The following overview of the housing market by Westpac chief economist Dominick Stephens was released in a Westpac Home Truths newsletter.
Going vertical
In financial market parlance, Auckland house prices are “going vertical”.
According to the REINZ’s House Price Index, Auckland house prices rose 5.3% in May (seasonally adjusted), and are now 25.6% up on a year ago – the highest rate since 1994.
Meanwhile, the same index suggested that prices were broadly flat or fell in May across the remainder of New Zealand.
Annual house price inflation outside of Auckland varied from 0.3% in Christchurch to 5.4% in the North Island ex Wellington and Auckland.
Stunningly, this REINZ data suggests that since January 2011 the relative price of houses between Auckland and Wellington has blown out by 69%.
That is, if two houses had the same value in 2011, the Auckland house would now be worth 1.69 times the Wellington house.
Where to from here?
There have been three important policy developments recently that might have implications for the housing market: the RBNZ has loosened its LVR policy for most of New Zealand, but has introduced new lending restrictions in Auckland; the Government will apply capital gains tax to any house resold within two years except the family home; and the RBNZ has reduced interest rates.
Without doubt, this mix of policy developments is positive for housing markets outside of Auckland. Combined with the anecdotes we are hearing about “Auckland money” arriving in Hamilton, Tauranga and Whangarei, we would not be surprised to see some degree of pickup in housing markets around many parts of New Zealand over the remainder of this year.
Christchurch may well be a different story – the inevitable lift in housing supply has reduced the pace of increase in both house prices and rents in the Garden City.
We suspect that Christchurch house price inflation will continue to underperform prices in the likes of Wellington and Hamilton for years to come, until something resembling the pre-quake price relativities between those cities is restored.
For Auckland there has been a different mix of policy developments. However, we suspect the impact of lower mortgage rates will outweigh the tighter lending restrictions and tax changes.
However, in a situation like this market sentiment will count for a lot, and can be unpredictable.
So while our tentative view is that the Auckland market will keep powering on over the remainder of this year, we will be watching the data very closely over the next few months for confirmation.
A wild ride
Last month we suggested that the blow-out between Auckland house prices and the remainder may be due to expectations of Auckland’s housing becoming denser, which have driven up the perceived value of land.
This view fits with key characteristics of the market much better than other common views – most of the price increase has been in the land, not the houses; the price of land is going up much faster in the centre than in the periphery or in other regions of New Zealand; and while house prices are rising, rents are very subdued.
If our view is correct, the key implication is that land values in established districts of Auckland will keep rising so long as expectations of population intensification remain germane.
Those expectations are being driven by the buoyant economy, strong population growth, the global trend for economies to concentrate on big cities, and the recent strong drive by Government and council to facilitate intensification.
None of those looks likely to wane this year.
However, the other implication is that Auckland land values could go into reverse if expectations of intensification are disappointed by the likes of an economic downturn or a slowdown in population growth.
In fact, we expect both of those things will come to pass around 2017, and consequently we are forecasting a period of declining house prices at that time.
This is quite different to the prediction that would be made by those who believe that a physical shortage of supply is the main driver of Auckland of house prices.
They would argue that house prices will only fall once actual physical supply is put in place.
We beg to differ – house prices hinge on expectations, and could fall before physical supply actually comes on line.
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