The Auckland house market is "primed to soften" and the twin attack on it from the Government and the Reserve Bank may prove to be the "turning point", ANZ economists say.
In the ANZ's latest Property Focus, chief economist Cameron Bagrie and senior economist Mark Smith estimate that, based on current sales patterns, about 5000 house sales a year in Auckland could be affected by the RBNZ's 70% loan-to-value restrictions.
"...The Auckland market is primed to soften.
"Prices have risen by a third in two years and by two-thirds in five years. That’s a pretty stretched base to keep accelerating off, especially with major sources of buyer 'demand' now being targeted," they say.
"At the very least, sentiment will be negatively affected and sentiment is a crucial element of any asset market.
"Ultimately, we suspect this will mark a turning point for the Auckland housing market."
Bagrie and Smith say it is "telling" that there have been such a breadth of policy responses to the Auckland housing market in such a short space of time.
"We can point to the obvious financial stability justification (RBNZ) or politics (housing affordability, foreign buyers, the debate on whether we need a capital gains tax etc) but let’s not forget the currency too, with Auckland property one factor keeping the OCR higher than would otherwise be the case.
"Given commodity price falls, New Zealand needs a lower currency and only interest rate cuts will do that. You can’t simply dangle the possibility of cuts if you really want the currency down. Auckland property was a big hurdle standing between the Reserve Bank and a lower OCR."
But the two economists say that financial stability and housing affordability concerns are not the only issues.
"Given its size and importance, any action aimed at the Auckland property market has real implications for the broader economy and monetary policy.
"New Zealand is often perceived as a three-shot wonder growth-wise: Auckland housing, Christchurch’s rebuild, and dairying.
"Strictly speaking we think the story is broader than those alone, but each is still significant. Right now, dairying is facing a cash squeeze that will last until 2017. Christchurch’s rebuild is ongoing but the boost is waning, and with the housing market cooling and rents starting to recede in the region, the inflationary risk here is turning into a deflationary one. And now we have the Auckland property market under a multi-pronged policymaker attack.
"The airplane is progressively losing engines."
Bagrie and Smith say they suspect there is enough economic muscle across the wider economy to cope with "these additional headwinds".
"...But it adds to the shifting risk profile. Importantly, the RBNZ must be cognisant of economic risks around their central projection when it comes to setting policy."
In terms of the nitty gritty of the new measures, the two economists say there is a lot of uncertainty surrounding the precise application, "and there are a number of moving parts".
"REINZ figures suggest there were around 30,000 residential sales in the Auckland region over the past 12 months. Assuming a similar number of sales over the next 12 months and that the sales share to investors remains at 40%, this equates to around 12,000 sales per annum. Assuming Auckland sales have similar LVR characteristics as the nationwide average, slightly more than 5000 Auckland sales per year could potentially be impacted by this 70% LVR restriction, which is around 17% of total Auckland sales volumes. Whilst tight inventory levels, booming net immigration and low mortgage interest rates are likely to ensure still strong demand for Auckland property, such a sizeable potential impact is nothing to be sneezed at."
The economists believe that as the new initiatives don’t apply until October 1 this may "distort behaviour in the meantime".
"Some sellers may rush to get out while the going is good. Some would-be investors may also try to skirt the borrowing restrictions by getting in now.
"But we expect to see behavioural shifts straight away. The RBNZ has already made it clear that it expects banks to work within the spirit of the changes immediately and we are sure it will be monitoring bank behaviour closely. On net, then, it seems likely the changes could tilt the balance in favour of additional supply over coming months, further reinforcing the impact on sentiment and house price expectations. We will be paying particularly close attention to the number of property listings over the coming months."
But Bagrie and Smith say that "more active investor demand management" won’t fix the real shortfall of houses relative to Auckland’s population.
"However, the subdued nature of rental increases in Auckland (CPI rents were up just 2.6% over the 12 months to March) tells us the supply shortage thesis is not the only game in town; demand has also been fuelled by unrealistic expectations of ongoing price increases. Rental yields in Auckland (sub 4%) remain well below current (and historically low) mortgage interest rates. Ironically, higher rents could help push annual CPI inflation closer to the midpoint of the inflation target."
50 Comments
Not too sure this will happen. There are people out there including first home buyers who are willing to borrow large amounts of money because they think they are missing out on something. It's funny how people think paying interest to a bank is different from paying rent to a landlord. I do not see any distinction between the two. In fact it can be cheaper to pay rent when landlords are only getting a 2 to 3% return. If property values drop in Auckland there will be a few people wishing they had waited for it to happen. Especially if they have borrowed around the $800 to $900k as reported.
