Auckland housing goes bananas

By Leith van Onselen

Please find above a cracking interview between Interest.co.nz’s Gareth Vaughan and John Bolton, principal of Squirrel Mortgage Brokers, discussing the Auckland housing market.

As readers might recall, last week Auckland’s stratified median house price hit $600,000 for the first ever time, according to the Real Estate Institute of New Zealand, following 16% price growth in the year to March 2013 (see below chart).

ScreenHunter_23 Apr. 11 13.34

According to the above Interest.co.nz interview, all the elements of a house price bubble appear to be in play in Auckland, including:

1) Perceived housing shortgage:

“I think the story that there’s a shortage of property in Auckland is pretty much believed by everyone now. That creates a pretty compelling story around why prices are going up. What has happened with vendors is with the shortage of listings they’re basically getting promised the earth by (real estate) agents and I guess with what they’ve seen in the market over the last three to six months that has certainly been the reality. So the expectations for vendors are very high.”

“Buyers have probably been through a process over the last year of constantly having to revise their expectations. Either they’re buying a lesser property or they’re having to borrow more. And I guess they’ve accepted that because they’ve believed the underlying story”…

“With everything going to auction pretty much the buyer’s going to be the nutter in the room… We’ve got plenty of clients that are going to four or five auctions and just not even getting close to being able to buy property.”

2) Negatively geared investors increasingly chasing capital growth over yield:

“It has given them [investors] enough leverage to drop back into the market and buy another one. [But] I’m surprised how low the yields are generally on the properties that investors are buying. We’re seeing investors buying with 5% yields, which [are] cashflow negative”…

“That traditional kiwi investor who is all about capital growth and not too focused on cashflow is back in the market”…

“I’m probably getting a little bit more nervous about this market now, and with my property investor hat on, with the exposure that I’ve got, I’m actually probably starting to de-risk at the moment because my feel is that this is actually becoming a riskier market and that gets me a bit more nervous”

3) Hot Asian money:

“We particularly see it with a lot of young Asians that have been over here studying at some point, and have probably got residency and are not necessarily working, getting large deposits out of in particular China. So as far as any surveys are concerned it’s actually New Zealand residents that are buying but the money’s very much coming from overseas”…

“I had a young woman this week who was looking to buy a property in Onehunga for around NZ$900,000. She was in a position to put a NZ$350k deposit down.”

“She wasn’t working so initial thought was ‘well, sorry’ that ain’t going to work. She clearly couldn’t borrow that much money. But the reality is she had another NZ$600,000 on term deposit which we could use as additional security. And so for the bank that became a no-brainer because essentially there was enough cash there to take out the entire mortgage. That’s actually surprisingly common. We see that a lot with our younger Asian buyers. Very large deposits coming from overseas, support from family, and that’s allowing them to buy up property in Auckland.”

As noted last week, the Auckland housing situation highlights the need for the central government to redouble efforts to free-up land supply and planning constraints, as well as the RBNZ to implement macroprudential controls on mortgage lending.

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Comments

  1. The Government and the RBNZ are going to do…nothing… about this., They will leave it to the market (then it’s not ‘their fault’!). And here’s how the market is going to deal with it….The Gold price of the two preceding days, without any bounce – for a decade or two- and huge financial distress for the New Zealand public.

    • Yeah, I am coming to that conclusion too. National probably has seen the light about the disastrous effects of urban planning, not just on housing affordability but on productivity and economic growth and inequality and social mobility and debt and a whole host of significant factors.

      But they are probably now planning to introduce the needed reforms in about 2025, after there has been a massive crash for which their reforms could not be blamed, and after a Labour-Greens coalition has demonstrated the absolute futility of all the boilerplate “Keynesian” and Statist and “post resouce use economy” follies.

      • Surely National would only delay the necessary reforms if they thought making land supply competitive would lead to a financial crisis of negative equity, failed banks etc.

