Make Smarter Property Decisions

 

-Nick Goodall, CoreLogic NZ

 

 

Property values across New Zealand’s major centres recorded a diverse performance in August, ranging from a 0.4% fall in Auckland to a 1.2% rise in Dunedin.

 

According to the August CoreLogic QV House Price Index, the average residential property value in Dunedin is now $415,888; values have risen 10.7% over the past year. This result is in stark contrast to the other main centres, although Wellington City values continued to show a strong rate of annual capital gains (7.4%) despite values slipping 0.2% over the rolling quarter.

 

 

CoreLogic Head of Research Nick Goodall said, “Dunedin values continue to grow off the back of low inventory levels, consistently high demand due to strong economic conditions as well as relatively low housing prices which are attractive to a broad range of buyers.” 

 

He said, “Investor activity has reduced over the past few years, however owner occupiers have picked up the slack. The release of MBIE’s Healthy Homes Standards discussion document this week will be of keen interest to investors in the south, as the quality of stock in the University town is well known as being of a lower standard.”

 

 

Values in Auckland continued to track sideways as lending conditions remain tight, impacting buyer activity across New Zealand’s largest city where the average value hovers along at $1.05m. Within Auckland, there is not much variability between the sub-regions, with three month growth ranging from -1.1% in North Shore and +0.3% in Franklin.

 

Meanwhile both Hamilton and Tauranga continue to show modest value growth over the last three months of 0.3% and 0.7% respectively.

 

In Wellington similarities exist across the main four centres, however Upper Hutt continues to stand out with 2.7% quarterly growth and 11% annual growth, well above the other three centres. Wellington City tracked slightly down (0.2%) over the last three months, but values remain 7.4% above the same time last year as a lack of listings ensures some price pressure has remained, even in the quieter winter months. 

 

Across the regions, the performance was mixed, as the annual growth rate held or increased across five of the twelve centres; an improvement on the two recorded last month.

 

Invercargill property values saw a significant increase of 2.1% in August, taking the annual rate to 13.3% - the strongest percentage change in over ten years for the Deep South. Strong demand from owner occupiers has been a contributing factor to this growth. Given the strength of global agricultural commodity prices, the wider Southland region’s specialism in agriculture, and the associated manufacturing/processing activities (especially for dairy and meat), will be underpinning local economic activity and employment. And in turn, this will be providing impetus for the housing market.

 

House Price Index, Main Centres Relative to December 2003

 

Napier’s annual growth rate slide continued (11.4%), but it remains second among the other similarly sized regions. Nearby Hastings was one of the regions to see a slight lift in the annual rate of growth, up to 8.1% on the same time last year. 

 

Whanganui also saw a minor lift, up to 10.7% over the last year, while Palmerston North held strong at 9.9%. 

 

Gisborne rounded out the list of regions to see a lift in the annual growth rate - up 8.7% on the same time last year. As touched on last month, the Gisborne property market is supported by a relatively strong underlying economy with key industries including agriculture, forestry, and viticulture all doing reasonably well at present. Tourism in the area is also holding strong, with guest nights hovering at around record highs. 

 

Annual change in dwelling values

 

New Plymouth is now the region with the lowest annual growth rate, at 5.3%. Value growth has effectively stalled since April, probably in response to uncertainty surrounding the region off the back of the Government’s announcement banning new oil and gas exploration permits. 

 

Queenstown’s quarterly drop of 1.0% was noticeable and sees the annual rate drop to 5.3%; the lowest rate since September 2014. This could be evidence of a reduction in both demand and expectation from foreign buyers who are typically active in this market and are under scrutiny in the form of the ‘Foreign Buyer Ban’ being proposed by the Government.  

 

Mr Goodall said, “Property values continue to tick along at similar rates to what they have earlier in winter.” 

