Auckland's housing market has now been "lost from sight" by the rest of the country, with little chance that regional house prices will enjoy the kind of catch-up they have in previous economic cycles, according to BNZ chief economist Tony Alexander.
In the BNZ's monthly NZ Observer publication, Alexander looks at the recent Real Estate Institute monthly house sales figures, which showed strong price gains in Auckland, but flat patterns elsewhere.
"There is evidence of investors looking outside Auckland for yield. But this will only go so far," Alexander said.
"The way the world is changing toward economic activity concentrated in agglomerations (big cities) it does not seem reasonable this cycle that regions outside Auckland undertake the catch-ups which they did in the 2000s .
"This is the cycle when the Auckland hill runner went around the bend in the track and was lost from sight to those following," Alexander said.
He did think "a small catch-up" would occur as relative price attractiveness of residences outside Auckland attracted investors, some young buyers, and cashing - up retiring people.
Two years ago Alexander believed that the growth in house prices in Auckland would spread more widely, as was reported at the time.
"Over this year and through 2014 we expect to see the strength in Auckland and Canterbury spreading to other regions in the country as happened during the 1990s housing cycle," Alexander said then.
"This will involve some older people selling and shifting with cash for spending, and younger people leaving Auckland in particular for cheaper housing and a less traffic-impeded lifestyle elsewhere. These developments however will not stop the worsening housing crisis in Auckland for first home buyers and those at the lower end of the socio-economic spectrum."
In his latest monthly commentary Alexander also makes reference to developments in the construction industry - particularly with regard to some businesses apparently getting into trouble despite the buoyant levels of activity.
"There is more to being a good house builder than wielding a mighty hammer. One needs good governance, good financial management skills, willingness to pay an accountant to do the accounts properly and in a timely manner , effective use of invoice and stock financing, and knowing when to avoid over-trading," he said.
Those in the construction sector needed to be "quick enough" to realise that just because there was a lot of business coming through the door that did not mean trying to service it all.
"Businesses have grown strongly but without enough capital in some instances, and as the labour market tightens up we expect a new problem to be inability to deliver promised output because of inability to find not just appropriate tradespeople, but also truck drivers.
"Thus a rising tide does not necessarily lift all boats – or at least allow all to stay afloat.
"Be careful in any booming sector to make sure you can handle the growth, and be prepared to turn away some work else as an owner you may find yourself picking up the work you cannot find staff to do, and when that happens financial management risks going completely out the window.
"Keep in contact with your banker as these days banks have very good tools for helping you be aware of how your finances are tracking and delivering early warnings if things are looking stretched," Alexander said.
18 Comments
When your city becomes an asset class, and it's houses are a hedge against financial turmoil elsewhere then there is little point tinkering around the edges. The foreign cash is only interested in a few global cities, not in small towns in the hinterland.
As well as this global cash we have 40% of NZ mortgages going to "investors", probably higher in Auckland. GDP growth in the economy is closely related to housing boom if you look at sector growth. Interest only mortgages all the rage. 1-2% yields are not uncommon.
With so much of the economy depending on house price rises it's a big bet by NZ Inc that all is going to carry on as normal and keep on rising. Only Sydney property looks more mental and there are plenty lining up to point out the obvious there. Housing in China is heading south, commodities boom over, property developers going bust(?!), Europeans ramping up milk production, etc. Anyone who calls themselves an investor would be mad to get into Auckland property now. It's quite an impressive confidence trick!
Macbet, we've been hearing this for years now, literally years. It (infamously) started in 2011 with BH's "prices will fall by 30%" call. When exactly are we going to see this 'correction' of yours? Because for all the doom and gloom Auckland has record growth in GDP, population and foreign investors. All reliable forecasts for Auckland show the record growth and prices to continue, if not excelerate....
Damn the torpedoes!!!, full steam ahead!!!!, and I have to ask, what would constitute a reliable forecast?, would it , perchance, come from an industry stalwart?
I envy you in your asbolute faith and unquestioning acceptance. We poor cynics are simply troubled souls in need of clarity.
A reliable forecast comes from someone with a verifiable accurate track record. Should we rather believe all the losers who peddle their doom porn instead? Just think of how much money a person has lost by not buying a house back in 2011 in Auckland or not investing in stocks back in 2009-2010 all because of internet experts. The doomers have been handed their a** on a plate. The rest of us got rich.
Back in 2009 there was a stream of smugness from a handful of commentors here who said they had sold at the "peak" in 2007 and were happily renting while waiting to buy back in after the 30% fall predicted by the venerable BH. There's a word for them folks now....tenants.
...actually in 2009 there was some damn good buying, some properties were sold for 30% less than their purchase price. And there were plenty of apartments that sold for 50% less.
The only reason NZ escaped a major correction in 2008 was because our main trading partners were China and Australia. China isn't looking so strong now and neither is Australia.
You're right, I decided to rethink it, I ran out the back and disemboweled a chook just now and bugger me if the entrails didn't confirm all you have said. I should have known better than to dissent. Oh, my clock has stopped but look it is just that time now so it is still right, so I'll leave it, it'l be right again in 12 hours time. (Disclaimer, past results are not a guarantee of future performance.)
I make my own forecasts, no use listening to the perma bulls or the perma bears. I piled into Auckland housing from 2009 onwards despite the bears running rampant on this site and elsewhere. Auckland had strong growth forecasts then as it does now.