"It's funny how people think paying interest to a bank is different from paying rent to a landlord. I do not see any distinction between the two. In fact it can be cheaper to pay rent when landlords are only getting a 2 to 3% return. "
Keep that thought and Landlords will be extremely happy if there are more ppl like you.
"Landlords in Auckland are currently subsiding their tenants lifestyle"
LOL. Chortle. Tears of laughter. Fall to floor. choke...........
Now I have recovered my self let me apologise. I had never realised that is why they did it. I thought it was all about the capital gain and other perfectly fine ways to make a living.
"Given commodity price falls, New Zealand needs a lower currency and only interest rate cuts will do that".
I'd like to see what evidence they used to base that on. I need to export more, so a lower currency would help me, but I just don't believe there is long term data to support this assertion. There is very little correlation between the two over the last 100 years, except in the relatively recent circumstances where The Fed, set on an unchanging and diminishing course by Alan Greenspan in the 90s, has artificially suppressed interest rates, creating low yield on everything, and produced the global carry trade as a result, which is not sustainable. This has only been Fed policy for about 20 years , but I suppose those Economists were youngsters then, and haven't experienced a significant reversal in interest rate trends in their professional careers.
Bank employee Economists tend to project current trends to ridiculous future levels. Rich Economists predict that black swan events will occur and position for them.
Is anyone scared by these graphs?: http://www.tradingeconomics.com/new-zealand/interest-rate
http://www.tradingeconomics.com/new-zealand/currency
Select the date range 1985 to 2015. Once you've imagined yourself paying 20% mortgage rates again, you might also notice that over that period you'll see the opposite has happened, as interest rates have fallen, the NZD has risen.
This article is a list of factors that might lead to a prediction. But it is a long way short of indentifying something that actually has happened following the change of rules.
The sort of thing I am looking for might be that some chinese real estate guys tell us their group is newly reluctant to buy. It might be sharp rise in mortgagee sales of overextended property investors. BAnk lending demand may sharply change in profile. Some actual sign is what we seek.
Of course it is highly possible that no change emerges at all. The recent government move was gentle indeed, and wisely was not intended to create a big pop of the bubble. A gentle hiss will be disruptive enough. So you might expect there to be another two or three tightening up announcements in the pipeline to come. Only once we see what actually happens as a result of the first step.
Been looking for that. Not heard it yet. But it's only been 10 days.
Anybody hearing anything ??????
I went to two auctions in the last month. The first was before the RBNZ restrictions and I walked away thinking that everyone was mental! It was this house, nicely renovated but nothing special: http://rwremuera.co.nz/auckland-city/meadowbank/1290403/
It is next door to a big special housing area but the area generally is up and coming. The place went for $1.717M and it felt a bit frenzied. It ain't Remuera so really felt a bit bonkers...
Fast forward 3 weeks and I went to an auction on the same street, bigger site, older house with potential; (and some limitations). it was absolutely bucketing rain down. Auction stalled at $1.2M and got passed in. They want $1.55 but it ain't going to happen. Chinese couple arrived late, bid $1.15 after much interpreting, refused to go further: http://www.trademe.co.nz/880798884 - still for sale, good luck with the 1.55M target fellas.
The mood was very sombre and downbeat in the latter and none of the madness of the first auction. Now my sample is very small and not very scientific but maybe there's just been enough negative newsflow to make buyers think twice or maybe property 2 isn't perfect enough to drive interest.
My view is anyone who is an "investor" must be smokin' crack if they think there are huge capital gains to be made on the above two properties or any others in Auckland. Yield of 3% before costs. It feels like a poor investment and that there is plenty of downside risk.
Macbet, unfortunately you've picked two very different properties with which to make your assertions. When properties have development potential there is much more that contributes to their value than the average property; those two sites are very different in terms of access, drainage, potential configuration, outlook, existing dwelling, etc, etc
I have been looking to buy in Papamoa for 4 months. Aucklander's have been coming down and paying ridiculous prices for property - because they have 'cashed up'. I attended an auction last week. RV for the house was $620 k . The house had the wow factor that some are sucked into 'i.e. pool, landscaping' but it was dated inside. It was also NOT code compliant. Aucklander's bid and bought at $813K. This is in a street that has never had a house sale over high 6's - and it was in no way the best house in the street. All I can say is they will regret that big time in 2 years time and a sucker is born every day. However, the craziness is already starting to affect provinces and people really should do their homework first.
