David Hargreaves mulls some of the possibilities as 2017 gets into full swing

By David Hargreaves

The housing market looks intriguingly poised as we get up to speed in 2017, but it is far too early in my view to be reaching any hard conclusions about what will happen.

We do know that the Auckland market has made a much softer than usual start to the year. Listings are up as are the number of days taken to sell and prices have dropped.

A combination of the new 40% deposit rules for investors, tighter lending criteria from the banks, slightly higher interest rates and fewer foreign buyers in the market has provided plenty of reasons for people to stand back and have a look for the past month or two.

Whether this 'pause' continues for the year is questionable. The Reserve Bank is still uncertain whether the quieter times will continue.

We won't get really definitive answers till about April.

More life in it yet

I  think the Auckland market might have a bit more life left in it. I would still pick a mini-rally for Auckland activity in autumn, followed by a further quieter period into the election.

Even though the election result in 2014 looked a foregone conclusion ahead of the day, the housing market did hit pause in the run-in...then went fast forward straight after the election.

So, once this election's over something similar may happen - depending on the election outcome.

There are a number of imponderables in the current market.

We still don't know properly the full extent of offshore buying of houses. We really should sort out a proper system for collecting this information. It's important.

Then there is the question of how long housing investors will back off.

The monthly figures collated by the Reserve Bank on new mortgages have been painting a clear picture of retreating investors in the past few months.

There are counter points though.

There's still interest there

Those same figures have shown that activity from would-be owner-occupiers has stayed the same or even increased a bit, while first home buyers have been on the rise.

Indeed the separate RBNZ figures on household borrowing showed a rise in December - which was not what economists expected.

Those two sets of figures don't suggest to me a housing market going into hibernation.

The influence or non-influence of foreign buyers is, as mentioned above, really difficult to try to get a handle. Anecdotally such investment is down. But I think with some of the potential for global instability that we are now seeing, there is a possibility of renewed buyer interest from offshore as we get further into the year - and this won't necessarily be led by Asia as in the recent past.

On more local influences of the market, the key question will be how long the investors back off, coupled with how long the banks play cautious with their lending policies.

The one thing this housing boom has not shared with the last one is the parallel rise of the finance companies, which of course sourced most of their funding from public deposits.

The crashing and burning of that sector has not really been replaced - to this point - by many other large alternative finance providers. That might change depending on how long that 40% deposit rule for investors stays in place. There's probably zero chance of rule being dropped this year.

Alternative funding?

It may be that we will see greater sources of non-bank lending rise in coming months as investors look to find a way around that 40% rule.

It really depends on the appetite of the investors. A fair few seem happy to sit back at the moment, but equally, given a few months time and the sky hasn't fallen in, then they might get itchy feet again.

Until there's some fundamental Government-led change such as in taxes or duties, housing is going to continue to have favoured status as an investment asset class.

Anyway, that's investment. The other thing is what about demand for houses simply to live in?

The fact that the Government's now seeking to discredit figures showing the extent of housing shortages tells you the extent to which its efforts to fix the problem are proving impotent in the face of market forces. In Auckland last year there were under 10,000 new dwellings consented - against Government hopes earlier of 12,0000 to 13,000.

Regardless of what you believe concerning the existing shortfall of housing in Auckland, there aren't enough houses being built right now even to keep up on a day-to-day basis with the booming population.

Based on current immigrant numbers and the natural birth rate, you can say  Auckland needed to have consented 18,000 to 20,000 homes last year - just to keep up with new people - never mind catching up on the existing shortfall.

Housing all the people

If you take Stats NZ's seasonally adjusted net nationwide migration figures for the past four months, this has shown a steady net gain of over 6000 people a month - which averages out at about 74,000 people a year.

The recent pattern has been for about 60% of migrants to settle in Auckland.

So, in other words we are looking at a current annualised rate of about 44,500 net migrants (needing close to 15,000 houses) moving into Auckland.

Couple all this with the agonising (read slow) progress being made toward achieving densification in Auckland and it's actually difficult to see where there would be a lessening of demand to buy houses, or a significant slackening of prices over time.

Where I think there are risks in the current housing situation is outside of Auckland in some of the regional areas that have been and are building houses in good numbers, but are nevertheless enjoying strong buying support at the moment both from offshore and Auckland buyers turning their attentions elsewhere.

Auckland underpinned

Auckland's house prices will remain underpinned by its economic strength, the strong population growth its had and will continue to have, coupled with the continuing planning agonies and constraints. Other places won't be underpinned by that and for those places there is a risk - particularly if Auckland, as I suspect it will, enjoys another strong lease of life particularly from next year.

Another thing that concerns me is the relative surge in first home buyer interest. I just hope everybody is doing the sums. If you can JUST afford a mortgage now you probably shouldn't be doing it - or you should at least look for some other way of funding yourself.

