By David Hargreaves
Westpac economists have upped their forecast of NZ house price inflation this year to 10% from 7.5% and they say moves to liberalise housing supply regulations in Auckland are actually helping to drive up the prices of land in the country's largest city.
"At first glance, this idea sounds counterintuitive, but it is actually quite simple," the economists say in the bank's latest quarterly economic overview.
They say that "in line with the global trend towards greater centralisation of economic activity", Statistics NZ projections indicate Auckland’s population is set to grow by around 740,000 people over the coming 30 years (an increase of close to 50%).
This is expected to create unprecedented demand for dwellings located within striking distance of a major Auckland centre of employment, most notably the CBD. At present, much of the relevant area is occupied by single dwellings on relatively large plots of land.
"In the past, zoning restrictions and building regulations made it difficult or expensive to intensify the use of that land," the economists say.
"But recent regulatory changes are opening an easier and cheaper path to intensification.
"And consequently the value of the land has gone up. What this means is that the value of today’s house-plus-land packages is shooting up.
"If all goes to plan over time land will be subdivided and the swathe of more affordable housing that Auckland needs will be built. But if a young couple wants to buy into today’s market, they first have to outbid a developer or speculator who understands the concepts we have outlined."
The economists say that the latest housing data gives no hint of Auckland house prices slowing their upward march, "and we have upgraded our forecast of nationwide house price inflation this year to 10%".
They now don't see any interest rate rises in the "current economic cycle", and believe that the next movement in official rates will be down.
However, they don't agree with other economists that the Official Cash Rate could be cut as early as this year.
"That is certainly a possibility – we’d give it 40% odds," they say.
"But the strong economy and low inflation really do leave the Reserve Bank between a rock and a hard place. We find it more likely that the Reserve Bank will wait until the rampant housing market has cooled and the economy has slowed before cutting the OCR. That could be years away."
The economists say with low inflation keeping OCR hikes off the table, the RBNZ is instead "likely to dip into its macro-prudential tool kit to lean against housing market pressures".
"We expect that some form of lending restriction will be introduced in the second half of this year targeting residential property investors. However, while such restrictions may take some of the steam out of the housing market, we don’t think house price inflation will materially slow until the economy turns."
The economists are expecting that the economy will start to slow in 2017, but they note that it will have a a ‘two-speed’ look about it with strength expected to remain underpinned by domestic demand in the main urban centres, while at the same time, conditions in rural regions and among some exporters will be more challenging.
25 Comments
Hence the need for a land tax or capital tax in auck to get these developers/speculators off there a and building dwellings to justify sitting on multimillion dollar plots in or around cbd.
The real prob is fhbs don't understand why a central run down valueless property sitting on a 750sqm plot just sold for 1.5mill... after changes to land use can build apartments or multiple dwellings which is where the value lies.
But since they got out bid they then end up paying over the top for houses miles out even though in 30 years (", Statistics NZ projections indicate Auckland’s population is set to grow by around 740,000 people over the coming 30 years (an increase of close to 50%) Auck will still only b less than half size of Melbourne or sydney presently, yet already as expensive in these outer burbs...
Simon , you are barking up the wrong tree , FYI developers pay tax already on their trades just as any other trader in other commodity , or goods .
Speculators who trade regularly are deemed traders , so they have to pay income tax on the gain ( far higher than the 10% CGT mooted )
A gareth Morgan style tax or land tax would b an incentive to develop these plots instead of sit on them and ride the cap gains due to the point in the cycle... if they paid a yearly tax it would inpact cashflow etc and make it less attractive to hold on until auck prices peak, then develop and sell.. i know they lay tax, but only a number of years later once profit realized so no incentive to get on with bringing new dwellings to market
Simon you are right. Switching rates from capital to land value in a revenue neutral way would be the easiest way to encourage intensification of the Auckland isthmus. People would only pay the really high land prices and therefore land taxes if they had plans to replace one house on a big section with medium or high density housing, thus splitting the tax over many dwellings. If their plans fell through they wouldn't land bank because of the high holding costs rather they would sell to someone else to develop.
Na. Wouldn't change anything. Took me a while to work through this the other day but it has to be a tax that is a % of the value of land. Remember rates are just "what the council needs to balance the budget /all the landowners". The changing value of a property has no effect by itself on the quantum of rates collected from each property. So it needs to be a tax collected presumably by government unless you want to change the very basis of local govt finances.
Then, each time a fresh valuation comes out the govt helps itself to 1% or whatever of the assessed value. Get a run in land prices like now and Prince Harry will hear the wailing and gnashing of teeth from Halfmoon Bay. The point being that not only would you get encouragement to develop land but all the political pressures would change in favour of whatever policies it took to get land prices back down.