David , someone needs to remind these economists of some hard truths that don't appear in economic textbooks when it comes to this mess we are in , and are reasons the current levels of prices will stay so awfully high
1) Chippes are demanding and getting $50 /hour ( more than a young Doctor at the North shore hospital )
2) The costs of subdivision are horrendous , with Auckland council clipping the ticket for between $100,000 and $150,000 in fees taxes , levies , water connections etc . This is simply added onto the land price of each subdivision. The price will not come down while this rort continues
3) The flood of migrants ( who to get in need to be wealthy or skilled ) is showing no signs of slowing , this increases demand .
4) The ability of Asians to buy the whole city is scary. Auckland does not even have half a million homes (it has 437k residential dwellings ) There something like three times ( 15,000,000 people) more USD$ millionaires in Asia than our entire population . If each one bought just one Auckland house for his family , they could buy up Auckland 35 times over . Auckland would simply need to be as big as he whole North Island to accommodate so many Asian migrants
5) Once a level of pricing has been achieved it seldom falls off a cliff without some major traumatic event , instead it falls by 5 or 10% from the highs .
6) Money is the cheapest it has been since World War II that's 3 generations ago
If dairy prices fall , not one of the above will show signs of moving , the economy will simply slow
Two groups of owners in a "softening" market.
Owner-occupiers who can already afford to service their mortgage. A lowering of the market price of their property doesn't change the serviceability of their mortgage. They might be hacked off about going underwater and their bank might get a bit nervous about their exposure but there is no reason to rush for the exits.
Investors who are only in it for capital gain (excludes long-term investors who are getting adequate return on the historic prices they paid for their properties). The only ones who have to bail when prices go static or fall are the ones who are capitalising interest payments in anticipation of massive price rises. The others who are servicing any loans may now want to exit but not at any price. In Auckland there are always enough new entrants into the owner-occupier category to take up investor-owned property that is released back to the market. And any minor fall in prices will just make it a little easier for a few more people to exit renting and get into owning. As long as sellers are patient they won't have to take a bath.
So any correction will be mild. On the other hand if we went into a sudden deep recession and people were losing their jobs or the RBNZ had to double the OCR overnight, that would be a different story.
I should add I am talking specifically about Auckland. Both the RBNZ and government moves may affect the composition of the property owners but they don't affect the basic supply-demand equation: X number of people want to live in Auckland but there are only Y houses. So someone already exists to buy a house that is up for sale and the chances are good they can pay the current rate.
"In Auckland there are always enough new entrants into the owner-occupier category to take up investor-owned property that is released back to the market"
Not sure about that. If 40%+ of buyers go on strike, you can be sure the new entrants will start thinking twice. Then if prices drop why not wait for a further drop. Despite all the howling about lack of supply it looks like a market driven by investors, speculators and sentiment.
New entrants to property ownership will be in no particular order:
- internal and foreign immigrants and NZers returning home
- people inheriting or winning money
- people getting better jobs (higher income)
- households at the margin of ownership who can buy on any dip
- property insiders who will judge better than the amateurs when a bargain is on the table
- developers with intensification plans
As long as the number of dwellings is woefully short of the number needed there will be a level of support that stops the market from falling out of bed. Right now pretty well everyone has pegged both the government and Auckland Council as being completely unwilling to build the necessary infrastructure (roads, pipes, parks, schools, hospitals) to support a growing population. Even if demand "softens" it is still obvious that as long as people want to live in Auckland house prices will stay high.
The thing we don't often talk about is the new build rate. It's pathetic given the demand. The Housing Accord was supposed to fast-track new builds and that has been an embarrassing failure. The reason is simple. The price rises are all about land. Lots more people could afford to build a house if the land underneath wasn't so expensive. The construction industry has limited itself to the section of the market that can afford $475K sections which is why it is not belting away.
It's human nature to hold on to an asset that is dropping in value and hope for the best. Normally that is a silly thing to do but in Auckland its a good bet. As I say in the face of softening demand (by which I mean softening of demand to become the owner - there is no weakening of demand to live in Auckland) the best strategy for property owners is to sit tight and wait for the next round of price hikes. Or to be very patient when selling.I would expect that any softening in property prices would be felt first in a thinning of sales volumes then in a decline in new building. Neither will put any downward pressure on prices.
So sure you could see a dip of 5-10% and maybe an oscillation up and down around the current prices but nothing that would make Auckland housing affordable.
Boatman, just reading your post and wondering about point (4). The assumption here is that all 15m millionaires in Asia would like to buy a piece of property or live / migrate to NZ. This is not true. On the contrary, statistics from NZ immigration showed that only 10-11% of immigrants are Asian origin while around 80% are from UK & Europe. From personal network too, I know that close to 40% of all Asia PR visa holders to NZ eventually decide that NZ is NOT for them and decide to return back home.