        Does the unconventional economist have an opinion on the short term impact of freeing up the supply of residential land? Boom or Bust or some combination?

        • The bust is going to happen anyway; the reforms, if enacted, will with 100% certainly, be blamed. After all, “everyone knows NZ is different” and no crash was going to come unless our government did something stupid out of the ordinary.

  2. GunnamattaMEMBER

    Good video! Macrobusiness could be doing that….

    We could get a mortgage broker to sit in the studio and pass an honest comment on what is happening in Australian cities…..

    • Agreed,

      I would like to see a few more talking head videos from you bloggers other than the very seldom spot on ‘The Business’.

  3. People say to me, “But how can you know that the RBNZ will do nothing?” The answer is – Because we are where we are, now! It’s been obvious to anyone who cares to take note where this was all headed. And people like me only get see what we do. The RBNZ has had its finger on massive amount of corroborating data for months…no, over a year… now, and has chosen to both do nothing, and allow it to transpire (it wouldn’t have done, otherwise). So why would they change a policy setting that is deliberate, and that is obviously working? They won’t…..

    • The RBNZ CANNOT DO ANYTHING.

      This is like a medical misadventure. The victim has cancer – a house price bubble. The politicians have refused to use surgery to deal with it. The Central bankers have only “chemotherapy” (higher interest rates) in their tool kit. They will kill the patient if they kill the cancer.

      The urban land price inflation already DOES kill off the victim’s essential organs – i.e. the “tradables sector” of the economy. High enough interest rates to kill the bubble will only kill the already-weakened essential organs even more rapidly.

      The “surgery” is a drastic reform of the whole approach to supply of land for urban development. The victim was immune to the housing bubble cancer back when council planners existed to bend over backwards to provide the infrastructure that kept the land supply “competitive”; not to render it “anti competitive”. If we were going to remove this cancer-prevention factor from our lifestyle, we needed to impose another one, such as compulsory acquisition of land, to replace it.

      Don Brash correctly complained when governor of the RBNZ back in the 1990’s, that his job was being rendered increasingly impossible by the rising inelasticity of housing supply.

      • Freeing up the land supply pipeline is the least damaging approach to treating the cancer.

        Even if all restrictions were magically lifted today the impact would be quite gradual and take several years. Developers are not suddenly going to build tens of thousands of houses – even if they had the capacity. There is a lot more caution about as people will be alert to the likely impact of increasing supply.

        That would allow a more gradual process of adjustment than any of the alternatives.

        In reality the restrictions will only be lifted gradually step by step and thus the adjustment to a ‘non constrained’ approach will be even more gradual.

        Freeing up supply will be the least damaging approach.

        • This is what I believe. That sensible policies to ‘surgically’ treat the housing bubble ‘cancer’ would take many years to correct. That it would take time for the new cheaper houses to come onto the market and change peoples house price expectations.

          That a house building boom is genuine economic growth when there is a housing shortage whereas a house price boom is false growth.

          But if there is a sudden crash in house prices causing pain from negative equity etc. Then NZ has possibilities for growth from the Reserve Bank lowering interest rates and bringing down the exchange rate.

          Doing nothing when you know better is extremely cynical politics in my view.

          • Is this cynical view of politics also the problem? We no longer expect politicians to do their job of serving the public.

            Is that why the infrastructure is no longer provided so that land supply is kept “competitive”?

          • Brendon, the hidden reason that Councils prefer “intensification” to greenfields development EVEN THOUGH greenfields developers make a net contribution to the Council’s coffers in “impact fees” and “infrastructure levies”, is that Councils STILL gouge developers when they do “intensification”, on the pretext that the existing infrastructure “needs expansion because of the intensification”.

            The argument we hear all the time from the advocates of growth containment, to the effect that “we need to better utilise existing infrastructure”, is an argument made in very bad faith. Developers are STILL gouged when they do this kind of development…..!!!!!!

