Bernard Hickey points out that the tame Auckland rental market gives an important clue to the distorted Auckland housing market - it's not just about supply

Bernard Hickey points out that the tame Auckland rental market gives an important clue to the distorted Auckland housing market - it's not just about supply

By Bernard Hickey

If Auckland really has a housing supply shortage, why haven't rents increased?

This was one of the unsettling questions the Reserve Bank had to answer this week as it discussed the economy's major roadblock - Auckland's apparently tight housing supply.

Surprisingly, it was Auckland's Epsom-based National list MP Paul Goldsmith who asked the question of bank officials at this week's Finance and Expenditure select committee hearing after the release of the bank's September quarter Monetary Policy Statement.

The National government's entire thrust of the last six months has been to force through an increase in the number of houses built in our largest and fastest growing city.

It's widely believed that Auckland has a housing shortage and is building only half the number of houses it needs to keep up with population growth.

The government's message this year has been all about Auckland housing supply.

In theory, this shortage is the reason Auckland house prices rose 17% in 7 months between November and May and the reason why the government rapidly passed legislation to force Auckland to open up its land supply and take some of the pressure off interest rates.

The Reserve Bank confirmed this week it is likely to increase interest rates by around 1% next year in the lead up to the November election, but it also said it would have been more like 1.3% if it hadn't introduced its 'speed limit' on growth of high Loan to Value Ratio.

But if supply really was the only driver behind Auckland's latest boom, why haven't rents increased at the same rate as house prices ?

They certainly have in Christchurch, which has an obvious shortage of houses because of its earthquakes.

TradeMe figures for average rents show Christchurch rents were up 22% in the June quarter of this year vs a year ago because of a 7% fall in listings and a 16% increase in rental inquiries.

That all makes sense and is in tune with a rise in median house prices in Christchurch of more than 12% for most of this year.

Yet TradeMe figures for Auckland show average rents actually fell 1% over the same period that house prices were rising at an annual rate of 13%.

This appears to make no sense if the problem of house price inflation was only a supply problem, as the government has been pounding on about this year. Reserve Bank officials suggested a couple of possible reasons.

A lot of first home buyers have stopped renting and are looking to buy, which means less demand for rentals.

Also, a lot of owner-occupied homes bought this year in Auckland have been bought by rental property investors, which means supply of rentals rose.

TradeMe reported supply of new rental listings actually rose 5% across Auckland in the last year and the number of rental inquiries fell 2%.

The surge of former owner-occupied houses becoming rentals was most evident in Mt Eden (up 19%), Mt Wellington (up 24%) and Remuera (up 10%).

All of which confirm that Auckland's house price boom of the last year was at least sparked, if not wholly caused, by a surge in demand due to low interest rates, easier bank lending policies, higher migration and stronger non-resident buying.

Auckland clearly hasn't built enough new houses, but this was not a new problem.

This created the dry forest and the tinder, but it was the demand surge that sparked the fire.

That's why the Reserve Bank's moves to limit high LVR lending and warn of higher interest rates were not only right, but already appear to be working.

Since the Reserve Bank told the banks privately to cool it in early June and warned in July of higher interest rates, the median house price in Auckland has fallen more than 2% and the bank pointed to "signs of stabilisation" in its report.

Prices are always a reflection of both demand and supply, which shouldn't be forgotten in all the debate about Auckland's house price problem.

It's not just about supply.


This piece was first published in the Herald on Sunday. It is used here with permission.

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Rents may have reached a ceiling , Bernard ... there is a point of pain , where folk gotta take alternative action , such as move back in with Mum , or rent a granny-flat , doss in a garage ... or buy that ticket to Sydney .... and there is the prospect of more householders gaining an extra income by renting out the spare room to an exchange student ....
... the speculative end of town are still pushing house prices up , but that's not because of income yields on property , is it ... it's the desire for a capital gain , and the ability to negatively gear up against income tax ...