Indeed
Also, have always thought the monthly stats figures under the heading of "departures" from NZ to AU, presented as "kiwis" departing in fact comprise a reasonable percentage of those as Asia PR visa holders, having achieved PR status use NZ as a stepping-stone into Australia
In other words, the statistics are questionable
Landlords are not subsidising tenants, landlords are being subsidised by low interest rates.
If the rates where to go back to normal most landlords would go broke.
From what i see around nz the standard of Landlords their properties is appalling.
Warning tho your number is up by 2018 when their will be an over supply of quality properties.
Then who is going to subsidise your shack, gone are your tenants to new quality properties be warned the day is coming.
Dairy prices already well down.
Christchurch rents and prices have already hit a wall, with rents falling, and as is sales on the rise indicating most final claims will be mopped up with cash and not actual construction.
Last domino to fall Auckland house prices and immigration.
My thought is that when the actual flag referenda come about, that Nationalism will be front and centre and therefore the migration issue and what has happened in Auckland will be drawn to the public's attention, hence with a flagging economy (excuse the pun) and possible election defeat, the untouchable immigration issue may be addressed by a government that promised no new taxes and no CGT.
Actually having just rented a selection of my investment properties in Christchurch, I can tell you rents have never been higher, and there is huge demand for decent homes close to town. No softening in my world, but I hear there is in the satellite towns as people realize the traffic nightmare has beaten them.
"Softening" could be slower price rises, static prices or easing of prices. I read recently that the definition of a housing price correction is a 10% drop in prices. That would take Auckland from being severely unaffordable to......well.......severely unaffordable.
It seems no-one remembers what happened in Auckland after the '87 sharemarket crash. The real estate market bottomed in October 1991, after a nasty prolonged fall. The basic outcome was the the higher they were, the harder they fell, up to 30% for high-end eastern suburbs. Properties up to $200k hardly fell. I know because I was at Valuation NZ and it was our job to analyse what was happening and revalue the city. In fact we had a regression formula derived from the sales evidence that worked a treat.
I don't think anyone is discounting the carnage that would occur if there was a repeat of '87.
We are musing the likely path for the market where there are a couple of tweaks to demand management and where possibly the speculators have found the top of the market. Some expect carnage; I expect something way softer.
Fertile ground for those with analytical minds :-)
steven: Which shares are based on crazy P/Es, oh wise one. Can you name maybe three specific entities whose shares are overvalued based on "less oil". Should be easy, there are hundreds of thousands of listed companies to choose from.
Having named three we can track to see how right you were. Maybe sell our holdings and down the track buy you a beer for helping us save all that money.
regards
QE, money printing, weakening currency was described recently by some old wise bugger on cnbc as a way for low growth countries to steal growth off higher growth countries. The fact is there are a lot more low growth, big sized countries (US, JP, EP) in the world than high growth as present, and NZ's currency is going to be elevated for a long time while these larger economies continue to 'steal' our growth.
@Boatman, two people I know since uni days bought several very expensive properties in Auckland, both are wealthy Chinese business men with NZ PR. They are taking their wealth out of China and parked in NZ while waiting for the economic tide in the US to turn. Once the US economy and housing are back on its feet - that money will simply flow out of NZ.
Easy Chinese bank credits credit in china that credit shows up in a Chinese bank in nz.
Then a Chinese or Asian person goes along with a bag and collects cash interest .50%
Then goes to auction with bag and gives it to the person that will except his paper money for a REAL hard asset.
One country against another can conqueror it via the issue of cheap debt credit while the kiwi tries to play the game right.
Sorry kiwi you missed out new game in town.
NZ now run by Beijing.
I am Chinese, I would like to know where can I get .50% interest rate? I bought an apartment in China two years ago, interest rate was 6.75%, up to today, interest rate have been floating around between 5.5-6.75% in China.
Also, to secure a loan in China, banks need security, they don't take overseas property as security, you will have to purchase china local property to get the loan.
One needs to get to the core of the issue...
That is lack of vision, foresight and planning for the good of the deceived kiwi.
Deception abounds hidden in the back ground.
The British stole the lands off the Maori
The Chinese will do the same but not with guns, mirrors and wet blankets, but with created digital money sourced from China/Asia then digitally moved around until it finds a suitable home.
This form is far less violent think about it no wars no deaths, just the death of the kiwi.
Lets focus on the substance:
1. The reality is NZ is a spec of sand in a big desert. Assuming IMF don't give the Chinese SDR's in JAN16, the #1 determinant of NZ asset prices is $USD interest rates ∴ the second NAIRU & Broad Money/Divisia increase is the second the $NZD & carry trade crashes. No need for the RBNZ to do any heavy lifting (& will they need the ammo). QE game of thrones ends.
