3 reasons Auckland’s housing market went into overdrive


#1

Late last year we started to see a spike in activity in the Auckland housing market in terms of both turnover and prices. It looks like a key driving force behind this was a rush of new investors entering the market, probably encouraged by three key things.

The first was a change in sentiment regarding New Zealand interest rates – away from expecting further rises beyond the 1% seen over 2014 toward decreases and many years of low rates. The second was almost certainly what some people operating in the financial markets call the “capitulation moment”. This is the point in an asset price cycle when those people who have been holding off and holding off expecting prices to fall before buying lose faith in their view after being repeatedly wrong and jump in to make their purchase. They capitulate.

Third, some people, generally non-traditional investors, got tired of feeling that they were missing out on seemingly easy money and started buying. Perhaps people in this last group, being quite inexperienced, started attending seminars and enrolling in investment courses for five thousand dollars a course and more.

These people were suffering from what our teenagers suffer – FOMO, the fear of missing out. It is not the actual doing of a thing which FOMO acts upon, but getting rid of a feeling of regret from not doing the thing. In this way most critics of the property market are wrong when they say it is driven by greed. Instead, late in the cycle at least, prices get a last strong shot upward from people driven by a desire to avoid feeling in a year’s time the regret they feel now for not doing something they now think might be easy.

Investing in property of course is not an easy thing to do and in my experience many people underestimate the costs, the management of tenants, and the time which might be involved. Personally I recommend using a property manager for those with little experience in the business or little stomach for being a landlord.

So, if these three factors kicked the Auckland housing market into a higher gear late last year, are they still operating? The low interest rate expectations factor certainly is, to the point where the Reserve Bank is quite concerned about the way in which their cutting of interest rates to reflect inflation near zero is stimulating the market. This raises bank exposures should the unthinkable happen and an outbreak of foot and mouth arrive to collapse our economy and depress prices by 40%.

Capitulation of investors who have been holding off is probably still happening, though many are looking outside of Auckland to make their purchase, seeking better yields and smaller mortgages in markets where there is strong potential for a catch-up in prices after years of lagging behind Auckland.

But the third factor of inexperienced non-investors being driven by FOMO to buy anything has probably been killed off by the measures introduced to slow the Auckland housing market. These include the 30% minimum deposit and two year capital gains tax bright line test. This is a positive development because it is generally these people each cycle who end up being burnt when the pace of price gains slows down and the actual value of the property they signed up for off the plan is not what they thought.

Does this mean the Auckland market has peaked? In terms of the pace of price rise I would say yes. But given the still worsening shortage of property and the very strong population growth prices are still likely to keep rising over the next three years – at a slower pace, else the Reserve Bank will simply take the deposit requirement to 50%, or 75%.