The buyers are back: Auckland's housing market


Last month I wrote about the way in which data for Auckland were suggesting that the pause in Auckland’s housing market following the October introduction of an IRD number requirement had ended. The March data confirm this. After rising on average by 5.5% in February Auckland sales prices rose another 4.3% in March. Sales were down 12% from March 2015 and this goes to show that what caused the pause was not sellers placing properties on the market but buyers holding off. Now they are back.

Looking to the near future, are there any strong candidates for causing the market to plateau? If you adhere to the theory that there is a seven year cycle in the Auckland housing market then things have peaked. But it pays to note that what often causes the cycle to peak is the economy growing strongly, producing inflationary pressures, and interest rates rising strongly. Yet the opposite is happening.

The Reserve Bank cut interest rates in March and is likely to do so again late in April and in May. They will act because the outlook for world growth has got marginally worse and because gauges of inflationary pressure in the NZ economy remain low – low as in not responding to the 1.25% worth of interest rate cuts this past year.

Could a migration collapse occur? Unlikely given the firmly growing NZ economy compared with the rest of the world, the political and social stability in NZ compared with many other countries, and the absence now of a boom in the Australian mining sector.

Is an NZ recession imminent? No-one is forecasting it and that is hardly surprising considering the strength from construction and most non-dairy exports.

One candidate could be a strengthening of the Reserve Bank’s credit controls. If the pace of Auckland house price rises again approaches 20% we are likely to see the RB attempt to slow credit demand by raising the minimum investor deposit requirement from 30% to 50% and perhaps consider maximum loan to income ratios.

That latter tool focussing on income levels however is not highly likely as it would hit hardest amongst young home buyers rather than investors. What is more likely is that the 30% rule will be applied to the rest of the country because that is where price rises in some regions are close to or even above 20% per annum.

But could an expansion of what we call macroprudential regulations actually cause the housing market to go in reverse? The chances do not seem high because there is a long queue of people wanting to buy property in Auckland. Their buying would simply be delayed by perhaps a few months. Plus it pays to remember that not everyone buys with a large mortgage.

A rule in the regions however could have more impact because outside of a very small number of locations including Central Otago Lakes there is not the combination of strong population growth, existing property shortage, and land shortage which helps drive Auckland prices.

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Sounds like the lines which were being touted in 2005 and 2006. We live in the provinces. We have a good whack of equity in our property and will be paid off in a few years. In essence my outlook is very bearish but either way with almost no other household debt we are covered either way.

Contrast this with a first home buyer in Auckland - the majority of whom are stuffed. Residential houses are a non-productive investment and combined with appalling house prices/average wage metrics, society will pay the price in several ways. I am picking the day of reckoning to be within the next couple of years but in any instance it will come.

“What is more likely is that the 30% rule will be applied to the rest of the country because that is where price rises in some regions are close to or even above 20% per annum”.

All this means is some regional areas are suffering the same insanity. What should be kept in mind is the majority of the privately held land outside of major cities is tied up in farming which is not doing too well at present. Put another way - this is a significant amount of land in NZ which is only worth what it can produce in crops or live stock.

“Interested in finding out more about home loans?”

This is another reason I take the writer’s overly optimistic outlook with a grain of salt. Higher prices = more debt.