 

We retain a keen eye on a number of areas to help us assess the current property market situation. Property investors remain a key area of interest as both local and central Government continue to announce changes for the industry. The latest sees potential changes to the Tenancy Act in order to improve renters’ rights, while Auckland Council looks to address the underutilisation problems caused by the popularity of short stay options such as AirBnB and Bookabach.

 

 

As widely expected the Reserve Bank held the OCR rate at 1.75% last month and intimated the low interest rate environment looks set to remain for even longer. This stability should give some confidence for current and potential home owners with mortgage affordability unlikely to worsen.

 

Business confidence is another area of considerable interest with the measure becoming a hot topic in political spheres in recent weeks. In general though it seems widely accepted that while the measure shouldn’t be outright ignored, it’s not forever and always a reliable economic indicator. Mr Goodall said, “While we remain cautious of the surveys’ implications for future economic growth, it seems that businesses are saying one thing but doing another at present with job growth still strong as well as growth in online job ads.”

 

Meanwhile KiwiBuild continues to take a high profile place at the forefront of many people’s minds. This week saw the first completed KiwiBuild houses unveiled, with the ballot to buy them opening in a week’s time. So some visible progress for the programme and this off the back of further information regarding the Government’s plan to set up an authority enabling it to relieve Auckland Council of its planning and consent authority for major housing developments in the City. There remains a long way to go to improve the supply side of the equation, particularly in Auckland and positive steps are being made, however any impact from the improved housing supply will take a while to be felt and in the meantime the overhanging shortfall will guard against a significant drop in prices across the city.

 

In summing up, Mr Goodall said “Market activity remains subdued and our indicators suggest there could be a slight worsening in housing market conditions yet before things get better.” 

 

“It remains to be seen whether this may contribute to the Reserve Bank considering a further loosening of the LVR restrictions which have been in place since November 2013 in order to bolster demand. With spring now upon us we’re also expecting a lift in listings, but unless there’s also a subsequent lift in demand this could simply prolong the slowdown due to buyer choice increasing and the power swinging more in their direction.”

 

Note the September release of the QV House Price Index includes revisions to the back series based on changes to the classifications for some property sales.   The revisions primarily affect the Council areas of Wellington and Nelson.  

 

As capital growth in the residential property market has continued to diminish and articles hypothesise what of a proper downturn, we yearn for more solid information to understand where the property market is heading next. Here in the CoreLogic Research team, we’ve been doing some work on forming a sales volume prediction model to provide a guide for future market activity. The inputs to the model we tested, ranged from GDP to unemployment, to interest rates, wages and migration.

 

And the results are actually pretty good. Not perfect, granted, but pretty good.

 

The good thing is that where the predicted model diverges from actual sales, it’s generally explainable. The single biggest occasion is in 2012, which happens to be following the Christchurch Earthquake and is also the early part of the most recent growth phase in Auckland. My feeling on why the model missed the increased turnover in Auckland is that it’s because the exceptional lift in sales volumes at this time was heavily credit driven (not interest rate driven) which we didn’t, and couldn’t capture.

 

The model also misses the significance of the most recent slowdown, since 2016. Again this has been impacted by credit policy (outside of interest rates) and also the stricter LVR limits implemented at the end of 2016.

 

Understanding the blind spots of the model is crucial to being able to apply some form of manual adjustment to the final projections, based on all the other market influencers we’re aware of.  

 

First though, the actual model results.

 

Based on forecasts by RBNZ and MBIE regarding the outlook for GDP growth and interest rates being stable, wage growth anticipated to improve slowly and migration to drop slowly, we get to a rather unglorified prediction of sales volumes staying at about the same rate they’re currently at. Super boring, when we know extreme opinions sell, but that’s what the model tells us.

 

The end result? Roughly 83,500 sales this year and 82,500 next. For context this is down from 85,000 in 2017 and 106,000 sales in 2016.

 

But now we apply our ‘adjustments’, or alternative scenarios.The overwhelming potential pressure here is downwards, with a number of measures reducing demand, either intentionally or otherwise. 