And there needs to b intense scrutiny of any insider trading situations arising where council plans become known to a few who then use that info to buy in the right places where as the general public or honest developer doesn't know this so not a level playing field.
Every purchase out of line with what might b a reasonable price needs close scrutiny. John key doesn't make his 55mill without using these sorts of advantages. Len Browns character isn't one that makes me think he wouldnt use his inside info to his advantage.
LOL Trust a Banker to let the cat out of the bag as to what's really going on in older Auckland suburbs close to the CBD !
Without being disparaging , the chattering classes , many on whom frequent this good site , don't understand this dynamic
The better informed have been aware of this for months now , and know that a 600m2 section in an older part of Auckland ( such as Kingsland or Grey Lynn or lower Ponsonby) with a run down wreck on it with GV of $250k is good for three or more units at $500k per unit , so are all blown away when the wreck sells for $ 1, 500, 000. 00 plus .
Don't b surprised to see some future revisions that make some recent purchases that even by today's standard seem expensive actually turn out to be bargain buys. Prevention of intensification in certain areas and not others will make what's left that is still able to be intensified relatively more valuable.. tons of ppl with big $ at stack hence the drama and slow action and massive value to be had in any inside info over and above what the public has
Jeffrey Sach's evaluation before the US Feds in Philadelphia in 2013 that the demarcation between the criminal and political classes are becoming blurred starts to seem prescient indeed (especially the last 4 minutes below).
https://youtu.be/hCCr-uiqtAY
As a general statement on why we have high prices across the board, what a load of c$#p.
Therefore according to Westpac economists, Houston should have high land prices because it frees up land to build. Yet, as even blind freddy knows, it has very low land prices because it frees up land, or to put it another way, the land was never captured to begin with, so there is no need to free it.
And to further follow their logic, their solution would be to stop freeing up land.
The reality is, that relative to demand, we have less supply that we did 5, 10, 20 years ago.
With the ACC putting a stop to Greenfields SHA’s and still having no coherent policy on brownfield zonings, covenants and what is a relevant Nimby concern, there is far less supply, relative to demand than there ever was.
They, of course, would find this counter intuitive.
Introduction of new land/builds will give minor inflation in prices, as it's economic stimulus.
_actual_ sales (ie commissions), actual building, actual labours, actual lunches, labourer rentals, sometimes labourer families, all creates a local stimulus. It'll drop off/even out as it reaching an equilibrium, but new opportunities + new money always equals increase in business (and a few people who can afford a bit more than pre-stimulus prices)
"...they first have to outbid a developer or speculator who understands the concepts we have outlined."
All developers and speculators understood the laws of supply and demand when these guys were still in shorts.
So just some points of fact for the Westpac wizards to ponder:
1. what universal law of agglomeration? The less sexy jobs are exiting Silicon Valley at a rate of knots because the people and the companies who would normally perform the mundane engineering and manufacturing work can't afford to live or work there.
2. The only and - I mean only - part of Auckland where more residents currently commute to the CBD to work than any other place in Auckland is.......the CBD itself. Even the residents of the inner suburbs don't work in the CBD in preference to other places (source :Statistics NZ);
3. What the population of Auckland will be in 30 years is anyone's guess. The only thing we are reasonably sure of is that natural increase is likely to be negative by then and only immigration will hold up any kind of demand for new property. The single factor that will determine at any one time how much demand there is for Auckland property will be the relative attractiveness of Australia (which we can't control or predict).
Journeyman economists have got to stop reading 'Freakonomics'; it makes them think any old drivel is a masterful insight as long as it is 'counter-intuitive'.
While I find it really hard to follow their logic I think, to be fair, that they are saying that if you upzone the inner suburbs the price of land in those areas will rocket. Which is contrary to the expectation of Auckland Council who think, despite all evidence to the contrary, that this will deliver lower dwelling prices. But it is absolutely consistent with experience around the world.
What they do get wrong wrong wrong is the idea that these inner city price rises will taint the "affordable housing" prices. They don't understand that it is the cheapest plot on the edge of town that sets the base for all the prices across the city.
What they miss is that these price rises in the centre can only occur while there is also strict constraint in the form of the Rural Urban Boundary that drives fringe prices up first.
The other thing they miss is that there has been no liberalisation of supply anyway. The fringes are strictly controlled and what upzoning was being talked about in the centre has been severely watered down.
Putting all that together I am sure what they meant to say was something like "Half-assed supply measures will continue to force prices up". I would agree with that.
One should also remember that bank economists are at the end of the day salesmen for their particular organisation. It is their job to sell more and bigger mortgages to the punters......
So this sort of article is not independent analysis rather it is banks promoting their own interests.
Nothing wrong with banks being public with their interests as long as everyone understands that is what this is.
We welcome your comments below. If you are not already registered, please register to comment.
Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.