BNZ’s Chief Economist Tony Alexander reflects on a few factors to be aware of if you’re looking at investing in the Auckland property market.
Back in the Weekly Overview of November 1, 2012, I produced a list entitled, 19 Reasons Why Auckland House Prices Will Keep Rising. Since then prices on average have risen 65% and while we see minimal chance of another 65% rise over the next four years, it still looks like prices will rise further.
Recently, I gave presentations to a few hundred home buyers and investors at functions in Takapuna and Ellerslie and made reference to a list of 15 factors which people should make themselves aware of if they are looking at the Auckland property market. The full list was reproduced in the Weekly Overview of September 15. But here are a few of the points.
Underbuilding – since the mid-2000s, not enough houses have been built in Auckland to keep up with population growth. That situation is likely to continue for perhaps another decade, especially given the way 60% of the net migration inflow to New Zealand boosts Auckland’s population and the average annual net migration gain appears to be settling at higher levels than before.
Auckland’s economy will outperform most of the rest of the country, especially as technology sectors deepen and Auckland becomes our agglomeration of talented free thinking people from diversified backgrounds.
There is a backlog of buyers wanting a house in Auckland. Some delayed their purchase from 2007 to 2011 because of high interest rates, then the GFC and forecasts of collapsing prices. Others have had to save and build a higher deposit because of rising prices and LVR rules. And as each week goes by, this pool of unsatisfied buyers gets bigger and bigger.
Interest rates have settled at structurally lower levels and because most people purchase property using borrowed money, the cost of a purchase has declined – but this decline has been permanently factored into the prices people are willing (and initially able) to pay.
Baby Boomers are seeking assets which yield higher than the now very low returns on bank deposits and bonds. They want to hold these assets for a retirement period expected to last a lot longer than for previous generations.
Vital resources needed to build more houses are in short supply. This includes not just builders, materials and land, but finance. Post-GFC, banks globally cannot take the sort of lending risks which they could before. Funds available for property development are limited and unlike the pre-GFC period, there is not a large number of minimally regulated finance companies able to step into the breach and undertake that lending.
It means nothing that Auckland’s average house price is now $1 million. Unlike a barrel of oil, no two houses are the same and the average price is merely a statistical measure, rather than the actual price of Auckland houses. The $1 million average price will not present any sort of psychological barrier to further price changes.
Chinese buyers have eased off their purchases following the introduction of the 40% minimum deposit requirement. But there are millions of people wanting to get assets off the Chinese mainland and eventually these buyers will come.
More generally, on both occasions in the past when LVR rules were introduced/tightened, the market went quiet for three to four months and then took off again. We expect the same this time around.
The Reserve Bank is almost certain to introduce further controls on bank lending. A rise in the 40% minimum investor deposit to 50% is probable. Introduction of a debt to income regime is virtually certain. Thus, the incentive for buyers is to move sooner rather than later – which has been essentially our key point in debate regarding the Auckland housing market for seven years now.
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