By Gareth Vaughan
We all know that if you took the Auckland housing market out of New Zealand the overall housing market picture would look very different.
Would the Reserve Bank have ever felt the need to introduce restrictions on banks' low equity residential mortgage lending without Auckland? Very unlikely.
And would the likes of Brian Gaynor be raising eyebrows with warnings that house prices could fall by up to 25% if it wasn't for the Auckland market? Nope.
Just how big a driver Auckland is on national house prices is made clear in the table below.
Based on Real Estate Institute of New Zealand (REINZ) data, Auckland's median house price rose $238,000, or 54%, in the six years from December 2008 to December 2014. Over the same time period the national median price rose $121,500, or 37%. But the national median price excluding Auckland rose just $50,000, or 17.5%.
Figures for the 2014 calendar year are perhaps even more stark. The REINZ Auckland median price was up $78,000, or 13%, last year to $678,000. The national median rose $23,000, or 5.4%, to $450,000. And the New Zealand median price excluding Auckland rose just $3,500, or 1%, last year to $335,000.
So if you take Auckland out of the picture, where according to REINZ about 38% to 40% of national monthly sales are made, the national median price barely budged last year. No wonder many people outside the City of Sails get so grumpy about the Auckland housing market and the Reserve Bank's high loan-to-value ratio restrictions.
In fact if you dig into interest.co.nz's median house price growth chart for some regions around the country, over certain time frames, the Gaynor worst case scenario has almost played out.
For the year to June 2014, for example, the Southland median house price fell 17.9%. And in the year to January 2009, the Southland median dropped even further, by 22.2%.
For the purposes of balance, if you go back even further you can find a period where the Southland median price rose by levels that would be eye popping even in Auckland, given there was a 44.2% jump there in the year to February 2008.
But to emphasise to the doubters in Auckland that house prices don't necessarily rise everywhere forever, other New Zealand regions that have experienced chunky falls in recent years include Northland where the median price dropped 12.4% last year, Manawatu where it fell 7.8% last year and 13.8% in the June 2008 year, Taranaki where it fell 10.7% in the October 2012 year, Wellington were it declined 8.2% in the August 2011 year, and Otago which recorded a 10.6% median price fall in the year to January 2009.
Hawke's Bay in the June 2011 year recorded a median price drop of 10.9%. And even Auckland's median price fell 5.8% in the year to August 2008.
| Month |
Akld median dwelling price |
Akld 12 month % change |
NZ median dwelling price | NZ 12 month % change |
NZ excl. Akld median dwelling price |
NZ excl. Akld 12 month % change |
| Dec 14 | $678,000 | 13% | $450,000 | 5% | $335,000 | 1% |
| Dec 13 | $600,000 | 12% | $427,000 | 10% | $331.500 | 7% |
| Dec 12 | $535,000 | 10% | $389,000 | 10% | $310,000 | 3% |
| Dec 11 | $484,375 | 6% | $355,000 | 1% | $300,000 | 2% |
| Dec 10 | $455,000 | -3% | $352,000 | -2% | $295,000 | -1% |
| Dec 09 | $470,000 | 7% | $360,000 | 10% | $297,000 | 4% |
| Dec 08 | $440,000 | --- | $328,500 | --- | $285,000 | --- |
What goes up can also go down, as demonstrated in the Southland median house price chart below.
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46 Comments
Good analysis. And if you isolate some individual cities like Gisborne, Whangarei, Hastings, Wanganui etc you'll see significant downward trends with price growth unlikely in the next 3 years (until we get some actual Govt spending & Regional Devt again).
Meanwhile home owners in these 'real estate depressed' areas are paying 6.5% floating mortgages on a declining asset. Hopefully, they don't start going underwater.
I doubt they are paying 6.5%, more likely under 6% fixed.
Which probably is significantly less cost than renting in those areas (5.5 to 6% interest on the outstanding loan balance compared with more like 8-9% of entire house value in rent). So I don't think they are doing too badly...
I think its more likely Auckland landlords with 100% leverage and are topping up almost as much as the rent just to break even are more in danger of going underwater. It will probably be more when than if.