Is the cost of rent captured in the cpi index ? – if so it would be a huge part of the cpi index. And as such the inflation index the reserve bank is using would register an increase in inflation – if rent went up.  If rents are not going up - why are house prices going up ?  as houses are only worth how much rent they can provide – as you don’t buy a capital good to make a loss on it do you ?  The product a house creates is accommodation – which you can get by renting or owning.  Another side of the coin is – are not the oldies leaving Auckland to retire – which then leaves empty houses – ive notice a lot of the houses Ive been looking at are being sold by oldies going to retirement – ie Robert kiyosaki baby boomer theory.

Short answer: Yes- then no for the huge part bit.
If rents are not going up - why are house prices going up ?
If having money you control in a house in New Zealand has benefits other than the effective rent value, those benefits can cause house prices to rise independent of the rent value. I'm going to call this hedging with houses.

Since house prices are soaring, and house debt is not soaring, the Auckland bubble on bubble can't be coming from households buying a house to live in. The two other main possibilities are off-shore money and developers consolidating (or both).
The way you could measure the effect is the number of adjacent properties owned by the same business entity (if it is a personal entity it should be affecting household debt). The change in that figure over the past few years should give a clear indicator. Of course, actually getting those figures out of someone that has them in a cost effective way is another matter entirely.

I think it’s the banks giving all and sundry massive loans, which we all take to the local auction room and then creating "artificial" demand by bidding up on houses we cant afford ( or can only afford due to the loan)  - no loan – no demand as you cant afford it.  Rinse and repeat a few times – and you end up with what we have now.  We are all preying that great sucker theory is still true when we come to sell.  The housing stock is damaged pretty much – nobody can afford to maintain it (or it leaks).  Perhaps the word is "death spiral" except nobody in charge can see it.

I will certainly agree that people getting out loans to buy houses is the mainstream view. However, I have become increasing convinced that people loaning money from banks is not what has been driving the NZ housing market since the early 2000s.
If you compare house prices with household debt for Ireland (since I found some figures last week) and New Zealand you get graphs like this:
Note that with Ireland in the top left, household debt increases along with house prices. In New Zealand house prices go up without household debt increasing much. This becomes even more dramatic if you focus only on how much did house prices increase by during the boom vs how much did debt increase by during the boom. To put some actual numbers on the second row of charts, for the boom years (just after house prices began to head up dramatically until they show any decline) if all the money in household debt Ireland borrowed in this period was spent on houses this is 95% of the total (so basically all the added money Irish people borrowed in this period went into houses). On the other hand, if all the added money from New Zealand household borrowing was spent on pushing up house prices, this only explains 35% (1/3) of the money added to house prices in this period. The other two thirds of money pushing up house prices must have come from somewhere else.

The manner in which real estate data is collected in NZ is farcical - how anyone (RBNZ incl.) can collate any trends is a mystery! 
I don't know what they do in overseas markets but if it was my call I would have a compulsory questionnaire to be filled out by all agencies, based on the information given at the time of sale that would help determine any demographic or economic patterns based on age group, nationality, form of finance, intentions of sale or purchase etc. and I'm sure there are other relevant determinants that could be added which would also be useful to analysts from many sectors.
No personal details necessary, and it's not for the purpose of singling out any particular ethnic groups or generation - it's merely to try and stop all guesswork surrounding the whole housing issue.
Why hasn't this been rolled out before - either proactively by the REINZ or regulated through Treasury/Finance ministries?
Seems simple and logical - get the information at source...

You could get a lot more information about the housing market by matching existing sources, if there was a will. That's why I get quite annoyed when Nick Smith goes "it is impossible to measure overseas buyers". It is impossible to measure it exactly, but with full access to existing data, you could get quite an accurate estimate within a narrow range.
Adding a layer of data capture at sale would make easy analysis, but it is something not needed for the housing market to run, only to make it easy to understand, so I am sure would see complaints about big brother intrusions and compliance costs.
Overseas can range from minimal (I'm thinking of the U.S. where banks have essentially been able to get away with foreclosing on people who didn't have mortgages with them) to maximal where everything is basically on the public record (I'm thinking of some of the Scandinavian countries where your interactions with the state are considered public record, making it pretty hard to hide assets or launder money through housing, but at a cost of what we would call privacy).

dh...I'm talking about non-intrusive, anonymous, survey-like tick-box data that is easily collatable each month by the REINZ gathering all the sales questionnaires from agents - one from the vendor and one from the purchaser.
Nothing overly involving, and not divulging any sensitive or confidential data from clients.
But there would be plenty there in the statistics to provide clarity and forward guidance as far as how things are trending in the market.

