How and why previously unfashionable Auckland suburbs are becoming popular and causing house price rises to ripple out from the centre

How and why previously unfashionable Auckland suburbs are becoming popular and causing house price rises to ripple out from the centre

By Gareth Vaughan

House prices in Auckland have been going up, up, up, up, up.

The city's biggest real estate agent Barfoot & Thompson says the average price of an Auckland house topped NZ$600,000 for the first time last month. The Real Estate Institute of New Zealand says Auckland's median house price rose 2.9% to a fresh record high of NZ$530,000 in October and the Auckland median price is up 14% year-on-year. And Quotable Value says values in the wider Auckland area last month hit levels 9.1% above the previous market peak in 2007, with the old Auckland City 12.5% above that mark.

With a growing population, not enough new houses being built, interest rates at historic lows meaning it's relatively cheap to borrow money, and no capital gains tax, demand is outstripping supply. Against this backdrop housing affordability is a hot political issue and many people are picking house prices in the City of Sails to continue rising.

However, John Bolton, principal of Squirrel Mortgage Brokers who also dabbles in property investment and development, told in a Double Shot interview he expects prices in mature central Auckland suburbs to plateau, with price rises instead rippling out from the centre as people who find their first choice suburbs too expensive, set their sights on cheaper suburbs further out.

"There are people out there saying property prices in central Auckland will double in the next five years. I think that's a big call. I think there's a couple of things that will limit any price growth from here," Bolton says.

"I think at the moment pretty much the whole market's going up. I don't expect that to continue. I would think that most of the more mature markets will plateau for a while at least. But you'll still get people venturing more into some of these emerging areas like Otahuhu, like Mangere Bridge, like Avondale, like New Lynn, where you can still get reasonable quality entry level housing," Bolton says adding: "Reasonable quality being a do up 1930s villa that you probably need to spend five years and a labour of love turning it into a decent house, but they're there."

He says people are pushing out into suburbs they wouldn't have looked at in the past.

"For example, you've basically seen people push out from Ponsonby towards Mt Albert, and Mt Albert prices have gone through the roof in the last couple of years to the point now where to get into Mt Albert you're looking at NZ$700,000 to NZ$800,000."

'Grey Lynn property at half the price'

With those sorts of prices now getting too high for some young professionals, they're looking even further out.

"They've jumped into Avondale Heights and prices there are starting to go up. Now who would have thought that young professionals would be buying in Avondale?"

"I think for long-term Aucklanders, four, five years ago people would look at me sideways and say 'Avondale?' Whereas now you've got lots of young professionals diving into Avondale buying three or four bedroom villas and bungalows, kind of the Grey Lynn property but at half the price."

With a growing population things change, Bolton notes, and with this is opportunity that good investors find. He says the Avondale effect is taking place in other parts of Auckland too with people who previously wouldn't have, now looking at suburbs like Mangere Bridge and Otahuhu.

"Recently we've started to notice a wave going through Otahuhu. Historically everyone wanted to live in Ellerslie but Ellerslie's getting a bit expensive. It pushed into Mt Wellington, all the investors dived in there (and) Mt Wellington prices are getting up towards NZ$500,000 now. So it's starting to get a bit hard for those first home buyers. Guess what? They're now in Otahuhu.  And you can still buy a three bedroom villa in Otahuhu for well less than NZ$400,000. In fact fully renovated for NZ$400,000, maybe a bit of a do up for NZ$320,000 to NZ$330,000."

Overall Bolton describes activity in the Auckland residential property market as "crazy." He suggests confidence has been building in the market all year. And once headlines regularly appear in newspapers reminding people prices are going up, it turns into a "bit of a frenzy."

"First you had first home buyers in the market, towards the end of last year, and the start of this year we started to see a lot more investors coming back in."

And as the market improved, investors started selling, which resulted in some renters having to move and deciding it was a good time to buy. Now Bolton reckons the "less astute" investors are getting in.

"I think the astute investors probably saw this coming and were buying maybe a year ago. Whereas you get a lot more of those mum and dad investors hearing the anecdotes and the good stories around them and they are coming back into the market as well," Bolton says.

Poor quality rental stock helping fuel the fire

Bolton reckons a range of issues are fuelling the fire. These include the quality, or lack of, in Auckland residential property with leaky homes and a general run down in rental property quality.

"So for a lot of first home buyers they've looked at the trade off. They've looked at poor quality rental properties that they can't renovate, they can't tidy up, they can't do something with it, (because of a) shabby bathroom, a crap kitchen from the '50s, that sort of thing. Then they've looked with the low interest rates, they've looked at the opportunity to buy and even if it's a do up, at least they can do it up. So a lot of first home buyers have taken that step."

