Auckland Council chief economist suggests 'considerable speculative element' to recent house price rises

Auckland Council chief economist suggests 'considerable speculative element' to recent house price rises

Auckland Council's chief economist suggests there has been a "considerable speculative element" to recent house price rises in the region.

In his latest Auckland Economic Quarterly newsletter, Geoff Cooper said "one of the most intriguing aspects" of Auckland’s housing market was that rental inflation remained contained.

"While median house prices in the three months to September were 10.8% higher than the same period of 2012, rents rose just 3.4% over the same period and there is no sign, as yet, that rental inflation is gaining momentum," he said.

Cooper said it was "not entirely clear why" there was not more pressure on rents, given that Auckland had seen a sustained shortfall in housing supply relative to population growth.

"It does suggest that there has been a considerable speculative element to the recent run-up in house price growth," he said.

"It’s also possible that recent sales activity has added to the rental stock, which would have taken some pressure off rents."

Auckland has a perceived shortage of about 30,000 houses and the council has recently signed a Housing Accord with the Government, which is aimed at providing 39,000 new houses in the region over a three-year period. The first proposed development sites under this initiative were announced recently.

The Reserve Bank's concerned about rapidly rising house prices, particularly in Auckland and has, from the start of this month, introduced "speed limits" on high loan-to-value lending.

Cooper said it was "too early" to see the impact of the LVR restrictions on house price growth and lending.

He said that annual house price growth in the region had eased back since May, but the data suggested that this reflected an increase in listings, and more listings in lower price brackets, rather than a reduction in demand.

"While there is considerable variability month to month, sales volumes have remained strong."

Cooper said the undersupply of housing facing Auckland could have been much worse were it not for the significant slowdown in population growth revealed in the new census numbers.

"Estimates of household formation will be revised down along with estimates of pent-up demand for housing. Nevertheless, supply-side constraints remain a major problem for Auckland’s housing market," he said.

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Why haven't rent gone up?  As a suggestion, rents get paid out of income...who out there is getting a wage rise that meets other living cost rises, let alone being able to afford a rent increase.
Whereas property purchases are paid with borrowed money... low interest has kept repayments down...for now.

ostrich is on to it - Auckland's unemployment levels are rising faster than the national average - hence as you note higher wage rates are hardly likely to meet the rising non-discretionary spending costs. 

No more money in pocket = less to "discretionary" spend when "essentials" have sucked out more.  So I wonder looking at the sectors that are shrinking, and some must be. How much are they shrinking and whats the profitability and employment impact?  I look around stores like Briscoes, and Kmart and see hardly any staff with constant sales.  Automated, self use till at Countdown, saves on checkout ppls wages, min wages...
However I do think there is a % whom are doing well if not better and can afford to borrow to accumulate a paper profit, done with real debt....all goes well for them til they also suffer.  In the meantime in-equality is getting worse....
Im not so sure that interest rates will rise by much and for long.....there isnt the flesh let alone fat in the system IMHO....take more out and the patient dies....

Rubbish - theres tons of room for increased rent to occur.
The average rental inhabited by 3 people 20 years ago now contains 6 or 7, sometimes two families.
Rents largely mirror CPI from my experience and thats about where theyre sitting now - no change from whats been seen previously.

Slum landlord conditions hardly fit with the clean green image NZ wishes to peddle to the incoming tourist and the purchasers of our food exports.

Hmmmm... a very needy high maintenance investment. 
I must declare the government securities sitting in the NZDMO registry investor A/C make little call upon my time and yet serve the government well in as much as they can dish out the accommodation supplement today knowing they have willing partners supporting their cause that they can pay back further down the track..

... not alot of maintenance needed if you own XERO or Pacific Edge stock , either .... and they rocket up 10 to 50 % everyday .....
The only thing you require is a Kiwi made Brown's Broom at the standby  ... ... incase the stocks crash & burn , ....  and you need to sweep up the ashes ....

