By Gareth Vaughan
The Auckland housing market will slow over the next 12 months with prices potentially even falling, says New Zealand Institute of Economic Research (NZIER) principal economist Shamubeel Eaqub.
Eaqub told interest.co.nz in a Double Shot interview Auckland housing doesn't make sense. He also says the Auckland Accord, designed to address a shortage of houses, could lead to an over supply, and outlines three key issues he'd like to see debated during the election campaign.
Eaqub says trying to forecast house prices has been a mug's game.
"But everything that we see on the fundamentals is that Auckland housing does not make sense relative to incomes, relative to rents, and the downside is in the order of up to 30%."
Yesterday's March quarter Consumer Price Index noted a 2% year-on-year rise in rents, with Canterbury up 4.9% and Auckland up 2.3%.
The Auckland housing market, which had been New Zealand's hot spot for house price inflation, seems to be at a turning point, Eaqub suggests.
"It may be too early to judge whether it's from the (Reserve Bank's) LVR policy, or it's other things like rising interest rates or banks becoming more cautious," says Eaqub.
"But it feels like the (Auckland) housing market, which had been just rising very, very strongly and almost without any stop, is now taking a breather. And with the Reserve Bank raising interest rates, it feels like there are some big concerns around whether house prices can keep rising in Auckland. And they may even start to fall."
'A huge amount of speculation'
Outside of Auckland and Canterbury Eaqub says he expects New Zealand house prices to do "practically nothing" this year, continuing the trend of the past three years.
"So real house prices outside of Auckland and Canterbury, they're fine, they haven't really done much. In Canterbury a lot depends on whether the supply comes on and there's a lot of uncertainty around that."
"In Auckland there is a huge amount of speculation that's driving up house prices. And I say this because when we look at what's happening with the cost of housing through rent versus the cost of houses, rents haven't really done much. They're very subdued, growing at a gradual pace, but house prices were rising at a very fast pace," says Eaqub.
"That means that there's no shortage of actual houses, physical houses, but a shortage of investment properties. And that dynamic can turn very quickly. And when you run out of investors, house prices can't sustain the levels they have achieved in the last few years. So our prediction is that over the next 12 months we are going to see housing markets slow in Auckland, but it's hard to tell by how much."
The latest Quotable Value figures show an annual increase in residential property values of 14.3% for Auckland in the year to March. And the latest Real Estate Institute of New Zealand figures show a record high median price for Auckland of $637,000 in March, a rise of 13.3% year-on-year. Recent data has led to a confusing picture of what's going on in the housing market as outlined here by David Hargreaves.
QV said: “The LVR speed limits and the Reserve Bank signalling further interest rate hikes is likely to be contributing to a levelling off in the growth of property values in Auckland and for the first time in more than two years we are seeing a decrease in some areas of that market.”
'Short-term migration impact'
Immigration, seen as a major influence on the Auckland housing market, is running strong. Statistics New Zealand's latest figures show a seasonally adjusted net migrant gain of 3,500 in February 2014, which was the highest monthly gain since April 2003.
Eaqub, however, says migration only causes short-term dislocations if housing supply doesn't keep pace.
"Those disruptions can usually only last 12 to 18 months. We tend to supply houses one way or the other. So the migration flows can give you a little bit of cyclicality around house prices, but the fundamentals really have to be around incomes and rental price," says Eaqub. "And those things have detached to a level that are quite frightening."
"And what we have seen in the provinces of New Zealand is very similar to what we saw in the US or in Spain where, once the investors ran out, those marginal buyers, speculative buyers, prices go back to a level that's more sustainable. And in Auckland that's really the big concern. That even with immigration the prices don't stack up because it is getting so expensive now that a small shock can really make a big change on house prices."
His views on immigration's impact on the housing market contrast starkly with those of former Reserve Bank chairman and senior fellow at public policy research institute Motu, Arthur Grimes. Grimes last year co-authored a report that said it takes up to nine years for housing supply to catch up to demand after an unusually strong population increase.
What a perfect storm for the Auckland housing market would look like
Meanwhile, Eaqub says the "perfect storm" for the Auckland housing market would be increasing supply, rising interest rates, and an economic shock along the lines of a slowdown in China that hits Auckland jobs.
"A more likely scenario if we don't have the kind of fairly risky scenario, would be that house prices don't do anything for a period of say 10 years," says Eaqub.
Eaqub and NZIER have also been critical of the Government and Auckland Council's plan to build 39,000 houses over three years to solve a perceived housing shortage in the City of Sails. Basically he argues this is many more houses than needed. He says the Auckland Accord targets relied on assumptions that were wrong.
"People were assuming that 2.6 people lived per household in Auckland. That's just not true. Auckland's young. We tend to live in bigger households, more like 3.1 people per household. It sounds like a small difference, but that can shave off tens of thousands from your estimates of shortage," says Eaqub.
"But the real kicker has been that the population growth in Auckland hasn't been nearly as strong as the previous estimate suggested. With the latest census we've seen that we were growing at a much slower rate in terms of household formation."
He does acknowledge, however, there have been pressures on housing supply.
"But the shortage is probably in the order of 5,000 to 7,000 rather than the order of 30,000."
And if the Housing Accord meets its targets, "we're talking about moving from a small under supply to an over supply of about 10,000-12,000."
'Education system not working in the provinces'
With it being election year, Eaqub says he'd like to see good discussion and debate on superannuation, health and especially education.
"I've been doing a lot of work in regions over the last three to six months, and one of the things that I find is this massive disparity of economic opportunity and outcomes in many of our provinces. And the biggest failing, and the biggest weakness is our education system is not making people work ready and future ready for the changing economy," says Eaqub.
"And it has to be about education, it has to be about our young people. Because if we can't create those opportunities for young people, we are going to have this divide across New Zealand of the haves in the urban centres and the have nots in the provinces. And I don't think that's the future of New Zealand. We must be far more inclusive than that."
In the video Eaqub also talks about yesterday's Consumer Price Index, the "opaque" tool of the Reserve Bank's loan-to-value ratio (LVR) restrictions, and NZIER's outlook for the Official Cash Rate and mortgage rates.