Reserve Bank market data shows interesting dynamics at play. Central bank data shows 32 consecutive weeks where there have been more than NZ$1 billion worth of mortgage approvals, which is the longest such run since the Reserve Bank started compiling this data in 2003. But Reserve Bank data also shows overall housing loans up NZ$4.1 billion in the first nine months of 2012, which is growth of just 2.4%. Against this backdrop banks have been competing hard for each others customers by throwing cash and even smart phones at them to try and win their business and offering 95% mortgages.

Bolton says competition between banks is "pretty prolific" with refinancing activity an obvious market for them to target.

"Some lenders out there, Kiwibank in particular, that's what they do. They basically target the refinancing market. It's far easier to refinance someone than to go through the whole house buying process," he says.

The primary school zone effect

One long-term factor in Auckland house prices is school zones. But this doesn't just mean the Auckland Grammar zone anymore. Primary school zones are also a factor. Bolton says primary schools are a big driver of where, particularly, first home buyers want to buy.

"If you think about first home buyers today they're generally in their early thirties and they've either got kids already or they're pretty close to starting a family. When they do that the daycare, the primary school, is probably a significant driver."

"And as they (primary schools) get zoned you've got to buy in a particular street to get into that school. You can see that around Sandringham, you can see that around Epsom, Mt Eden, even on the North Shore places like Hauraki, Takapuna, up in Milford, Campbells Bay," says Bolton.

"Heaps" of them stand out with one example being Mt Albert's Gladstone Primary School zone.

Bolton says first home buyers in central Auckland now often have household incomes of NZ$140,000 to NZ$150,000.

"That doesn't have to be high end professional jobs. A policeman and a teacher can get their double incomes up to that sort of level. (But) it creates some interesting challenges later on if they drop to one income and start a family."

That said, in general first home buyers over the last three to five years have tended to have bigger deposits than in the past with a lot of this coming from KiwiSaver.

"They're coming in with deposits, they're coming in with low interest rates and in Auckland they're actually coming in with pretty reasonable incomes," says Bolton. "Our first home buyers that are out there buying aren't NZ$60,000 or NZ$70,000 household incomes, which is what gets dragged out of the mud every time we have a debate about affordability."

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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4 bed villas in Otahuhu for under 400k - Whats everyone complaining about.
Woe is me I cant afford an 8 bed castle on 2000sqm in herne bay - get the violins out.

How I see the housing market will continue to be bouyant for the next 18 months-2 years in the city centres and then start to ease as soon as interest rates start to rise.  We have seen from the central suburbs prices moving up and now spreading to the outer suburbs as the prices look more attractive.  This makes sense where the purchasers are seeing value for money compared with centres and prices are re-adjusting upwards.    when we look there are areas that look attractive in price and areas that do not look attractive.  Some of the most desirable suburbs will always have strong support and when the kiwi eventually weakens more buyers from overseas will come into the market to keep prices elevated.  At the end of the day you decided what you think it is worth and what you are prepared to pay and altermately where you are happy to live.  Also since New Zealand has limited other industries to make Kiwis prosper the housing market will always be well supported at least for the next 100 years.

Time will tell, looks like an unsustainable bubble that is dangerously inflating to me.

"Bolton says first home buyers in central Auckland now often have household incomes of NZ$140,000 to NZ$150,000." - Citation needed
Doesn't back up the statistics really. Sure if you've got first home buyers as a professional, university educated couple in their early thirties, then possibly... but this is far from the typical first home buyer.

I would say that the typical first home buyer in central Auckland would need a household income of $130k at least - otherwise they would have to be looking in the outer suburbs. Like he said it isn't hard to earn that much - it is just two people earning slightly higher than the average wage. Most of the couples I know in their early thirties earn at least that

First home buyers are usually double income couples arent they.
Ave auck income 60k - 80k isnt it.
He is a broker who advertises to a younger clientele than most - I would say he meets lots of first home buyers so he would know.

But that's just it. Average salary isn't average for every age group. I'd say that while mid '70s might be average salary for an Aucklander, the average salary for an under-35 would be very significantly less than this, much like the average salary for a 45-60 year old would be significantly higher.
There aren't many 50 year old burger flippers at McDonald's just like there's not a lot of 27 year old CEOs of major companies.

Auckland seems to have huge income diversity - there are lots of people earning well below the national average, and lots earning well above the national average. Most of that comes down to whether you have a useful university qualification.
Your age band theory doesn't take into account that there are a lot more university qualified people in the 30-40 age group than the 45-60 age group.
Our household income was over $140k when we were 30

probably - but the under 35s arent really in the game in large numbers are they?