Good question. I'm sure they all have a story why property prices can only go up. There is nothing new about bubbles, property or otherwise. The UK has had several housing bubbles, and to say 'this time is different' is an invation to dissapointment. Japan took 10 years to peak, the US 14. Who can say when they will burst, but I wouldn't like to be on the wrong end of that trade. Capital gains are only realised by selling.
I think there are two components to Auckland's high house prices. I think fundamentally through geography, infrastructure provision and plannng restrictions new housing or at its most basic 'floor space' is inelastically supplied. So prices are higher than would be the case for a more elastic supplied city.
The second component because of this inelastic supply, property is kind of 'fixed in quantity', say like gold. This means property or 'floor space' goes from being a normal good to a speculative good. Speculative goods are prone to booms and busts, depending on the collective 'mood'of the market -greed and fear in particular.
Because of these two components Auckland's house prices will never correct. There never will be a tulip moment where tulips go back to being just tulips. There may be price crashes like have occurred in the UK several times since WW2 or more recently in California and Dublin but like those places until the fundamental supply restrictions are lifted the bubble will just re-inflate as the market mood switches from fear to greed.
I'd say gold prices have corrected, now hovering around marginal production costs. Years ago when the property spruikers were in their prime, it was normal to talk about the property cycle. Now after a few good years we only talk about the property elevator.
It's like the story about milk for the past few years 'people will always need food'. Which is true, but how much can they pay, and what type of food can they afford was never discussed. Now we talk about oversupply, but could just as easily talk about demand destruction. Iron ore is another example where the story was plausable, but the next few years look to be a disaster for anyone associated with steel.
The story of constrained supply sounds plausable for Auckland, though I can think of a few negative factors that could influence price. Slowing migration, lack of new entrants, lack of cashflow for property investors, a NZ recession, higher NZ growth raising interest rates.
I have a calm confidence in calling Auckland a bubble, the fundamentals (aka what people can afford without speculative gains) don't support the price. It will crash, as they all do.
All good points Skudiv and I agree that Auckland is a bubble and a some point some external event will pop that bubble. Greed will turn to fear.
Commodities it seems have gone though an 'irrational' period where prices did not reflect underlying supply and demand factors.
What I was trying to make clear was these bubbles are less likely with normal products where supply automatically (elastically) responds to demand. A more elastic supply of 'floor space; in the Auckland property market would have a protective feature for preventing future bubbles.
Brendon.... can u define the word ..."bubble"... ??? Imbalances between supply/demand does not mean a "bubble"...
I dont see any signs of Auckland being in a bubble.....????
I'm guessing.... that the only thing u are looking at is price..??
In NZ ...Nominal GDP is growing faster than credit growth..... ( according to ANZ ).
A P/e ratio... ( house price/income ) is not an indictor of a "bubble"
cheers Roelof
Perhaps a bubble is when folk are buying because the price has been rising.
Not rational but that's human nature for you!
A non bubble market would be more aligned to fundamentals such as long term affordability.
I wonder if the supply/demand equation in Auckland is distorted because it is in a bubble, the modest rent rises would suggest that there isn't a genuine shortage of actual houses. Buyers buying 'cause it will be dearer next year - folk not listing 'cause the price is (has been) rising. "I'll get more next year" thinking. There are many living in Ak that hate the place, my contacts in Bay of Islands real estate tell me they have been overwhelmed by the very high level of interest from Aucklanders keen to move up. Especially those nearing retirement.
I'm with Gaynor, she's gonna blow. But when? Probably got another year of double digit price rises at the most. Then slowing sales and rising inventory followed by falling prices.
Roelof a bubble could be defined as being driven by speculative demand. In bubbles from tulips on, the demand is speculative in nature. Factors such as previous capital gain driving demand seeking future capital gain. As Skudiv reports a lot of this is driven by particular market 'moods', a temporary consensus 'like property values never fall, the world is running out of food and so on. I called it greed. Some day something happens and the mood changes, the consensus message changes, all that speculative demand rushes for the exit in fear....
I believe there is evidence this is occuring in Auckland. Markets are not always rational.
