'The nutter in the room' is the one buying Auckland houses, says mortgage broker, with many sales going to auction

By Gareth Vaughan

The red hot Auckland housing market may be peaking with sellers' expectations getting really high and potential buyers waking up to these, says a central city mortgage broker.

John Bolton, principal of Squirrel Mortgage Brokers, who also has interests in property investment and development, told interest.co.nz in a Double Shot interview the Auckland residential property market was currently "pretty crazy." He also noted the traditional New Zealand residential property investor who is "all about capital growth and not too focused on cashflow" is back in the market.

"There's certainly a lot of buying activity out there," Bolton said. "My sense though is it might be just starting to peak now."

"I think vendors have got really high expectations now in terms of the sort of prices that they can get. There have been some stellar sales around Auckland and I guess everyone's looking at those and is thinking that's the new price. Whereas buyers, I think, are starting to look at some of these prices and take a little bit of a step back."

"So the sense that I get is that buyers are starting to wake up to the fact that this is a bit out of control. And I suspect what you'll see over the next three or four months is maybe just a slight decrease in the amount of auctions that are converting and maybe a bit more property falling over at auction and coming back to price by negotiation," Bolton said.

"I think the story that there's a shortage of property in Auckland is pretty much believed by everyone now. That creates a pretty compelling story around why prices are going up. What has happened with vendors is with the shortage of listings they're basically getting promised the earth by (real estate) agents and I guess with what they've seen in the market over the last three to six months that has certainly been the reality. So the expectations for vendors are very high."

"Buyers have probably been through a process over the last year of constantly having to revise their expectations. Either they're buying a lesser property or they're having to borrow more. And I guess they've accepted that because they've believed the underlying story. But prices are getting to a level now where there's probably a growing sense that it's a bit too hot. I think part of the problem for buyers as well is just how difficult it is to buy."

"With everything going to auction pretty much the buyer's going to be the nutter in the room," added Bolton. "We've got plenty of clients that are going to four or five auctions and just not even getting close to being able to buy property."

The latest Real Estate Institute of New Zealand figures show the Auckland median house price reached a record high of NZ$562,000 in March, up 13.5% year-on-year. At 3,359, sales volumes in March this year were 18% higher than in March 2012, and 40% up on February 2013.

Investors back in a 'riskier market'

Meanwhile, Bolton said a lot more investors were now back in the residential property market, albeit a lot of first home buyers were also still active. He suggested investors were probably coming back after getting equity gains in their existing portfolios.

"It has given them (investors) enough leverage to drop back into the market and buy another one. (But) I'm surprised how low the yields are generally on the properties that investors are buying. We're seeing investors buying with 5% yields, which (are) cashflow negative," Bolton said.

"That traditional kiwi investor who is all about capital growth and not too focused on cashflow is back in the market."

"I'm probably getting a little bit more nervous about this market now, and with my property investor hat on, with the exposure that I've got, I'm actually probably starting to de-risk at the moment because my feel is that this is actually becoming a riskier market and that gets me a bit more nervous," said Bolton.

The Chinese effect

In terms of the much talked about Chinese impact on the Auckland market, Bolton said this was a significant factor both in terms of new and existing properties. He suggested non-residents are relied on, to a degree, on the development side.

"A lot of development basically needs to be sold off plan, the finance just isn't there for it. So it needs to be pre-sold. Offshore investors are much better at buying off plan than kiwis are. Kiwis generally, we're a sort of a 'want it now' society. The thought of waiting a year to a year and a half for a house is just out of our consciousness," said Bolton.

"We see a lot of offshore investors buying new development and that's not a bad thing because that's actually contributing to GDP, it's contributing to supply."

In terms of the broader market, the Chinese impact was "pretty hot."

"We particularly see it with a lot of young Asians that have been over here studying at some point, and have probably got residency and are not necessarily working, getting large deposits out of in particular China. So as far as any surveys are concerned it's actually New Zealand residents that are buying but the money's very much coming from overseas," Bolton said.

"I had a young woman this week who was looking to buy a property in Onehunga for around NZ$900,000. She was in a position to put a NZ$350k deposit down."

"She wasn't working so initial thought was 'well, sorry' that ain't going to work. She clearly couldn't borrow that much money. But the reality is she had another NZ$600,000 on term deposit which we could use as additional security. And so for the bank that became a no-brainer because essentially there was enough cash there to take out the entire mortgage. That's actually surprisingly common. We see that a lot with our younger Asian buyers. Very large deposits coming from overseas, support from family, and that's allowing them to buy up property in Auckland."

Also see last November's interview with Bolton; How and why previously unfashionable Auckland suburbs are becoming popular and causing house price rises to ripple out from the centre.