Interest rates certainly won't go down again this year. How much they rise will be principally down to how much the banks believe their cost of funds demands increases.

In truth, I can't see interest rates rising markedly in this way, but the other thing that should still be considered is the possibility of official interest rate rises late this year. The Reserve Bank hosed down market speculation on this last week with its forward interest rate predictions that show no rises till late 2019.

Inflation a dark horse

I have a feeling, however, that inflation might continue to surprise on the upside this year. Since the housing market heat spread more generally from Auckland to the rest of the country last year there have been more signs of a return to the types of spending patterns seen in the mid-2000s boom. This had been absent when most of the activity was in Auckland, but it does seem to be resurgent now.

Of course if the Kiwi dollar stays strong this will help to keep the lid on inflation. If interest rates rise more quickly in the US now - as I think they will, and then couple that with some resurgent interest in the Australian currency on the back of rising iron ore prices, and it's possible the Kiwi will finally fall back a bit this year. And that would open the door to more inflation.

So, I would still see an Official Cash Rate rise last this year after the election as a possibility. The point is, anybody out there struggling with the mortgage payments now should have a look and see how they will be if the rate were to up by say one whole percentage point - and it's easy enough to do those calculations.

Nobody wants to see people getting into strife because they over-reached - but it is a risk. Be careful out there people. An interesting year lies ahead.

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

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28 Comments

Interesting call on Auckland.

I don't think investment will flow to the place with the highest prices and increasingly mediocre returns. I think that places with lower prices and rising returns will be preferred.

I don't think that the intra-regional migration that has turned sharply outwards from Auckland will suddenly reverse itself or that Aucklanders will borrow heavily to invest in more Auckland. I think that the influx of indebted young student immigrants arriving in Auckland will prove an inadequate investment substitute for cashed up Aucklanders heading for the provinces.

In short, I don't think "the continuing planning agonies and constraints" form the basis of any positivity for the Auckland market.

In terms of house building for Auckland unless there are some fundamental market changes then the number of houses being built won't greatly trend upwards. There is now quite a reasonable supply of consented land to build on and its not so much a constraint. Politicians talk about number of consents but actual houses built/ finished is the operative number. My understanding is that 8,000 new houses were completed last year, well short of requirements; this doesn't include houses added on to which would increase supply. Anything built gets sold pretty much so demand is high - when circa 40-50,000 move to Auckland in a year you'd expect that.

As to why the government says NZ is only 10-20,000 houses short then this can only be bare faced lying...sorry alternative facts. So why can't more houses get built if the demand and buyers are there? As usual and a bit like the leaky housing there are lots of cumulative reasons resulting in only 8,000 p.a. (a fall from previous year). Planning and consenting takes a long time and is expensive, Council planning is under a lot of pressure from so much other construction (commercial, public sector) and they are many staff short which they can't recruit. The boom means labour very expensive, materials also up and general building inflation is very high (over 10% p.a. or something). Also difficult to coordinate all the trades in a building on a timely basis. Developer finance is restricted without the 2nd tier lenders, land incredibly expensive and meaning only big houses get built to maximise profit, not to cater for need. New subdivisions take so long to build on, e..g 5-10 years for Hobsonville pt. Individual houses take 3-5 years to build from buying land if subdivided. And its very easy to lose money developing, a risky activity meaning prices raised to allow for risk. And NZ style of individual buildings, not mass building doesn't help. Also there is some really low quality building going on - lots of cowboys or not giving 2 hoots about workmanship so buyer beware. The dipsticks in the national govt make noise but seem to be too far up their own @*$%s to make any difference.
Whats the solution - a multi dimensional problem needs multi dimensional solutions. Personally I think high rise apartments in designated areas can add a lot of housing at most speed. Apartments can be pleasant and well designed but need to be well built...we don't all need and now can't afford a garden. Apartments give better urban density, can be built at transport nodes, maximise land use, are the main form of housing internationally etc etc. If you're going to go 10 stories why not go 40 stories like Hong Kong. Surprisingly not that many getting built comparatively - not a great track record in AKL.
The fundamental question is high growth for AKL good for AKL - I think not on the balance as we already can't handle numbers. So slow house building is one way to limit this...maybe National's policies are better than they appear!

David you do a great service with your calm balanced setting out of the facts reporting. Well done.

"..continuing planning agonies and constraints.." are not gonna go away because the Planning Elite (motto "We Know Best") apparatchiks are still there.

Despite the RMA having zero mention of spatial planning, just Effects of any given proposal, the Brit-style zoneration madness continues.