Too true and they have the full faith and credit of the Federal Reserve's failure to taper backing them by association with their US traded cohorts - a comforting outlook to say the least.

Rents have gone up....   
His charts show Rental inflation at around 3-4% per annum.
Here is an old herald article
Of course there is a speculative element to the property cycle....  just as there is an investment element....just as there is a "shelter" element....
Mkts have an ability to discount the future....
Maybe rents go up alot more next yr..???

Mkts have an ability to discount the future....
Not always of course but very often they do. 
All round the world markets seem to be playing chicken with central bankers; with only 3 scenarios for it all to unfold that I can imagine:
1) Central bankers fold, and let general inflation catch up with asset prices.
2) Interest rates go up; resulting in asset bubbles popping, and considerable defaults and bankruptcies, along with another recession.
3) Interest rates stay super low for many years, allowing even modest inflation to catch up with asset prices.
It seems the markets are betting on 1 or 3; with an assumption that the authorities can't live with option 2, and would move to 1 or 3 to avoid it.

Yes I thought the latest wage growth figures were interesting. Barely net of inflation. Discretionary spending going nowhere fast. Renters aren't in a position to pay rent increases unless they have no choice (aka Christchurch). Household formation will stay subdued if wages and economy aren't coming to the party.

I've been puzzling about why prices are going up but rents haven't. Conclusion I have come to is that there is (and has been for some time) a significant shift in housing wealth going on in Auckland. Continuing surge in ownership towards multiple property owners / investors who are soaking up a greater proportion of stock which they then rent out. The PIs are competing with first home buyers (not to mention overseas investors and immigrants) driving up prices but at the same time increasing availability of rental stock, therefore rents are flat-lining.  

Both the ability to pay rents and service a mortgage have a direct relationship to income.  As long as interest rates keep falling house prices can go up independent of incomes as the amount to service a mortgage stays the same.

Problem in NZ is you cant fix your interest rate for any decent length of time.  

The property ponzi scheme relies on ever decreasing interest rates.  
If the tide turns there will be carnage.  

Agree totally JesseP.
What is surprising is why this is a topic now. This has been the case in the Auckland market at least for as long as I can remember.
To me the only thing thats going to drive up rent is house prices flatlining or falling, until then capital gain is proving more than sufficient increased wealth.

I agree JesseP. This is a logical explanation. It also ties in well with other trends we are seeing in NZ at present. Namely the rich get richer.. the poor get.. their benefits cut off. 

To use a Ron Weasley term from Harry Potter ... Bloody Hell, who on earth  is the Auckland Councils Chief Economist ?
Quite apart from the question as to why ratepayers need an economist , he should be fired for incompetence.
Has this individual not heard of Opportunity Cost in economics ? 
Did he not consider the opportunity cost of renting VS borrowing and buying a home?
Basic arithmetic would have told him that someone paying rent of $600 a week for a four bed house on the North Shore , he could buy a four bed house for up to  $623,000. for the same instalment
If he has the 20% deposit he can go up to nearly $700,000 
This comparative  formula applies to any rental level with mortage rates at 4,99 %
In light of this , why anyone would want to rent any of Aucklands overpriced rental properties ?

Opportunity Cost is normally attributable to those that forgo one investment return for another - usually a higher but more risky return. Renters and debtors hardly qualify.

So someone nearer the corridors of power has noted the situation.
All they have to do now is to research WHY?....
and then send the message up the chain!
Will it really come down to speculation?
Or is it partly the need for new immigrants to be housed or to earn some income that does not require language skills?
Or are we just a soft touch for overseas based speccys?

I'm Delighted (and not a little Amazed) to realise that Awkland CC employs an Economist! 
Perhaps, perchance and perforce, this 'ere Economist would consent to answer a number of Economical Questions?
We'd all be Agog (or, possibly, Gog and Magog) to listen to the Answers.
Why don't I start the ball rolling with a couple?