In ever decreasing numbers if our average home ownership age is to be believed. Certainly not in the market as much as the foreign speculators! ;)

whats wrong with under 400k for a renovated villa in otahuhu?

Why go to the ghettos when you could have purchased this do-up villa in on the Sandringham/Mt Eden border in perhaps the areas top street yesterday:
An original full north facing title.
Detached character villa in need of severe elbow grease.
Surrounded by million dollar plus villas.
Quiet location, just moments from the CBD (even walking distance!)
Wait for it...  $561,000.  Yes a cheap entry level for a picket fence dream.  It is a heritage zone so you can't tear down as of right, but a rebuild to a comfortable home could be done for not excessive amounts of money.
If I was looking for a foothold in the Auckland market I would have bought it.
Opportunities to enter even this top area always come by.  Recently a quite liveable state house on a full 600m2 section in Meadowbank went for $468,000.
You can be rewarded by a little hard work you know...

That state house is a tiny house on a really steep section. To do anything with it would cost a fortune. However it was good buying as a unit would probably cost a similar amount.

wouldnt a first home buyer be 30 - 40 usually.
anyway they arent driving the market.
pay a little more and get 2 bathrooms and a huge section.
2 income household would pay that off in no time.

Looks like mortgage brokering is the business to be in. 
Is Grey Lynn really that aspirational? I would have thought that Takapuna, Remmers or St Heliers would have that cornered. 
Plenty of quality villas up in Whangarei, but few people with the incomes to keep them maintained well or able to actually buy them. 

Mortgage brokers and refi guys were the street level kingmakers in USA prior to their crash. I know this because I was doing VA mortgage refi's in CA '04-05. Just how far they are allowed to push the limits will have a huge bearing on how much collateral damage will be left once values top out here in NZ. I note advertising on The Sound FM (and prolly others) promising "if you have 25% or more equity we can write up a loan on [anything], guaranteed". Meanwhile on same station another crowd is fishing for suckers for investment properties. What caused the crash in US, amongst other things, was loaning anybody with a heartbeat too much money on overvalued RE. God Bless America is believed by locals there as much as NZ is Godzone here... 

problem is that Remmers and St Heliers are boring and full of old people who are gradually heading off to the old folks home.
the rich kids want the gypsy tearooms, blackbox and richmond rd cafe etc
not bowls clubs and crochet shops

Or you can hop across the ditch, 4km from Brisbane CBD - asking $695,000

Does it flood???  I don't know the area, but on the street view it looks like it's on the edge of a flat plain area close to the river...
What price is that?  Around $NZ900k?  You can buy in ChCh's upper suburbs a blinking good full size house on a full site for around half of that (with insurance cover and damage repaired or to be fixed).

I live not too far from that house.  According to Brisbane council data - 2011 flood came up to 2.3m above sea level - the lowest point of this street is 2.1m, so the water did come up about 20cm at the lowest point.  Had I known about that I would consider making an offer. 
Compare to Auckland, this is a bargain - we sold our house in Freeman Bay not so long ago - comparing value to value this is way better and way cheaper

that sort of property would be close to $1 million in equivalent Auckland rip-off suburb

This article is very valuable in that our broker lays bare the transmission vector for house pricing.  So put that into the context of first-home new-build affordability, and a couple of things stand out:

  • our broker is dealing with well above average AKL household incomes (last I looked around $70K)
  • which means the median new-build purchaser can (using MM of 3 to make my shaky maths reasonable) afford a $210K mansion.

Transmission of this economic malaise (whether it applies to new-house pricing or differentials as between suburbs) ripples throughout the housing market, exactly as per the title.
And, existing-home sellers who wish to buy new at roughly the same level of amenity, need to sell at around the new-build price.  Of course, if they choose to downsize and play it right they get to trouser the CG tax-free, mais naturellement.

The Ponsonby/Grey Lynn frenzy is scarcely believable. Both areas still have that hipster/wannabe urbanite atmoshere. But how can it be if it's gentrified into 800K+ villas? The once awesome NZD150K dual-income will not be so spectacular soon. North of 250K will soon be the target. 

what looming economic boom is going to sustain and increase incomes to help support higher prices?
I've never heard a convincing argument. 
the way I see it Auckland's economy will be ordinary for a number of years. Construction won't properly pick up until the unitary plan comes through, that's at least 3-4 years. Even then with better zoning in place its arguable as to whether much building will start happening.
The infrastructure building boom of the early to late 2000s is over.
Retail, hospitality and tourism  is flattish. Manufacturing is in dire straits.
Please someone enlighten of the economic boom arriving to sustain higher and higher house prices   

if you assume the money to support higher prices comes from local people your question has some merit
If hot money continues to flow in and crowd out local money, this can go on indefinitely.

true and young kiwis continue to get screwed over
What enlightened leaders we have!