            The Council loves this rather than greenfields development because they are DOUBLE DIPPING. The infrastructure that is already there in established areas, has for decades had local taxes paid to allegedly fund it, including maintenance and upgrading. But the Council likes to get a windfall source of funds from developers of intensification projects, so they can spend the TAXES on “other things”.

          • Thanks for the replies Phil. I am still struggling through the problem. It seems that the cynical people who think the ‘government is the problem not the solution’ have no answers while the left have created the problem with all this contained development crap.

            The answer is some properly constructed public institutions like Texan municipality districts that ensure residential land competition.

            These sort of reforms will never happen if the public have lost faith in politicians and public institutions.

  4. Terrible news, and I concur with Janet, it’s deliberate policy from all our policy makers. Leith, in addition to supply and macro reforms, nz must also massively curb immigration, like aus it is way too high.

    • According to Statistics NZ the pop growth rate for NZ for the 12 months to June 2012 was 0.6%. Less than half the rate pop growth rate of AUS.

      • thats good news Patrician, lets hope it continues. but the devil is always in the detail for stats, maybe its partly due to the huge number of kiwis heading overseas so they can return with enough cash to buy a studio apartment within Len Brown’s urban ring to raise their kids. There are also tonnes of temp residents buying up ppty. Its not the only problem, but certainly a major contributer. If we could combine NZ first immigration policies, Green neg gearing policies and foreigner purchase restriction policies, labour cap gain policies and National’s land release policies then we would have affordable property within a few years. But govts dont govern for the people anymore, cerainly not in NZ so it wont happen. The only hope is for global events to overtake us – fingers crossed on this one.

      • There was a census in NZ on 5 March this year so a more detailed analysis may not be far away.

      • I Did some research on this recently – it appears there is about 40,000 a month leaving New Zealand and a similar replacement rate.

        For a nation of 4 million that’s a massive shift in demographics.

        • Quite right. But let’s be honest, the 40,000 out mostly went to Australia, and they were the 40,000 that came in, 2 years ago. We are just a bus-stop on the way to Oz, because that’s the way the rules work. If Oz stops free entry by ‘Kiwis’, then just imagine what our unemployment rate would be; what your unemployment rate wouldn’t be!

  5. The western world is priming the property market for the next tax base. We have friends staying with us from Britain, they own a villa in Portugal and a house in Florida. Both properties have fallen dramatically in value yet the property taxes have increased by more than 50% over 3 years. They are now tax payers in 3 countries but only have a vote in one country.
    Absentee landlords with no vote very nice, keep them coming will be the thought of any government.

    • Yes – nothing like a broad based land tax ( or higher general rates) in NSW being paid by the residents of China.

      Though we may find a lot of houses well protected from Sea Dragons and bad luck coming onto the market.

  6. One wonders if the RBA is hoping for a little bit of this sort of madness to take over from the slowing mining boom. Let’s hope not. Yesterday, Sweeper wondered why the RBA had paused on their way to ZIRP. If it helps prevent situations like this, that has to be a good thing.

  7. Housing bears might need to raise the white flag. Not sure there is much going for NZ industry, but housing speculation follows poor monetary policy on top of bad planning policy.

    The new motto might have to be ‘don’t sell now’.

    Why should Australia be any different? Hard to see how it is. I’m anti speculation on established housing – but let’s face it we might as well be shouting at the waves.

  8. Is there a shortage of property in Auckland or a shortage of affordable property?

    There seemed to be For Sale signs every where when I was in Auckland a month ago.

    • You need to first explain what you mean by shortage.

      A) Is there one ordinary house for each ordinary family – NO

      B) Can a very rich person purchase a dwelling – YES

    • There is a mass of “For Sale” signs up in Auckland. And now Christchurch too. I spoke to a chap there yesterday who has put his property in an inner suburb up for sale because “it looks like the market is turning”. Take those observations for whatever value they have.