  • Given that ACC levies development taxes (contributions, levies, charges etc) at early points in an average land development cycle, what is the economic effect of such taxes, what is an average of such costs per lot, and upon whom does this tax burden principally fall?
  • Given that ACC has a RUB, and that the Productivity Commission estimates the rural-to-urban land price differential at about 10 for Auckland, what is the economic effect of the RUB in terms of land prices, capital gains, taxes gained or avoided, what is an average of such effects per lot, and upon whom does this burden principally fall?
  • (I lied).  How many times does 58 go into 32 and what is there over?

I'm sure other common taters will have much more intelligent questions....

I had originally posted this as part comment to another article, but this portion is more relevant here:

It has to be remembered that total return on investment is a combination of rental return and capital growth and that they are inversely related to each other and normally follow higher yield/lower capital growth or lower yield/higher capital growth, with the other two combinations of high yield/high capital growth and low yield/low capital growth uncommon.

In Auckland’s case it’s a combination of 1) capital growth speculation based on a shortage of supply, and any rent can be a happy by product for many of the investors, and 2) non-resident purchasers whose motivation to purchase could just be to use the property as a vehicle to park some cash rather than in their own financially more risky country.

In fact, having any tenant for these type of investors can be a hassle given they cause wear and tear (fair or otherwise). This is why in speculative high capital growth cities (which are also cities that have restrictive zoning policies) you can get an increasingly high vacancy rate, not because the tenants cannot afford the rent, but because the owners prefer to keep the property vacant to preserve its condition.

On top of this, tenants can mitigate this increasing lack of supply by increasing (elasticity) the numbers of people in existing rental properties, couples house sharing, children staying at home longer, leaving for Aussie etc. This flattens the rent curve as prices still increase.

In cities that have less restrictive land zoning polices (can build at the rate of demand) and medium multiples around 3, mortgage payments are generally lower than rental payments. Thus rental yields as a percentage of amount invested is higher than in restrictive land zone cities (low supply like Auckland).

And because housing in less restrictive land zoning policy cities is supplied at the rate of demand, capital growth is not much more than the rate of inflation. These two factors discourage speculation and encourage longer term rental investment.

Spot on!

It has to be remembered that total return on investment is a combination of rental return and capital growth and that they are inversely related to each other and normally follow higher yield/lower capital growth or lower yield/higher capital growth, with the other two combinations of high yield/high capital growth and low yield/low capital growth uncommon.
If capital gain is the requirement there are many more cost efficient vehicles offering US government support without the extortionate costs associated with property buy/sell transactions. E-Mini S&P futures come to mind.

It;s a great time to sell property in Auckland.

With an incredibly generous tax regime for housing (claim the losses against your tax, but the capital gains are tax-free), plus the RB keeping interest rates at ultra-stimulatory levels for years, it is hardly surprising that property is going along nicely, porked by the government.
However, since most of the money going into it is borrowed from overseas, & all going into non-productive assets, it can only lead to tears. 
In other countries, not in Godzone, of course.....

PI's get your heads out of the sand the moment factors swing so much in your favour you are starting to believe your own BS !! ...but you always have...
The rental market is TOTALLY DIFFERENT  to the sales market ...renters are usually younger with less income and way less access to the "cheap munny" around ....whether it be from  local or overseas sources, that both overseas and local PI's have access too. 
For all the SKs, Big Daddy's et al out there, who are so convinced that you can keep pushing up rents exponentially, you are deluded and I hope you have planned your medium term cash flow, taking into account that interest rates could rise and rents could stabilise (talking about the Awklund market here)  
With the rental and sales market completely out of touch most property only returns a gross 4% pa,  most PI's are relying on the "greater fool" theory, in that they are hoping a greater fool will come along in a certain time frame and pay their "perceived" market price and not a penny less !!
Property is a fantastic investment, don't get me wrong, its just there are way better opportunities currently outside Awklund .......    