My further point was there really is a problem with inelastic supply in the Auckland market and it wouldn't surprise me if that is not corrected that we will see repeated boom/bust property price cycles in Auckland.
An imbalance creates the opportunity to create a bubble by speculators.
Take oil right now, last week it was $46, this week with the rig count dropping like a stone specualtors are buying back in and it has gone to $57. the economy has not improved 20% so real demand has not changed it is purely gambling IMHO.
P/E ratio? I beg to differ if you mean the historic norm of wages to house price. A 3 to 1 ratio at most 3.5 to 1 is par. That is important because on every occasion the price has been above that it has eventually corrected back to it and even over-corrected. On top of that there is rental earnings, rents have not gone up insync or greater than prices.
On top of that there is a lot of money out there in digital land looking to convert itself into real assets, hence art, classic cars, antique guns, and yes houses are all sort after as hedges. Also ship the money overseas and the Govn cannot simpy take it, you also have a bolt hole and possibly an appreciating asset.
The next Q is what are the drivers and if you remove them what is the impact. Look at the LVR it has greatly quietened the market, atke out the % of foreign "investors" and that could be enough to make the market dip.
Personally I cannot see it as anything else but a bubble, will it pop or is it poppable? that is the Q to ask. If it is then surely a sound business plan is to have an exit strategy?
There are more than two components to the ever increasing Auckland prices - 1) Resource Management Act restricts development 2) Building supply industry monopoly keeps prices high 3) Government soaking up the labour force on mega projects plus their own Housing NZ construction program which then leads to higher hourly rates across all sub trades 4) Net migration gain at record levels and likely to go far higher 5) Head offices relocating to Auckland and moving staff with them 6) Flood of Kiwis to Aussie has been reversed due to downturn over there 7) Term depost rates too low so funds withdrawn and used to buy rental property 8) Parents withdrawing term deposits and helping kids into homes 9) Not enough rest home accomodation being built so as people get older they stay in the family home so supply reduced further 10) The Chinese are buying far more properties than government are aware of 11) The number of Chinese buying 2,3,5 or even 10 properties is quite incredible (Key knows!) 12) Kiwis are returning to NZ in very large numbers 13) Kiwis are no longer doing the big money OE UK stints and putting down roots here earlier than would otherwise be the case 14) Nobody believes the government/council initiatives will see 40,000 homes built in 3 years - more than a year has gone buy and they have built a few hundred 15) Low interest rates and they are going to go lower 16) No CGT and no stamp duty 17) LVR rules just made it easier for investors to add to portfolios without having to copmpete with pesky first home buyers 18) Expectation of further price rises means people who dont need to sell wont 19) Nothing to buy means no point selling 20) Lower petrol price/no inflation & wages increasing in Auckland = can afford an even bigger mortgage 21) Can now protect yourself against interest rate increases by locking in for years at a historically very low rate 22) Prices hardly dropped during the GFC so people do not believe that there will be a decent crash as they have never seen it happen before - ie predictions of 40% slump after 2008 never eventuated and many forecasters had to eat pie
Both "real estate depressed areas" and "distorted high prices (in Auckland)" are correct.
Compare the cost of a new build with prices of existing stock in Gisborne, Whangarei, Hastings, Wanganui, etc., to see that the housing stock in those places is deteriorating due to lack of demand caused by lack of job opportunities, etc. No one can afford to build in those places, except for cashed up Aucklanders, and no one wants the tired old houses that haven't been upgraded in decades, so their prices are in decline.
And yes, Auckland prices are nuts, too.
thanks Pythagoras. We do have pockets in the regions where employment is an issue. As does Auckland with it's zombie suburbs.
However if we compared "Áuckland" with say the South Island, employment is much higher in the South.
We will always have a variation from place to place. By and large house prices should track with inflation. Given Inflation is pretty much zero or at best 1-2, then house prices in an particular place could be minus 10%, without it meaning much at all about the local economy.
Of course the idea of House prices moving negatively stikes terror and confusion into those who have staked their future on the rising house price. We see it all the time on interest.co. But in my view a negative house price movement is a ordinary thing, not of much note at all.
