We pulled 8 gems from the torrent of property news to keep you abreast of the most important insights affecting investors. 21 Dec 2019 to 17 Jan 2020
Happy new decade to you and welcome to our first edition for 2020 – the year of perfect vision! Things have been relatively quiet, as expected, but we sifted through the news since Christmas to find what’s important for you.
This time of year always brings a rash of experts and not-so-expert commentators making predictions for the coming year. Half of them never come true, and you never know which half will come true, so I’ve ignored all fortune telling and just focused on real news…
First Home Buyers Respond to Mortgage Interest Rate Cuts by Bidding House Prices Up, Up and Away
Next time a millennial tries to blame boomers for high house prices ruining their home ownership dreams, just point them to this fact.
According to Interest.co.nz’s Home Loan Affordability Reports for November, rising prices at the bottom end of the market have more than made up for falls in mortgage interest rates since the Reserve Bank cut the Official Cash Rate (OCR) from 1.5% to 1.0% in August.
This means potential first home buyers are now worse off than they were just before the OCR was cut. It proves that interest rates are a bigger driver of house prices than incomes. Because first home buyers can afford to borrow more for the same monthly repayments, they are. And bidding up the price of houses at the bottom end of the market to stratospheric levels in the process.
Here Are the 12 Factors You Can Blame for Higher House Prices than Your Parents Paid
We’re often told house prices are “affordable” when they’re about 3x a typical household income. The problem is, we’re now at levels of least double that in most parts of the country.
But Tony Alexander says, “It’s pointless to hope for a return to the affordability of previous decades. There has been a structural shift, moving house prices permanently higher for modern generations of house-buyers.”
Alexander lists 12 factors that drove the change…
- Lower interest rates. The decline in mortgage interest rates and alternative investment rates (e.g. term deposits) since 1992 have driven house prices up.
- Population growth & immigration. Following the changes in immigration rules from 1987, and development and deepening of the economy following the economic reforms of the same era, more people come here and fewer leave. More people means more demand for houses, but construction has not kept up.
- Double-income households. Up until the 1970s there were few females in the workforce on a permanent, full-time basis. Double-income households can (and do) bid more for a desired property and have access to more bank funding than single-income families.
- Higher construction costs. Building materials, consenting fees, inspection fees, health and safety-related costs, developers’ fees, new requirements for seismic strength, insulation, etc – all have pushed the cost of building up. Houses are also bigger than in earlier decades and have toilets on the inside – several instead of one.
- Improved credit access. Getting a mortgage used to be difficult and banks rationed credit according to government rules. That changed with deregulation of the banking sector in the mid-1980s, and house prices went up as a result.
- Save or starve. Governments have been telling us for 3 decades that we need higher savings and ownership of a mortgage-free house to enjoy retirement. People have reacted to the constant drumming of these messages by investing in housing.
- Foreign house buying. This effect has waned since last year’s ban. But internationalisation of housing markets from the 1980s brought new buyers into our cities who were not there before. More demand means higher prices.
- Couples divorcing. More couples have been divorcing, requiring two houses instead of one.
- Airbnb. With increasingly stringent requirements being placed on landlords, more are choosing to provide short-term accommodation for the tourism sector instead. This has removed thousands of houses from the pool available for Kiwis to occupy. Less supply means higher prices.
- Foreign students. The growing export education sector has boosted demand for housing accommodation. Construction of student units has taken resources away from construction of housing for owner occupancy.
- Land availability. Availability of land for housing in locations near to where people work has structurally declined in recent decades thanks to restrictions imposed by the Resource Management Act, insufficient investment in transport networks, and organic growth.
- Housing shortage. Not enough houses were built in Auckland from about the middle of the 2000s. Then, after the global financial crisis, while our population kept growing, construction fell to the lowest levels since the 1960s. The recently announced $12 billion boost to infrastructure spending will mean fewer people available to build houses.
Alexander says too many analysts have failed to acknowledge these structural effects on house prices. They mistakenly expected New Zealand to follow (temporary) price collapses overseas from 2006. They looked at low rental yields versus equities yields and concluded an adjustment would come via lower house prices. They adhered to old rules of sustainable house prices that are not relevant to the modern age.
And they were too “victim” focussed. They saw young people missing out and felt sad, concluding things simply have to change so that this sadness can be removed. Despite such noble and wishful thinking, reality won.
Commercial Property Set to Boom in 2020
NBR reports that the continuing shortage of office space in Auckland will be alleviated by some large projects coming to the market, easing the upwards pressure on office rents. Industrial property supply, on the other hand, will continue to be constrained – leading to price growth for investors in this sector.
“Industrial property heads into 2020 on a high note. Industrial transactions made up 50% of the total property transaction value in 2019 and industrial vacancies hit or neared record lows in the three major centres.”
Colliers New Zealand research and communications director Chris Dibble says solid activity in manufacturing, imports and exports, the growth of the transport and storage sector due to online retail growth, and a significant pipeline of infrastructure announced by the Coalition government will all assist occupier fundamentals and further strengthen investor confidence.
Housing Affordability Was Once Only an Auckland and Queenstown Problem
The year ended strongly in the regional housing markets, but ended with a whimper in Auckland. QV’s national house price index in December shows Auckland made back 1.9% of previous losses to result in zero annual rise.
The big action was in the regions where prices were up 4.0% from a year ago. Dunedin was the star, up 18.3%. Christchurch was much more subdued, up a mere 2.3% in a year.
The twin cities Napier and Hastings (with a population now greater than Dunedin) were up 9.9% and 13.0% respectively. Tauranga was up 5.9%, beating out Wellington which was up 5.3%.
These sharp price increases will bring Auckland’s famous housing affordability problems to the rest of the country. Low interest rates won’t help either. In fact, low interest rates are the problem. They allow those who have managed to save up a deposit to bid up prices.
The other problem is that owners aren’t selling, resulting in a shortage of listings. With multiple buyers looking to purchase a limited number of properties, prices have been pushed up even more.
Barfoot’s December Ends Year with Limited Choices for Buyers
As listings slide, prices stay marooned at Auckland’s largest realtor. Although December sales transactions rose, they ended the full year lower than for 2018, and no sign yet of a rise in choice for buyers.
And the low levels of listings are not resulting in higher prices. Auckland prices have been generally flat now for more than three years, reports Interest.co.nz.
Residential Property Is Now a Bad Investment
Kernel’s Dean Anderson challenges the Kiwi fascination with investing in residential property, suggesting that circumstances have changed negatively for the residential real estate asset class and says things can only get worse from here.
Note: Kernel is an index investing platform so they do have a vested interest in this line of reasoning. However, it’s a very good and thought-provoking article, full of good data to back up the claims. Read it.
Rogue Landlords to Face Criminal Court After Tough New Moves by Investigators
For the first time, tenancy laws designed to rein in rogue landlords are being applied by investigators.
45-Year High for New Home Consents Is Nothing to Crow About
For the first time in 45 years, the annual number of new homes consented rose to over 37,000 according to Stats NZ construction statistics manager Melissa McKenzie.
There were 37,919 new homes consented in the year ended September 1974, while the overall record is still 40,025 in the February 1974 year.
The population of New Zealand in the mid-1970s was around 3 million, compared with about 4.9 million today.
COMMENT: Comparing the number of consents issued on a per capita basis certainly puts things into perspective. When our population is 63% higher than 1974 but the number of consents issued is only just approaching similar levels, it’s nothing to crow about.