Or maybe it's because there's only a housing shortage in the most desirable locations - which are generally owner occupier suburbs. Whereas in places with lots of renters (like where most new housing accord locations are) have no house price increases (according to the REINZ breakdowns they sadly no longer provide), and much higher yields.
Auckland region contains such diverse housing markets that generalisations are meaningless - I bet they will increase supply where no one wants to live and then wonder why prices in other areas don't respond. I reckon 200,000 new houses in Weymouth would have 0% effect on Ponsonby house prices.

Absolutely. What I have been saying to the supply-siders for a long time. They don't seem to understand. The "demand" is in the inner suburbs. And they are full.

We now have all the intelligentsia and cognoscenti running around creating (or attempting to) additional supply out in Weymouth and Drury and Pukekohe. Fools

iconocalst - would you say that the unitary plan as it was originally was on the right track? 
Where does inner end and outer begin? And can outer become inner? Serious questions.

The Unitary plan will fail simply because it fails to understand land economics.

There is a direct correlation between fringe land and CBD in all cities that goes from cheaper on the fringe to dearer as you get into the CBD, and this is regardless of whether the city is has restrictive zoning policies like Auckland, or less restrictive like Houston.

The point being it is the urban fringe that sets the value going back in. High prices on the fringe will mean higher prices going back in. The urban fringe is the only area that prices, on a like for like basis can be cheaper as they can start off at or near to the fringe/rural land price.

This can only happen if it is not restricted because as soon as it is restricted then in can be controlled and rationed which is exactly what the unitary plan does. It has gone from a RUB to a MUL to special housing areas, which is the release of land getting smaller and smaller, which makes it easy for land bankers to anticipate which land is up next and buy ahead. This also gives council the greatest amount of control (read development levies, value uplift etc). That’s why land at Hobsonville for townhouse development is priced at $1,400,000 per ha raw land cost.

If fringe land is this price then it isn’t going to get cheaper going toward the CBD. More housing is not the same as more affordable housing on a like for like basis. Buyers with a budget and a hoped for lifestyle can either ‘drive to qualify’, ie move until they find the lifestyle that fits the budget, or alter their lifestyle to suit their budget.

There is a huge difference from living in a town house (fringe or CBD) because that is all you can afford, to living in a townhouse because that is your preferred lifestyle.

Building these fringe townhouses is going to be like building Minis at Rolls Royce prices (on a $m2 basis), when the market is asking for Toyotas at a Toyota price, and at the same time giving all rust buckets everywhere else a leg up as well.

NZ land and building systems need to go the same way as our car assembly systems went.

A good test would be if the central government bought up a large belt of rural land ajoining the current fringe urban land under some compulsory arrangement (as per motorways etc) and onsold it at rural cost plus expenses for social housing and low income private dwellings, bypassing the council. Would it reset prices from the outside in, starting with the neighbouring suburbs and spanking the landbankers or would it make no difference because no one wanted to live there at any price. I used to think the former but there have been sections for sale in west Auckland and Waiheke that are in the $100-150,000 price bracket for years and are still for sale.
How low would section prices need to go and how many sold to make a significant difference ie a surplus and not just get soaked up and onsold at current prices.

A better test would be to allow Municipal Utility Districts MUD’s a la Texas style. Texas GDP is around 8%, with a huge influx of new immigrants, and yet no rise in house prices. As fast as they come, as fast they build.

Getting Govt. involved has never made anything cheaper unless it is in the form of a subsidy. The key to Texas success (and is the same system used by Toyota) is to be able to development at the rate of demand. This is a well understood production method.

This allows sections quickly to be bought to the market, and just as importantly be switched of if demand falls. No boom no bust.

and what about all the empty sections throughout the US that have roads and services but havnt been built on, so no busts? not so sure.
"getting govn" and of course here we arrive at it, a myopic political outlook....

