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 interest.co.nz 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."