To answer your question: "what looming economic boom is going to sustain and increase incomes to help support higher prices"
Plenty of hot money that has been on the sidelines is now coming into play. There was a post a few weeks back about the hundereds of millions of $ that is sitting in term deposits......
Its supply and demand. People want a return and are now looking more and more at Auckland property. Look at the Fonterra TAF (over subscribed and will go over $6 when it trades today) and Moa Beer (over subscribed). Why do you think John Key wants to sell off the SOEs....because he knows people will invest. Greed and fear.People want to get ahead and want keep up with the Jones. At the moment everyone is piling into Auckland property and with banks giving money away, that my friend is what will support higher prices  :)

$150k household income is really below average in central Auckland.  The new average income for a household in central suburbs would be around $220k at the moment I would have thought i.e. average $110k per annum each for an average working class couple.  Note that an average Project Manager would be earning $150k per annum and a senior manager in a medium size company around $200K.  A contract Project Manager in general earns $150.00/hour and this is just standard rate.

Just in general term per se - I've been working long enough in Auckland to know what I am talking about...take it or leave it.

As the evidence shows, and everyone should know by now, yes there is a correlation between prices in the centre and the fringe, so this rippling effect is expected, and it will continue until it hits the urban boundary which sometimes causes a higher price rise on the boundary as it is the only place for most new homes to be build, which have to pay developer levies and other inflated costs. This price rise then rebounds into the city again with all the older properties (without ever having paid these extra levies) getting a free further capital gain increase courteous of the higher than needed fringe development prices. This cycle continues albeit influenced by other influences. This urban boundary bounce is due to restrictive zoning policies. It doesn’t matter where you buy in Auckland, it will always be overpriced under the present system.

"I think the astute investors probably saw this coming and were buying maybe a year ago. Whereas you get a lot more of those mum and dad investors hearing the anecdotes and the good stories around them and they are coming back into the market as well," Bolton says.
Is that a mortgage broker's euphemism for "a sucker's rally"? 

Stop allowing our property and labour markets being skewed (or screwed) by foreign investors and temporary migrant workers, where there are kiwis available for the work, think builidng projects in Auckland for a kick off. Sorted

Agree. Face up to the fact that one house sold to an investor from overseas is:
A. One less local owner occupier continuing to look unsuccessfully.
B. One more rental or worse an empty box
Possibly there is much less a shortage of housing in Auckland and much more a surplus of renters who aspire to their own home.
So firstly stop the overseas spoilers and at the same time tell them that if they want to keep what they already have acquired they must get resdiency  and as Dotcom has found that means six months living here full time in twelvemonths (if that is the rule) otherwise sell up and get out.

We're seeing the ripple effect in the South East of Auckland too.  Many people are realising they can ferry into the CBD in 35 minutes and at the same time get a coastal property for $650k or something a bit further in land for 450K. 
Howick, Pakuranga, Bucklands Beach, all pretty static on prices up until a few months ago. 

All of the above comments about Auckland makes the rest of New Zealand look really sick (and poor!)  Is this really how people live - in old (cold, damp) houses that sell for $1m and upwards.  Who are these people who can afford such houses and keep up the mortgage payments?  Is the median wage in Auckland really $140k? 
Sounds to me as though many Aucklanders (not all - many have accumulated wealth from hard work and are mortgage-free) are living in a fools paradise.  Problem is that if it all falls over and the Emperor's clothes (or lack of!) are revealed the rest of New Zealand will suffer as well. 
Keeping up with the Joneses is hard work however with time, age, and experience many will see it doesn't mean a thing and is a waste of one's energies.   
Decent education, a decent wage, a decent job (especially for the young), a reasonable roof over your head that is not overpriced paid for by either mortgage or rent, and good food on the table is all that is necessary for a reasonable life.  Not McMansions, not huge TV's, not all the electronic gadgets in the world (that produce absolutely nothing worthwhile but waste huge amounts of time).   Plus a lot of people looking to buy a home get seduced by the "art directed" photographs of the homes for sale, nobody lives in a magazine people.  Its too much like hard work to do that. 
Just saying!

There is an easy solution to this.   Why not buy my house?  It's in sunny Torbay and it's a beauty.