 

We have:

There are a few things which may increase demand, including the possibility of shared equity schemes to help first home buyers and even the potential relaxation of the LVR limits, but it’s unlikely these will do enough to counter the downward impact of those listed earlier.

 

So with so much downward pressure, the question moves to whether we could see a more significant drop in sales volumes (and consequently values). But the good news for those in the industry is that a lack of supply, still high migration (despite it reducing), still historically low interest rates and an ingrained mentality of property investment being the best, all provide a very solid floor underneath the market (both volume and value wise).

 

We can hypothesise different scenarios though. For example, we estimate that a gradual lift of 1%-point in mortgage interest rates by the end of next year could see a further reduction in volumes of roughly 7,000 – to 75,000 in 2019. This would be lower than anything we’ve seen in the past 20-odd years, and then probably be accompanied by further intervention to push things the other direction (or at least hold things up). 

 

In the end, the reality is that almost every day there’s a new announcement or piece of information which could influence the property market, and a lot of people have a stake. Having solid data to help us sift through the conjecture and potential bias is crucial, and our sales projection model (version 1) provides a great head-start.

 

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Author: Nick Goodall | Head of Research, CoreLogic NZ

 

According to the June QV House Price Index, utilising data and methodology from CoreLogic, none of the main centres saw growth in values of more than 0.5% since May’s index.

 

 

Values in Dunedin, where growth has consistently been very strong compared to the other main centres, even saw a significant reduction in growth, with the change from May only +0.3%. 

 

Three of the six main centres saw very minor value drops in the June results, with the Auckland, Tauranga and Christchurch indices all dropping 0.1%. Values in Christchurch remain 0.3% below the same time last year.

 

Wellington City values bounced back according to June results – up 0.4%, after dropping 0.9% at the end of May. Values remain 1.3% lower than they were at the end of March however, as reduced demand and credit unavailability hinders the amount buyers can pay in a city where the average value hovers above the $750,000 mark.

 

This market weakness appears to be spreading to the Hutt too, with values in Lower Hutt only increasing 0.6% since the end of March. For now, Upper Hutt is still seeing more considerable growth, 1.9% over the same period, however this is well down on the 3.5% rate at the end of April 2018.

 

Meanwhile the highest annual rates of growth remain in many of the regional markets, however these rates of growth continue to slow and the outlook appears to be uncertain. CoreLogic head of research Nick Goodall said, “Further investigation into the regional composition of overseas migration into NZ reveals that provincial centres seem to suffer disproportionate outflows when overall net migration losses from NZ are high. With net migration tipped to continue to fall, including the balance with Australia, the provinces may feel this more acutely as fewer people arrive and more people leave the regions.”

 

 

Across the other Main Urban Areas, Napier retains top spot, with the greatest annual growth – although this has dropped for the second consecutive month, down to 15.7% at the end of June, compared to 17.6% at the end of April. Nearby Hastings has seen a similar slowdown (from 12.5% at the end of April to 8.5% at the end of June).

 

With consistently strong annual growth, exceeding 15% for the last two years, and an average value exceeding $510,000 now, unaffordability will be starting to have an impact on the region’s property values, especially with credit remaining tight. 

 

Only four of the twelve main urban areas (outside the largest six cities) saw annual growth increase in the June figures.

 

 

Whanganui was one of those, with annual growth hitting 12.6% in the year to the end of June 2018. The lower average value of property here remains an attraction for owner occupiers and investors alike. 

 

The other three areas with a similarly lower value profile, were Invercargill, Palmerston North and Rotorua all of which saw a lift in annual value growth from May to June. Gisborne was the only city which recorded an average value lower than any of these areas, and annual growth slowed from 10.1% to 8.9% over the month of June. 