2. Fonterra payout is the worst in its history in real terms ∴ $NZD fiat is not worth >$US0.70; Unemployment will rise, Net migration will fall as skilled & mobile vote with their feet (those with the gold make the rules), smart foreign money seeks better returns, $NZD cannot support its interest rate premium - a wall of AKL properties will hit the market & demand dissipates, until a weak $NZD feeds back into export income, which could take a while given the inverse relationship commodity prices have with the $USD.
Yes, I'm starting to question just how low the NZD will go. I too thought 70c likely but now I'm thinking 40-50c maybe. These things tend to go for longer and further than most people expect. The NZD is only held up by the money flowing in to bid up Auckland property as far as I can tell. The carry trade is reversing (my evidence being the NZD is now down to 72c from 86c last July - that's a real 16% pay cut so far folks).
The US Federal Reserve are fans of "optimal control" which is a fancy way of saying you switch higher interest rates on later but fast and hard when you do. Sort of like an on off thermostat. So they expect to push interest rates up 2% once they start. They have momentum in house building which is the big swing sector - you don't need to build houses when times are hard but everyone wants to when their prospects improve. If they really get momentum going they will probably need higher interest rates than they expect to stop it. It's a slow process.
Agree re $NZD - Grexit issue is underestimated - don't listen to anyone saying it is not serious ⇒ Europe cannot let it happen (its a bluff). Not only does it undermine the whole EU (& ends ECB), but Greece will exit NATO & an alliance with Russia has the Russian fleet (proxy China) departing Crimea & sitting in the Med (look at the South China sea) ⇒ Contagion cannot help but happen, Flight to safety - noone wants to be holding $NZD's. My advice is to buy Gold & call options on the VIX now.
re Jobs - NZ is a great place to live, but not everyone lives on a "Lord of the Rings" set - when jobs dissipate, people have to assess their individual options.
http://davidstockmanscontracorner.com/praying-for-graccident-would-trig…
AJ - music to deaf ears - Most of the foreign house buyers bought at the top of the USD/NZD currency curve and have already taken a significant haircut on that one - because the Renmimbi is/was tied to the USD - while China has only just freed up its currency controls in the past 6 months - you can imagine all the players who moved suitcases of cash out prior to that, one suitcase at a time, probably copped a "hefty" haircut on getting it out and converting it - and I do mean hefty
And still it goes on - as in this transaction this week by a fly-in fly-out buyer
http://www.nzherald.co.nz/property/news/article.cfm?c_id=8&objectid=114…
Nary a worry in the world
They are here for the long haul
Not so sure about this: any Renminbi weakness will just rotate their economy back to export growth which is what they want after their infrastructure splurge. China is spending vast foreign reserves maintaining the peg; noone knows how much is into Gold (to become the alternative reserve currency to $USD & SDR). POBC debasement of Renminbi against $USD is more bearish for $USD!. albeit China have their own bubbles - ChiNext P/E's > 130! China still the biggest contributor to world growth - they want an artificially low currency to export the deflation.
http://www.zerohedge.com/news/2015-05-26/why-china-so-desperate-blow-mo…
I think that Kumbel has nailed the issue: in the sadly missed Hugh Pavletich's formulation:
'If the land price is wrong, everything's wrong'.
There is a wonderful counterfactual happening right here in Canterbury.
The beclowned City Council is still holding its hand out for DC's, still reluctant to break the land bankers by anything as conventional as a swingeing rates differential (land tax).
Whereas Selwyn DC, just over the boundary, is offering the following inducements to industrial settlers:
- No DC's http://www.izone.org.nz/why-izone/no-development-contributions/
- a nifty Rates Comparator site http://www.izone.org.nz/why-izone/rates-calculator/
- a workforce just across the road (walking/cycling distance for youse uoung fit personages): http://www.izone.org.nz/the-development/work-life-balance/
- a factory that is starting to churn out factory-built houses which (I'm holding their advert in my shaky old hands as I type) are selling as house plus land for $395K in Halswell. http://concision.co.nz/
And the result of all this?
- CCC is stagnating as residents and businesses see better deals outside its boundaries
- the increased Supply has lead to a distinct levelling off in Prices (whodathunk?) http://www.stuff.co.nz/life-style/home-property/67577484/property-value…
- the transfer (particularly of businesses) creates its own localised demands and further shifts - a domino effect. Once established, a business needs hard economic reasons to move anywhere else. This could easily be Hamilton's niche with respect to Auckland, in just the same way that Rolleston and IZone have eaten Christchurch's lunch.
We welcome your comments below. If you are not already registered, please register to comment.
Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.