The rapidly heating Auckland housing market is being driven primarily by buyers' expectation of capital gains - not a housing shortage, according to Westpac economists.
Latest figures from the Real Estate Institute show that Auckland's annual house price inflation is running at just under 20%.
Last week Auckland's biggest real estate firm Barfoot & Thompson, which is said to account for around 40% of Auckland house sales, reported that its house listings were at historic lows. It also reported that the median price for its house sales in June rose by 3.5% to a new record high of NZ$590,000, although the REINZ figures for the same month, in contrast, showed a NZ$10,000 drop from a record high for Auckland in the previous month to NZ$555,000.
The Reserve Bank is becoming increasingly concerned about, particularly the Auckland market, and is talking up its prospects of introducing "speed limits" on high loan to value lending as a way ensuring continued financial stability and potentially of taking some heat out of the housing market.
The central bank's concerned that a sudden sharp fall in property values could cause financial stability problems. Interest.co.nz analysis of past household credit figures suggests households might be more vulnerable to the effects of a bursting housing bubble this time around than they were in the run-up to the last housing boom in the early 2000s.
The Government and Auckland Council have agreed in principle to an Auckland Housing Accord that would enable the fast-tracking of housing development, with a target of 39,000 new houses in three years to rectify a perceived shortage of around 30,000 homes in the region.
Westpac chief economist Dominick Stephens said in the bank's monthly analysis of the housing market, "Home Truths" that it has become "fashionable" to talk about a physical shortage of houses and slow building activity driving prices higher in Auckland.
"But physical housing shortages cannot explain the fact that rents are falling in Auckland," he said.
"House prices in Auckland are now rising at almost 20% per annum, while rents actually fell 1% in the year to May 2013, according to the Ministry of Business, Innovation and Employment.
"If physical supply was desperately falling short of demand, rents would be rising alongside house prices like they are in Canterbury. Physical supply shortages simply do not fully explain the Auckland housing market."
Stephens suggested that a better explanation for the characteristics of Auckland's housing market - these being low turnover, rapid sales, rising prices and falling rents - was widespread expectation of future capital gain.
"Owners are reluctant to sell because they expect better prices in the future, hence low turnover. Buyers are desperate to get in and enjoy capital gains, hence rapid sales and rising prices. Investors are keen to acquire properties despite low rental returns, hence falling rents. Tenants would rather own, again pointing in the direction of falling rents and rising prices."
BNZ chief economist Tony Alexander in his weekly newsletter last week noted that in Auckland there was a growing tendency for people moving up the scale to their second home to keep their first home as an investment property.
"Hence further aggravation of the listings shortage," he said.
"Reinforcing that, one [real estate] agent noted that of 93 people through an Open Home recently only three had houses which they wanted to sell! The listings shortage is getting worse," Alexander said.
Westpac's Stephens said that in trying to explain why there existed a widespread expectation of capital gain in Auckland, three "candidate explanations" sprang to mind:
- People believe that Auckland's population and incomes will grow rapidly while insufficient houses will be permitted, creating a future sharp increase in rents that restores balance;
- People believe that today's low interest rates will last forever, thus allowing future generations to pay more for houses despite low rental yields;
- The expectation is irrational (a bubble).
"If physical shortages are not the main explanation for the behaviour of Auckland's housing market, then building more houses will not necessarily change the market," Stephens said.
"I seriously doubt that the supply measures recently enacted by the Government will really change much. Prices are being driven by buyer expectations of future capital gain - we know this because prices have become divorced from rents.
"The key to changing the trajectory of prices is to change buyer expectations."