Strong population growth, the continuing housing shortage, a residential construction boom and record low interest rates… So why is the Auckland housing market flatlining? We talk to valuations expert Gordon Edginton about the reasons behind the cooling market and whether it’s here to stay.
The Auckland market has remained very slow this year, with low monthly sales numbers and flat pricing. In fact, sales volumes are down 30% and prices have actually contracted about 2% on average across the region – although wide variations are evident depending on suburb and property type.
This cooling of the housing market has continued since the end of 2016. Thanks to the Reserve Bank’s LVR restrictions, more prudent lending from banks and wary investor activity stemming from a loss of confidence, the market has entered a phase of uncertainty. This has been compounded by the change of Government and new policy initiatives aimed at curbing speculative behaviour and making property a less attractive investment vehicle.
But the unusual thing is that this slow market activity flies in the face of the many positive factors evident in the New Zealand economy. Strong population growth, booming residential construction, favourable financial conditions (particularly record low interest rates) and the ongoing housing shortage should all drive a continued property boom.
So where are all the buyers? And why isn’t the market continuing its upward trajectory? Gordon believes the key reason is lack of investor demand.
“Market weakness is sentiment based. Affordability issues are weighing heavily on the market and the speculative nature of past behaviour has gone. With prices already high and capital gain non-existent over the last two years, investors are not diving into the market as they previously were. Obviously, high prices and very low rental income returns are not attractive for investment.”
Government policies have also made property less desirable as an investment. These include tax changes such as the extension of the Bright Line test to five years (where any gain on resale in that time is taxed), and the introduction of the foreign buyer ban. Further tax changes are also planned for next year, with rules around tax deductions for property investors being introduced and a potential capital gains tax on the horizon. Additionally, as Gordon says, property investment is becoming increasingly difficult.
“There are more onerous requirements on landlords to improve their rental housing, and tenancy agreements are becoming stacked in favour of the renter. As a result, housing is losing its lustre as an investment choice. With capital gain gone over the next three years, future house price inflation expected to be very moderate, and any tax advantages being eliminated, where is the attraction to invest in property?”
On the other side of the coin, there is still pent up demand from first home buyers to enter the market. Tight LVR restrictions are preventing many would-be home owners from being able to purchase, as they must raise a sizeable deposit (20% of purchase price) to be in a position to buy. But Gordon says help is on the way in this area.
“On Auckland’s current median price of $850,000, first home buyers require a deposit of $170,000 – which is not easy to find! However the LVR handbrake will be loosened soon, with the RBNZ announcing that banks can lend up to 20% of new mortgage loans to owner-occupiers who have deposits of less than 20%, as well as a slight increase in lending capability to investors. Furthermore, there is a significant amount of new housing being built which should fall under the $850,000 median price tag.”
This swathe in new housing is in the medium density sector – made up of terraced homes, duplexes and units or apartments. Annual residential dwelling consents in Auckland hit over 12,000 this year and multiple dwellings made up half that number – up significantly from earlier years when less than 2,000 multiple dwellings were typically consented. Dwelling consents are expected to rise to 17,000 a year over the next five years with multi-unit dwellings making up 60% of this.
“Auckland is finally starting to build enough homes to eat into the reported housing shortage and these are of a type that’s affordable to a greater section of the market. More intensive housing is a game changer for affordability. It requires a much smaller land footprint and larger multi-unit complexes can be built more efficiently and quickly.”
“The high cost of land was one of the key issues making Auckland housing so expensive. With intensive housing, single plots that once would’ve held only one house can now accommodate multiple dwellings. The result is a more affordable, smaller home (and site).”
The new Auckland Unitary Plan has allowed for more flexible and intensive development across Auckland, resulting in a rise in home building and greater intensity – both in new subdivisions (greenfield development) and in existing established suburbs (brownfield development).
“The likes of Hobsonville Point, Whenuapai, Takanini to name a few, are examples of new greenfield projects which are growing at a rapid pace. Brownfield projects include the regeneration of areas like Glen Innes and Northcote, which are seeing the demolition of old redundant ex-state houses and redevelopment of quality intensive terraced housing projects. The land price is a fifth of what it would have been if conventional stand-alone housing was being built.”
So, what does all of this mean for the Auckland housing market? Gordon says the dampening effect of investor caution is likely to continue for a long time, and there’s a fine line between addressing the housing shortage and over supply.
“I believe, thanks to the lack of investor demand, the cooling market will continue until all Government policy changes and their effects are clear. As a result I believe Auckland’s market is likely to remain subdued for some time.”
“I would also suggest Auckland is now building enough houses to keep up with population growth. As long as the current construction boom is sustained, and the slowdown in migration continues, the availability of homes should return to levels seen in the past. If the very weak sales numbers seen over the last two years continue, I’m left wondering who is going to buy all of this new housing?”