may not be the answer, here is an example close by (based upon the model proposed).
In my strata we spent $0.5m on legal fees, $0.2m on engineering fees pursuing a builder and the home warranty insurer (joke!!) over $5.5m in defects through the courts.
We ended up with $2m, including costs.
The cheapest quote from rectification builders to do the defect repairs was $5.2m
So we, the owners, have to find $2.2m out of our own pockets!!!
The system is an absolute JOKE!!!
and
Welcome to Ant-Hive Sydney. I keep seeing cheap Socialistic Asia type apartments going up. One of the apartments that has gone up has rust seeping all across the rendering after some heavy rain. I think a bit of rust is normal but this was flowing like a torrent of rust.
I don't think I'd want to hand over the remainder of my life working (mortgage) to live in the humid hell hole and now rusty cheap blocks known as Sydney. The government and councils are doing nothing about this issue, in 20yrs from now Sydney will look like any 3rd world block avenue with no transport and a pool of cars trying to move a few feet.
Great plan, someone will be reaping in the benefits and it won't be you, it will be an investor somewhere in a mansion offshore with their feet up laughing at the gullibility and short-term vision that Sydney council and government so freely sold out on.
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