Expo: The one rational voice.

Astonishing that major decisions are being made in an absence of meaningful data. They have no idea what's going on. Decisions that have a long term effect. What if those decisions are wrong. These aren't decisions that can be undone easily. How do they know. They don't. They're guessing.
What we do know
Auckland property prices are rising out of proportion to population growth while at the same time rents are not rising, and
Nobody knows why, and yet, meanwhile
Major long term decisions are being made at multiple levels

  • Central Government - Housing Accord - 39000 houses
  • Local Government - unitary plans - freeing up land
  • Individuals - jumping on board - fear of missing out
  • Banks - overseas borrowing to fund all of the above
  • Reserve Bank - LVR's - protecting the overseas banks

They are guessing.

Too many wind bag theories and too little facts.

Here are the facts
There is no shortage of houses in the Auckland region.
Reason: there are almost 10,000 houses and apartments listed on Trademe alone right now.
There is an over supply of rentals hence stagnant rents.
Reason: there are almost 5000 dwellings for rent, now vacant and waiting for tenants listed on Trademe.
There is a plentiful supply of affordable houses contrary to the hysterical outbursts from the unwashed.
Reason: there are around 5000 homes for sale under $500k on Trademe today.

The housing shortage is a manufactured myth created for political purposes.

If there is really a shortfall of 15,000 houses in Auckland then there should be at least 45,000 homeless people sleeping in the street.
This is patently not so, hence the myth is proven.

Thus endeth the lesson.

Facts you say, strawman I say
The problem isn't a shortage of houses causing people to live on the streets. People still have other less undesirable choices -living with family, camping grounds etc.
The problem is housing is becoming less affordable.
By trying to reframe the problem you clearly feel threatened by the possibilty something might be done about housing affordability.
For BH if supply constraints are causing house prices to rise to 7 times incomes in Christchurch and they are at the same level of housing unaffrodability in Auckland. But the problem is not supply constraints because there has been no increase in rents. Why the increase in supply of rentals in Auckland, but no increase in the supply of freehold homes?
More foreign investors attracted to NZ's only major city? Property investors chasing capital gains or just the hype of capital gains? Is it a bubble that will pop?

"Facts you say, strawman I say
The problem isn't a shortage of houses causing people to live on the streets. People still have other less undesirable choices -living with family, camping grounds etc."
Yes I agree.....I want to live in a mansion but hell, it's not affordable...shortage yeah that's the reason.

I never thought I would hear him say this. This is exactly what I've been saying for yonks.

Dead on target Bernard.
Auckland House prices sharply up.
Auckland rents static
It's not a supply problem.  It's a bubble.

ZZ.  You must be in a desperate personal financial situation.  Trying to create a bit of buying panic with that comment. 
The 'bubble' is a great descriptive name.  But only a description.  Obviously thin air did not blow up the price of tulips back in the classic example.  It was excitement, panic of missing out, crowd mentality, and a fever of greed.  And it all turned out so wrong.

ZZ.   I take it then you are desperate for some capital gains.  As the property choices you made were speculative rather than realistic business choices, the cashflow just ain't keeping up, the properties are deteriorating, maintainance unaffordable and rents thus going down, and the bank is getting sniffy and foreclosure is looming.   Correct ? 

I was wondering why a 3 bedroom ex state house sold in Browns Bay North Shore for nearly $600, 000.
Obviously new owners are looking to develop a multi storey high rise.

Be honest ZZ.   Whats your level of equity ?  Mine is about 90% -or more. 

I'm quite aware ZZ -  of how leverage works both ways.  Now whats your % of equity or is that too scary to reveal.  I'm not asking for any identity information or other stuff.

Haha ZZ.  You are the one who is talking of the leveraging --  but you won't front.  a.  If you have high equity then you have not been following your advice you give to us.  b.  if you have high debt and if Roger is right then you are in doodoo. The static rents won't save you.  Not a good place to be.
Either way I hope it does work out well for you.  Cheers.