Steven what number Groundhog day is it 400, 800, more? I have heard you make these claims over a year ago, give us some more detail if you are going to rubbish other people's ideas with unsubstantiated criticism like, "what about all the empty sections throughout the US that have roads and services but havnt been built on, so no busts? not so sure"

As an aside there's some cool pics here of land subdivided decades ago and never built on:

Thanks Bob interesting pictures. Amazing the different configurations that developers try for their subdivisions.
Not sure what you can conclude from 20 or so pictures and half of them were of completed developments. If you fly over any city you will see half completed housing developments. Of course some developments will fail for a whole range of reasons, poor financial planning, miss reading the market etc. Does that mean we shouldn't have any new housing development?

I suggested something similiar for Christchurch/Canterbury. The difficulty is as a one off controlled by one set of politicians and bureacrats the potential cost savings that ought to go towards re establishing affordable housing will get redirected elsewhere. As Dale says our governments don't have a good history in efficiently providing entrepreneurial type services. Politicians will be tempted to provide 'slightly' less affordable new housing and subsidise other pet projects. Or the bureacrats will through delays, waste, empire building and laziness negate the possibility of providing affordable housing. But given enough collective will affordable housing could be provided this way.

In Canterbury other than earthquake munted land with expensive engineering build costs nothing within 40 kms of Christchurch is under $150 K. I am surprised that Auckland where we are repeatedly informed is the most expensive place in the country would have land this cheap.

That's what the sprawl proponents keep saying - but I don't see it happening in reality. I don't know anyone looking for accomodation who starts looking at the cheapest and moves 'in' until they find something that matches their budget. Everyone starts at more expensive than they can afford and go cheaper 'till they find somehting that meets their budget.

When I have bought a house, I have
A. Gone to the bank found out my budget.
B. Thought about what I need -number of bedrooms and so on.
C. Thought about where I want to live, close to family, work, shops/restaurants, recreation -the beach, forest parks.
If I cannot compromise on A and B then thats means compromising on how close I am to C.
The more unaffordable the housing is the more you end up traveling to get C. Well that is certainly what is happening in Christchurch/ Canterbury. Look at where people are rebuilding there houses after the earthquake. It is not in unaffordable Christchurch.

Exactly. You try to get as close to C as your budget allows. The price ripples out from desirable locations - cheap prices don't flow in from the edges. You won't tend to spend half your budget on a cheap place with crap school zone etc. where you don't want to live just because it's cheaper than the place you do want to live (and can afford).

Bob, you have missed the point entirely.

Yes I mentioned you look from your desired lifestyle (dream) area out. Brendon’s point about CHCH is if it was cheaper to buy closer into CHCH most people would have chosen to buy closer in.

The artificially high prices forced them out, because they chose lifestyle (eg three bedroom stand-alone dwelling on 500m2 at their budget) over the convenience of living closer in an area that they would not afford on a like for like comparison.

By the number of people that chose to move, this indicates that the their old lifestyle of stand-alone dwelling etc. preferences the other option of staying at the old location and only being able afford a smaller dwelling/property.

In this regard the artificially high price of properties in CHCH is forcing residents to locate not only to the fringe of CHCH but to Rolleston, Ashburton, Rangiora etc., that is, it is encouraging sprawl well beyond the normal limits.

And yes the cost of buying, holding and developing the fringe land does have an impact on the price going back into the CBD, the lower the price on the fringe the lower the price is in the CBD. The slope of the gradient curve is the same regardless for cities with or without restrictive zoning. So just as it is cheaper to buy a house in the suburbs in Houston, so it is also cheaper to buy a townhouse/apartment in the CDB, relative to NZ.

What point?
That if cheap free standing car-dependant sprawl houses are allowed to proliferate without any impediment whatsoever then house prices 30km's away will drop and there will be less traffic congestion and pollution?

