Uncertainty reigning over Auckland's confidence driven housing market, says Squirrel's John Bolton

By Gareth Vaughan

Uncertainty is a key feature of the Auckland housing market right now, with "softness" in the market likely to remain through the rest of 2014, says John Bolton, principal of Auckland mortgage broker Squirrel.

Bolton told interest.co.nz in a Double Shot interview a mixture of factors were contributing to this uncertainty.

"The LVR restrictions are there, they're doing their job, they've definitely contributed to slowing down the market along with two OCR increases, (and) the prospect of further OCR increases. And the other thing not to forget is that we've got an election coming up this year as well," said Bolton.

"So when you look at the mix you've got an OCR that's going up, an election that's looking less and less obvious in terms of what the outcome will be, and you've got LVR restrictions and a lot of commentors in the market talking about what potential impact all of these things will have on house prices. And it's that uncertainty around house prices that really slows the market down."

"Housing's a confidence driven market. What we saw in 2013 was a lot of speculation, a lot of people just jumping on the ladder as house prices escalated. What we're seeing now is the reverse of that, which is people being a little bit more cautious, a little bit less certain, and potentially sitting on the fence a lot more just to see how this market shakes out," Bolton added.

The latest figures from Barfoot & Thompson, Auckland's biggest real estate agency, show May sales volumes down 175, or 14%, year-on-year to 1,109. The median price rose to $645,000 in May from $619,550 in April 2014. It's not far off the record $652,000 set in March, and is up 13% year-on-year.

The latest Reserve Bank data on the high loan-to-value ratio (LVR) restrictions it has enforced on retail banks' low equity residential mortgage lending, show it was just 5.4% of total new commitments in April before exemptions, or 4.3% after exemptions, versus the limit of 10%. Meanwhile, the Reserve Bank has increased the Official Cash Rate (OCR) twice so far this year, by 25 basis points each time, to 3%, and is expected to lift it again next Thursday.

'Softness in house prices'

Asked whether he thinks the median Auckland price will follow sales volumes down, Bolton said there was definitely some softness in house prices.

"The interesting thing is a lot of the metrics that we have don't really give us any clarity in terms of what's really going on. Last year we had a lot of people that were renovating old houses and then selling them back into the market. So they were potentially buying them cheap and selling them high, and those sorts of things drive the statistics quite a bit," said Bolton.

"What we can see in the market at the moment is where a house is really well marketed and it's the right property, there's still a market there for it and a good property on the right day will still get a high price. But what we're starting to see is houses falling through the cracks. Houses that aren't marketed well, or aren't presented well to the market, houses that have got problems, maybe a code of compliance problem or something like that, and those properties are definitely selling cheaper than they would have last year."

"So that softness is starting to come through and I'd expect to see that continue to get a bit of momentum through the winter, which is traditionally a quiet period, particularly going up to the (September 20) election. I think it's safe to say that August, September, October's going to be probably quite quiet in the housing market. And if the sellers are there and the buyers aren't, then that softness will definitely come through," Bolton said.

Ahead of the election the opposition Labour Party is pledging to introduce a Capital Gains Tax on investment properties.

In terms of the LVR restrictions Bolton said they are clearly contributing to slowing the Auckland housing market down. However, banks are now rejecting a lot less high LVR borrowers.

"Since March-April we've found the market has slowed down and the banks now can comfortably handle the above 80% business that we're putting into them," said Bolton. "So we're not getting nearly as many declines as we were at the start of the year and I think that's just a symptom of the market slowing down."

There are also less sales through auctions, he said, with more customers, especially first home buyers, able to buy through negotiation.

"Auctions are a very expensive way to buy properties especially having to do your due diligence up front. It's always going to be a buyer's preference to be able to buy by negotiation," said Bolton.

Opportunity for first home buyers

Although a lot of would-be first home buyers are "lacking confidence and back on the fence", some rational ones who don't get too nervous are taking advantage of market softness.

"We've still got a reasonable chunk of first home buyers out there probably taking advantage of a bit of softness in the market at the moment, less competition, and feeling like there's an opportunity to buy. Whereas perhaps in 2013 there wasn't. It was just crazy," Bolton said.

However, talk late last year and early this year of floating mortgage rates rising to 8% as the Reserve Bank embarked on an OCR tightening cycle, has impacted the first home buyer market.

"Going into next year I think you'll probably see things settle down a bit and you'll get a bit more of that confidence coming back into the market," Bolton said. "The thing with first home buyers is they do tend to jump in and out of the market on mass. And when they jump back into the market on mass you get a little bit of momentum and the confidence builds, and you'll probably get another surge."

Bolton also noted strong immigration into Auckland. Statistics New Zealand figures showed in April New Zealand had a seasonally-adjusted net gain of 4,100 migrants, which is the second highest monthly total ever. Auckland takes the Lion's share of immigrants.

"There's this odd situation where we've got potentially a bit of softness coming through in the housing market at a time when we've got really strong immigration. I think that immigration factor will kick in again next year," said Bolton.