I am not overly concerned about static rents at the moment. My rents already went up by 25% on most of my properties in prior years
Hard to believe:
In the year to the June quarter salary/wages  increased by 1.7%. The annual mean increase was the lowest in 12 years. (Stats NZ)
Graphic detail

Let me, if I may, Mr ZZ inform you that a 25% return doesn't exist in a long term environment.
Best to take the profit, if indeed that is what you make, and run.
The world is full of sharks, more cunning than you or me.
If the best brains on Wall Street can only come up with US T/B as a risk free investment, which yeilds absolutely bugger all .........
Well best of luck.
Been there, done that Mr ZZ.
Do not coming crying to me or other taxpayers to bail you out.   Ever.

You must have the wrong person - I'm with the camp playing long NZ Government TBills until the details of the Fed taper are revealed in full. Thereafter, i might consider a note ladder.

So you think im a whining like girl do you, Mr ZZ.
I don't whine girls, normally i feed them enough alcohol to totally screw them over,
That may involve wine, but not whining, what ever that means. Dickhead, you will never get to know.

While yes there is too much whinning....if we see a 60% haircut from the OBR most landlords ie those with huge leverage will already have gone to the wall.  Even if you yourself have little bank loans, your property portfolio is going to tank....then the OBR will see depositors haircutted.....though I'd suggest its a brazilian job and not a scalping.
Personally if I had cash I'd look at short term govn those clsot to maturity...and avoid the OBR problem....

Remember, supply-demand is number offered for sale V number of buyers looking to buy.
A simple case of people holding onto their first home to rent out and buying their next on savings from last 7 years and capital gain growth in first home would explain everything; more rentals suppressing rents, and less properties on marker per unit buyer, leading to price rises.

Yes Simon I get your supply/demand market equation.  But "supply" is also a description of how many houses there are.   And static rentals means there are enough houses.    
As for the motivations of why people will increase the price they will buy a house for.  It's not the shortage of houses.  

If it was people buying additional houses from savings, money would be disappearing from other parts of household savings. That can easily be tested looking at the household savings figures.

Right On Bernard.
There is no shortage of houses in Auckland....nobody is homeless and we have yet to see people living three families in a house...or garages converted into bedrooms enmass.
The real reason for house price inflation is Cheap Money and Easy Credit....for confirmation of this fact see US Mortgages shrank by 30% last month after mortgage rates went from 3.5% to 4.7% in a month. I bet house prices will drop 50% if NZ mortgage rates is to increase from the current average 5.5% to 8%....
This is the real reason why RBNZ hesistated in every possible way to restrain the housing bubble....if prices were ever to drop the Banks goes bust and RBNZ gets blamed...Damien Grant in Weekend Herald is wrong to write that the property game is rigged in favour of existing is rigged in favour of investors are the patsy....
House buyers (especially first timers) are whinning about not getting into the property ladder is not because they want to own a house to live in but that they cannot get into the quick tax free capital gains game that everybody else is playing.   
If not for the fact that EVERYBODY is now whinning about high property prices AND and Election next year....Nick Smith would not be bothered to make a fool of himself trying to shoot down house prices like King Canute.....And David Shearer (now gone) would not have promised 10000 houses every year for 10 years....But election is coming and this game can only get hotter by the month.... 
I have been renting the past 15 years and is happy to continue to do so....meanwhile my money goes to other income related activities which gave me more returns than housing.

Completely anecdotal but I've just rented a property in Auckland out today. I had eight enquiries within 12 hours of advertising. I showed most groups through. Many people told me they had been "looking for weeks" and couldn't find anything suitable / decent. My asking rental price was right up there (it's a nice property). I took my pick of tenants and job done in less than 60 hours from advertising.
I wonder if a lot of people that have been living at home / flatting to save deposits on first homes will give up now, move out and get their own places and become tenants. This would dry up rental stock pretty quickly. 
Also, is the rental stock available any good? Most of the properties advertised for rent in the areas I watch have been advertised for weeks and have something wrong with them. Good properties are snapped up. There is demand for good properties.