Is the Auckland land bubble about to burst?


By Leith van Onselen

New Zealand’s National Business Review (NBR) has posted an interesting article today on how New Zealand’s Australian-owned banks have halted lending for projects on development land, which risks sending developers to the wall and causing a “freefall in prices over the next two years”:

Some of the country’s private finance companies say the banks literally pulled the plug six months ago making it difficult, if not impossible, to get major residential projects off the ground.

The consequences are likely to be dire for landowners who have development resource consents for big-scale projects but no capital or way of leveraging their investment. Holding costs are likely to become a major issue forcing many to sell at bargain prices.

But it could be good for the housing crisis as established developers will come back into the market and build new houses at reasonable prices on land they have been able to buy at bargain prices…

The Australian-owned trading banks are overweight in property lending following an apartment boom in New South Wales and Victoria and have been clipped by regulations across the ditch forcing their parent companies to provide less capital to their New Zealand operations. Some of the New Zealand banks have to repay their parent organisations billions of dollars over the next five years…

If a developer can’t borrow on land it leads to questions of its true worth and property experts believe the days of asking $30 million plus for substantial blocks of land with development resource consents are gone.

Land values are expected to halve over the next two to three years. It’s understood one developer with a swathe of South Auckland development land rejected a $39 million last year, now can’t borrow against the land, and the property value has plunged.

One private finance company that declined to be named says over the next two years as more developers can’t get leverage on their land there will be a massive drop in prices across Auckland. Even experienced developers are being affected.

“No one is touching land. If a speculator buys land, gets resource consents and then tries to flick it on they are stuffed. There are no buyers.”

If a large number of developments fall over, then surely it will also further reduce Auckland dwelling construction, which is already failing to keep up with population growth (immigration).

Could Auckland be facing a growing housing shortage alongside a deflating land market? I guess time will tell.

About the author
Leith van Onselen is Chief Economist at the MB Fund and MB Super. He is also a co-founder of MacroBusiness. Leith has previously worked at the Australian Treasury, Victorian Treasury and Goldman Sachs.