The southland graph illustrates my point. A couple of months after the -22% yoy move its back to +10% yoy. Did the market just have a massive turnaround or is the data very dodgy (volatile, small sample size etc) for drawing the conclusions which the author is trying to conclude
Well there you go. Adapting and survival is more about dealing with adversity than ignoring or not preparing for the unknown. With the bulk of NZ's savings wrapped in Auckland houses, this is far more serious than what it actually appears. If you could measure the impact on the economy of even a 10% fall in house prices in Auckland, I would not be surprised to see the economy go into a state of rigor mortis.
As for the media, the "25%" stories only grab your attention because they tap into your emotions. De-sensitizing does not negate the possibility of something happening.
I actually think it is the rest of NZ that is overpriced. Having watched a few housing programs on Sky in my time, I know you can buy a house in a small city in the UK for about 40k pounds, or in the US for around $10k. Yet in a small city in NZ there would be very little under $250k.
However in the bigger cities around the world you are normally lucky if you can buy a small unit or appartment for less than $500k, in Auckland you can almost get a house on full section for that.
The whole country is overpriced.
The rest of the country just looks OK when compared to Auckland. Average incomes outside of the main centres are pitiful, making even the cheap homes a stretch.
Phoenix is about the same size as Auckland and Arizona is larger than New Zealand. For $515K NZ you get this:
http://www.realtor.com/realestateandhomes-detail/27322-N-36th-Dr_Phoeni…
And your research of 'watching a few of those property programs on sky' sounds fairly impressive but...
http://m.realestate.com.au/buy/in-alice+springs+-+greater+region,+nt/li…
Apples with apples; Alice Springs is wanganui sized at 40k ppl. Basic house 350k plus vs 150k in wanganui.
3x median household income is the hard metric that property prices get reset to. Wellington has higher incomes than Auckland.
Small cities are only 10-20% lower income and employment rates similar.
you're not right or wrong because others think you're right or wrong, you're right or wrong because of you're facts.
Thanks, skudiv. Tried a bitmap via Word but that was no better.
All I have done here is apply the CPI deflator to give real price movements. For the life of me I can't remember what my point was.
AKL Median % chg Excl AKL % chg Dec-14 $672,619 13.9% $332,341 1.9% Dec-13 $590,551 11.4% $326,280 6.2% Dec-12 $530,228 11.4% $307,235 4.3% Dec-11 $475,810 8.8% $294,695 3.9% Dec-10 $437,500 -5.1% $283,654 -2.6% Dec-09 $460,784 4.7% $291,176 2.2% Dec-08 $440,000 - $285,000 -
And auckland isn't a minow compared to nearby neighbors sydney melbourne brisbane? Dream on spruikers, you're in for a price correction because idiots keep paying more and more and soon, you will run out of idiots as dispite popular belief the number of idiots in auckland is actually limited...get ready for it
What about foreign idiots though? I think they have a large influence in Auckland and there are plenty more with money to burn.
I agree that it's in for a bust, but I've given up trying to guess when. It's already in cloud cuckoo land but with so many vested interests and the level of cheerleading from the media it could keep going for some time.
I quit the Auckland market and bought just outside, so any pop will hurt a bit, but in Auckland it will be blood on the streets.
I quit the Auckland market and bought just outside, so any pop will hurt a bit, but in Auckland it will be blood on the streets.
This is the part I don't understand - if many can see that prices are a little out of touch and are sensibly pulling out, why are there so many more specualtors buying in? Are they all hoping they are able to shift them on again and not be the one left holding the bad debt?
I don't think many people see things that way, not many at all. Most people think they will kick themselves in 7 years because they didn't buy more. Thinking that house prices will keep going up because of scarecity. Could be the smart money is pulling out, most people wont realise until prices actually drop, and a drop in prices will attract those buyers who missed out last time, causing a dead cat bounce/bull trap/suckers rally. At which point others start to exit because they are waking from thier slumber, and the selling continues untill you find a price where things look like a good buy. Thats how bubbles typically go.
Those cities are population centers of Australia.
Auckland is the population center of New Zealand - which is a different country.
Dubai and others are much larger than Kuwait City - and even closer together than NZ to Australia.
BUT - and get this part - they are in different countries.
SK.
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