I'm just wondering when you lot are going to say "we got it wrong, horribly wrong, completely wrong, we don't know what the *&^% we're talking about"
Growth forecasts are always strong, you wont get very far as a forecaster by forecasting weak growth. Auckland house prices are in a classic bubble, and capital gains don't mean shit unless you sell. A lot of people thought they were investors during the dot-com bubble, valuing companies by their 'burn rate' and all that. Making big bucks, on leverage too.
Not predicting a correction, it's too complicated a task for little me. What I am saying is as an investor I think you'd be mad to buy anything in Auckland. The primary driver of the market is investors, not immigrants, lack of supply etc. These are factors. But if you strip away the easy interest only loans and the foreign inflows it is all over. I personally think the Auckland market is sustained on sentiment and foreign cash rather than fundamentals.
By all means, buy a home. But if someone says they are investing in Auckland property at this stage of the cycle I think they are solely relying on a rising tide to lift all boats and give them more capital gains. That is becoming increasingly risky and a small wobble in these circumstances could see a shift in sentiment.
So - it's riskier. It will rock on for a while longer. I think Sydney/Oz will go first and we'll have 3-4 years of slow price deflation.
Auckland is facing a confluence of negative factors which adversely affect property prices.
1. The milk solids price has plummeted from over 8 dollars last year to just under 5 this year.
2. Both the RBNZ (with borrowing limits) and NZ government (with it's surplus) are advocating policies with will reduce the money supply in NZ.
3. A large tranche of baby boomers will retire in the next few years. According to stats NZ 200,000 by 2020 if my memory serves me.
4. A large number of Gen X an Y have found themselves on the losing side of the QE, ZIRP and NIRP wealth transfer. These unfortunate souls have no assets to borrow against and not accumulated any significant wealth in the last decade, the only buyers of overpriced Auckland properties in the future will be moneyed up boomers and foreigners with cheap credit. Both of those market participants could leave at short notice.
Auckland is facing a confluence or positive factors that favourably affect Auckland house prices:
1. record migration, domestic and international, into Auckland with forecasts that it will continue.
2. the planned doubling of the student industry in Auckland, a major immigration and money source.
3. geography... the land between the harbours and Waitakere ranges is mostly built on.
4. record low interest rates forecast to go lower.
5. accumulated wealth of baby boomers investing into the market or buying in the market for kids.
6. Foreign investment forecast to triple in the next 3 years.
7. Len Brown and his unitary plan.
8. Auckland winning international awards as a great place to live.
9. supply shortage.
10. property friendly government.
11. tax incentives for property investment.
12. NZ's GDP growth is the highest it's been since 2007.
13. most of the land earmarked for development has been bought by land bankers.
14. shortage of skilled tradesmen to rectify said supply shortage.
Same factors that started the boom 3 years ago still exist today, many are exacerbated.
whats happening with the uni's up there? Doubling? Not in the short term anyway. But yes, a lot of international students using it as a way to get into NZ and transfer to work then perminant residence, possibly bringing family over sometime later. India leading the charge this time around, and older students also now that rules have been changed (used to have a age cut off for international students, this has been scraped). Im very bullish on all NZ cities with Uni's; auckland over last 12 months has just moved up in price too fast and too much above rents making it too risky for my liking. Best buying back in 2009ish would have been the 'shoe box' apartments for 100kish, yielding 7-10% and seeing as much if not more capital gains as the very low yielding 'landed' properties in auck.
Although happy123.. Some counterpoints to your points.
1b record migration; Its at record highs right now but if you believe in "reversion to the mean" then at some point in the future that will change.
4b; low interest rates; Could a "black swan event" not cause tightening like we saw back in 2008-2009. The central banks have limited options and the next time a Lehman brothers collapses. The outcome could be different, and the era of BTFD will come to an end.
5b Accumulated baby boomer wealth; I disagree with your analysis. Boomers will become net sellers of property, not net buyers. This is based on demographic spending habit analysis by demographers like Harry Dent. Worse still, the boomers will become net deleverages of debt.
11b Tax incentives; That could change with a change of government. The ring fencing of property has already been discussed.
12b NZ's GDP; Refer to my point on the milk solids price.
"Agglomeration economies exist when production is cheaper because of this clustering of economic activity. As a result of this clustering it becomes possible to establish other businesses which take advantage of these economies without joining any big organization. This process may help to urbanize areas as well".
The key question is 'does the clustering of businesses and people in Auckland make production cheaper?'
Id guess the sharp price increases in land values make production more expensive. But hey, its a nice theory Tony
I think a close watch of immigration patterns is needed before these sorts of calls can be made.
The 2000s was dominated by a similar immigration boost, and a lot of it was driven by international students. Immigration started 2001-2002 and was likely auckland focussed to start with (no data on regional immigration for this time period unfortunately). This coincided with auck prices rising from 2002ish.
The real catch up from the regions only happened from 2005-2007 after interest rates had already been cranked up and after large numbers of people had come into the country, most likely many moving out of auckland in search of cheaper living and or study opportunities.
2014 was the first year for many regions to record positive net migration, auckland having had positive net migration since 2012.... Watch for the immigration figures out tomorrow and see if this trend is continuing into 2015, as some regions have zero capacity for more people so are completely inelastic and will see rents and prices rise sharply from existing low starting points.
We are only at 2003-2004 stage for mine, with immigration not yet peaking, and interest rates only just starting an upward march (and then stopped...).
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