After all, the notion that one needs to employ a consultant to read the current/proposed Plan(s) and interpret them in the context of one's own modest proposal (Fee #1). before approaching the Planners to get Their take on the notion (Fee#2) and perhaps enter the tortuous process of a Notified Consent (Fee#3), have it appealed by some interest group based in Hawaiiki or Tahakopa (Fee#4 for the hearing and Fee#5 for the Legal Eagle) only then to be able to apply for Building Consent (Fee#6) based on plans duly Architected and Engineered up the wazoo (Fees #7 and #8) - may just - possibly, maybe, YMMV, put ordinary folks off actually considering a New Build???

You must be thankful you are retired....and dont need to go thru the madness of that..

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Auckland is clearly done. Even the current government that previously claimed there was no housing crisis has recently come out and told the populous there is trouble ahead. You would have to be insane to buy right now, not that the banks would let you anyway by the stories we are hearing on here anyway.

A great article thankyou, full of logic and common sense. The Auckland market is not going to crash and burn as many hope with their negitive views because they have missed out on oppurtunities to build wealth. The market takes know notice of doomsdayers. There is a 9 year cycle that is not hard to see, we are in the last 3 years where prices are either slow/flat/drifting or dropping slightly. Next upswing starts slowly in 2020 just like it did in 2011 and 2002 and 1993. So people including the negative ones watch/learn and act. There are always winners and losers, decide who you want to be, the market will never return to some perceived level of fairness based on a price of the past.Goodluck !

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People want the housing market to crash and burn so houses can return to an affordable and realistic price range, which is in the best interests of the country and the population. That talk about missing out on opportunities to build wealth and winners and losers is a pile of crap. Only investors and speculators with enough equity or cash to use as leverage end up winning.

FHBs, students, graduates and the poor get no chance at all to build wealth because they spend so much of their income on paying the rent to landlords or living pay cheque to pay cheque. Hell, the lower quartile house price for Auckland is 17 times my gross salary, and the median NZ house price is 13 times my salary! How am I supposed to "build wealth" like you say when it's taking me 12 years to save for a deposit?

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Now, to boot, it's the boomers finally acknowledging the need for changes to the pension...but all their talk is of gradually phasing them in so that none of themselves are affected by it. This most selfish of NZ's generations.

Over on Transportblog there is a good discussion about "Exports, prosperity and Cities"
http://transportblog.co.nz/2017/02/16/exports-prosperity-and-cities/

Anyway someone there made the claim that economic progress is threatened by a crash in property prices.

I think this claim is not necessarily true and is in fact scaremongering and another excuse for not implementing policies to build more affordable housing.

Anyway here is what I wrote.

"Re your last statement “Of course a crash in property values could bring that all done overnight … ”

I think a decline in property prices is not necessarily a bad thing. I think it depends on if the ‘bubble’ pops like 2008 with a big slump in construction -with huge secondary effects on employment, wages, and bankruptcy in the finance sector, versus housing prices becoming more affordable due to a ramp up in building more affordable housing -which would not have the negative secondary effects on employment, wages and bankruptcy rates…..

Some pretty serious economists in the US believe that the US would be $trillions better off if housing supply was more responsive and affordable. Stu check this article out. “Why Falling Home Prices Could Be a Good Thing -Popping the housing bubble in the American mind”
https://www.nytimes.com/2017/02/10/upshot/popping-the-housing-bubbles-in..."

Life is never easy for anyone, if the ratio of the median house price is 13 times your salary it's a difficult place to be. Re-invent yourself, re-train yourself into a job more in demand that attracts a good salary there are options, doing the same thing with the same outcome doesn't work. Construction is screaming for people,adult apprentiships etc. Improve, evolve or stay trapped, thats the new world more personal responsibility. A change of Government will happen this time or next but there will be little or know visible change. - That talk about missing out on opportunities to build wealth and winners and losers is a pile of crap - thats only because your on the wrong side of the equation, the world is not a fair place or flat ! Put your negative energy to work on a positive future,plan and change. Goodluck !

More simply, move to Christchurch or Tauranga or Brisbane or Melbourne. Move on with our lives.

Auckland will become one those cities all the young people leave from in pursuit of better jobs and more prospects. House prices will fall to Adelaide type levels, but who cares. We don't have to stay trapped within the inept Auckland Council.

Your logic falters here. The reality is that the population base in Auckland can't afford the house prices and so industry will leave the Auckland region. This was the pattern with London. There are a number of Government subsidies (eg accommodation supplement) which has supported industry in Auckland over the regions. The point that people miss is that prices change demand - and at current prices the demand is unsustainable unless you believe that capital gains will continue forever.

Your logic falters here. The reality is that the population base in Auckland can't afford the house prices and so industry will leave the Auckland region. This was the pattern with London. There are a number of Government subsidies (eg accommodation supplement) which has supported industry in Auckland over the regions. The point that people miss is that prices change demand - and at current prices the demand is unsustainable unless you believe that capital gains will continue forever.

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Shoreman what sort of society will NZ have if your 9 year property cycle continues?