Dale Smith, Brendon, Bob, WTF, Machiavelli.
You can intellectualise RUB's and MUD's and MUL's all you like, but I dont think it begins to solve the social re-structuring that is happening in Auckland. Re-structuring that is manifesting itself in the segmentation of society by the establishment of enclaves which aren't driven by the normal desire for a desirable address. RUB's, MUD's and MUL's assume a common characteristic of homogeneiety or the homogeneous distribution of demand whereas the "actual" demand that's occurring is heterogeneous. The answers will not be found in "land economics" but will be found in "behavioural economics"
An unspoken characteristic of one group of new migrants is their overt display of unseemly wealth which is not a natural new zealand trait

recent arrival into new zealand

same car, same crash, same recent arrival
described by witnesses as an Asian man aged between 30 and 50

Driving a $330,000 car? What sort of residential dwelling do you think this recent arrival acquired or intends to acquire? Where?

If you watch Greenstone "Motorway Patrol" it is in your face the number of young 20 year olds driving  Lamborghinis, Maseratis and Ferraris, heading over the Harbour Bridge to Northcote and Birkenhead and Takapuna.
Question - Is this happening in Christchurch?

An unspoken characteristic of one group of new migrants is their overt display of unseemly wealth which is not a natural new zealand trait
Very much a characteristic visible on the streets of Monaco during the summer months.

Iconoclast- Yes good point.

Land economies can be viewed as the system, and the behavioural economies as how we react to, and game that system. Politicians come up with the rules and what you see in the market is our reaction to that.

So in NZ we have a set of rules that makes land purchase, consenting, developing very expensive, our income/cost of financing caps what we can afford (even if that means sacrificing other things), builders have to build the dwelling for a price that is no more than this affordable price including the cost of the section (that’s why our housing is basic).

So our system gives us expensive poor quality housing compared to some other cities/states/countries that have systems that give more affordable better quality housing.

But what you are pointing out, there are some people that because of their wealth do not have to behave within the system.

Because we are the promoters of Global free trade, and want countries to open their doors to us, we think we have to do the same.

NZ in reality is a hard sell property wise; there are so many other countries that are offering better property deals for investors.

If we think we have a problem (or the start of one) with foreign investors/new immigrants buying property, we have not seen anything yet if they really take an interest in us.

As I follow the gyrations of the "lever-pullers" jaw-boning the market into believing something is being done and the problem will be solved by building 3,000 new dwellings a year on the outskirts of auckland, I cant help wondering what happens if the lot are bought up by the inscrutables and mothballed. Build away me buckos.

Iconoclast I haven't noticed any super rich new arrivals with $300, 000 cars in Christchurch. Plenty of new migrants but they seem be Filopino construction workers waiting beside the road to be picked up for work or some down on his luck Irish worker doing a shift at Bunnings type migrants. I'd say Christchurch is the opposite to Monaco at the moment.

I agree most of the price pressure is from demand but what is the motive for the demand? Are people borrowing huge amounts for lifestyle reasons or because they are expecting future price rises. If prices were expected to stay static or fall would people borrow as much?  Would the banks lend as much? If lifestyle desirability was the primary factor static prices or falls shouldn't make a difference. I would suggest if expectations were for price drops rather than rises than "lifestyle", demand would mostly evaporate. I think Dominick Stephens from Westpac was right that prices are mostly driven by future expectations.

I covered this speculative element plus more here on .

Supply/demand is not about absolute numbers but relative numbers.

What I meant about lifestyle is how you want to live. EG if you want a 3 bedroom stand alone home on a 500m2 and you have x dollars, then you drive outwards from a certain point (CBD/beachfront/amenities etc) until you find that property at that price.

The other way is to change your lifestyle (how you want to live) to fit the x dollars ie stay in the CBD but can only afford a two bedroom apartment.

Whatever x dollars you spend, you would like to be able to achieve your desired lifestyle (whether you are low or high income) at the best possible price.

Evidence from overseas indicates that whatever type of $ value you are after, you pay far more than you need to in NZ.

I agree.....the Q is then how to solve it safely.  ie collapsing the market would be messy.

VERY good comment.
If you can almost afford ponsonby, but not quite - are you then going to start looking in Weymouth?
I dont even know where Whymouth is!