 

 

 

New Plymouth remains an area of interest, as anecdotal reports of local discontent increase in response to the Government announcement of no new oil and gas exploration permits being granted. Values in New Plymouth continued to gradually grow, with the average hitting $450k at the end of June, however the future is more uncertain. Mr Goodall said this is especially true when considering the regionally supported dairy industry which also faces a challenge in retaining the kiwi ‘100% pure’ branding in the face of the mycoplasma bovis infection. 

 

He said, “Overall, the New Zealand property market continues to be constrained by tighter lending criteria, despite short term interest rates remaining low. 

 

“The banks continue to be very competitive when it comes to the shorter term interest rates, but with market activity still weak, they’re clearly keeping criteria quite strict.”

 

Market activity, as defined by valuations ordered by the banks to support loans, ended the month 10% below the same month last year. This measure acts as a very good predictor for sales volumes and indicates another slow month of sales volumes is likely to be reported over the coming weeks and flowing into July.

 

 

Mr Goodall said, “Looking longer term we’re predicting a fairly uneventful six-to-eight quarters of sales volumes, mostly tracking sideways from the four quarters.”

 

“This is due to a period of relatively benign movement in the factors that typically influence demand. Both GDP and wages are forecast to grow steadily, and mortgage interest rates are likely to remain low.”

 

Migration in New Zealand is forecast to reduce, which would further reduce property demand but not at the same rate as previously thought, as demand for skilled labour remains high. This is especially the case with the KiwiBuild targets and the recent announcement of the “KiwiBuild Skills Shortage List”, designed to provide an expedited process to fill specific roles which will further slowdown that proposed migration drop.

 

In summing up, Mr Goodall said “There’s no doubt we’ve gone past the peak growth phase of the most recent property cycle. The question now turns to how long the lull will last and whether it will be more than a lull. Given we’ve seen no discernable change in investor behavior, any improvement to supply will be a long term game (even taking into account current record building consents) and mortgage interest rates are set to remain low we think any drop will be shallow for now.”

 

When house hunting each person has a list of their essentials. Is there attic storage? What sort of access is there? Good natural light? An easterly wind? All considerations for new home buyers with a healthy market to shop in. Try as you may, curating a list that ticks everything is near impossible and upon living in your home you will discover features you can’t fathom ever having wanted (who ever thought the morning sun in the master bedroom would be delightful?). Once you’re in your new space, your home then becomes an entirely new project all together. While you were busy ticking the boxes, you overlook areas that need your attention - like your shopping list! Although you’ve got all the major pieces sorted, here are three essentials that go under the radar and make a big impact.

 

 

Storage

Simple right? Yes, this might seem obvious, your large linen cupboard and built in wardrobes were a huge selling feature for you so of course you’ve accounted for storage. This however extends to every part of your home. A storage solution for your spices, a dish caddy, your remote controls, stop me any time! Do your best to cover off as much as possible, otherwise you’ll end up with a coffee table covered in miscellaneous items, or a pantry hiding half your ingredients. The linen cupboard is obvious but a toothbrush holder may not be. Think about what you’re using in each room and how often, that will give you some insight into what might need a more accessible storage solution and what can live comfortably in a cupboard.

 

 

Window Coverings

With Winter looming, it is important to ensure you’re on your way to installing these once you move in. Window coverings act as both a privacy screen and a way to retain heat - keeping that power bill as low as possible in the cooler months. Outside of the obvious, window trimmings, whether blinds or curtains also extend your sleep in, keeping the light out and are an important tool for security. Keep in mind, many made to order coverings can take unto 4-6 weeks to be produced, be sure to factor in this timeline when planning the move if you’re after something more custom for your home.

 

 

Kitchen Gadgets

Now I don’t mean a frypan, or knives and forks, I’m fairly confident you have that covered. I’m here to reiterate the importance of kitchen items like the humble can opener. I’m talking about the items you scan over while shopping, as ones you’ll likely ‘never need’ because our products have evolved past them and therefore you leave them behind. I guarantee you, this will be the one thing you need when your dinner guests have arrived and you snap the pull tag on your can of coconut cream for your chicken curry (trust me - been there!).