Will it be some sort of neo-feudal society -with a self entitled hereditary landed gentry class who have some sort of economic determinism property price belief system which underpins their position in society. While underneath this class will be a growing yet powerless rental-serf class devoting the majority of their incomes to keeping a roof over their heads?

Do you really think that will work out?

With that logic we should all be living under the benevolence of the Roman Empire had not their conquering cycle been upset by a Black Swan or two.

Auckland's problem is that you can stop a boom cycle. In all the previous booms Auckland built lots of stuff, so was able to attract business in the down years between cycles with great facilities and low rents.

This boom Auckland however has been different, Auckland has made land very expensive and built almost nothing. So when the cycle ends in 2019-20, Auckland will have poor facilities and high rents. Good luck trying to attract business and restarting the boom cycle next time.

Auckland wants houses. Auckland does not want jobs, businesses, economic activity or people.

Shoreman - unfortunately no-one is building wealth. You are only amassing debt claims which real resources have to underwrite, and as far as I can see real resources are in decline.

"There is a nine year cycle thats not hard to see..."

Good luck with that - You seem to be suggesting property will rise indefinitely while incomes remain flat and interest rates can go no lower. hmmm Sounds like you have faith in perpetual motion.
There's far bigger cycles you might want to get your head round ... like the last 250 years of carbon burning which is starting to hit real limits ... shortly someone will tip the whole monopoly board over.

Young Kiwis' best bet is to start looking for better performing government, one that will address such factors as:

- tax advantages of property investment vs. other investments
- foreign buyers
- immigration levels
- actually cutting red tape to increase supply, not just talking about it for three terms.

It's reasonable for them to aim at bringing property back into reasonable ratios with incomes.

Otherwise, what sense for Kiwis to stay here? Just to pay rent and an unneeded pension to rich boomers whose only genius was being born at the right time to benefit from the lot left them by the post-war generations, while selfishly pulling the carpet out from under the following generations?

Noticed this link about Vancouver today. "The average resale price in Greater Vancouver was $878,242 in January, down 18.9 per cent from a year earlier, when it stood at $1.038 million, according to numbers from the Canadian Real Estate Association." While Toronto had increased by 22.6% over the same period.
http://www.huffingtonpost.ca/2017/02/15/vancouver-average-house-price-ja...

Yep, young Kiwis need to realise that housing can be about homes for Kiwis again - not just nest-eggs for boomer property investors.

Definitely agree with the declining reasons for young Kiwis to in NZ. What does NZ offer us? Average quality of life, stratospheric house prices, high cost of living, low wage jobs, no government representation, not enough/poor quality infrastructure... There's nothing in NZ that you can't find in England, Canada, Australia or the USA. The Guvmint may find a constant Brain Drain 2.0 occurring and end up with 20-30 year old Kiwis getting a uni education and going overseas and not coming back. Hell, a fifth of NZers live outside the country! If it's so rosy here then why don't they all stay?

The current Government works for the interests of multi-national corporations and foreign powers. They really don't care about kiwis. Regulations created by the current Government have only served to reduce developers interest in taking the risk to build new buildings. That reduces jobs and quite obviously has pushed property prices up excessively. There's no will to change and opposition parties could have a field day tearing the Government to pieces but instead they barely understand what action they need to take.

If you can't get a good paying job here then definitely leave. There's nothing left for kiwis, not even clean water.

We all know David that "We really should sort out a proper system for collecting this information. It's important". So does the national government also know that once the real data is out will have no place to hide though are experts in denial and manipulation.

So correct overseas/non resident buyer data is possible only when national party is being voted out. So wait till end of the year.

What is interesting is the demographic figures. I am embarrassed to agree with Nick Smith on anything - but translating net population growth into housing demand is fraught. In particular, we have seen very little rental increase which is an indicator of demand. If people are arriving - why havent rentals doubled.

I was renting in Auckland last year and the rentals were cheaper than Wellington. A factor in there is that clearly small increases in rental (especially in Auckland which has lots of low income jobs) has a big impact on housing options. What we are also seeing is the substantial gains in net migration have been in the 19-29 age group. The combination of increase in rentals and high proportion students in the immigration has meant that people have tended to live in higher density housing; eg (kids staying at home longer; students cramming into flats etc). The difference moving from 2.4 people per household to 2.5 people per household can be 25,000 houses.

What has happened, IMHO, is that continually talk of the immigration has created a PONZI scheme of escalating house prices - when in reality the underlying demand has been curtailed by small increases in rentals.

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Impressions I've gained from everyone I know in the building and real estate sector is that foreign demand - not immigrant demand - is much larger than most people have acknowledged. Seems like this is a sort of open secret, denied most strongly of all by National.

Reasonable demand in chch auctions today with 16 / 27 sold. A few over 1m. good properties in good areas did well. A few prices surprised me though and they'll be some happy sellers.