Make Smarter Property Decisions

- Kelvin Davidson

A recent ‘on-the-ground’ tour around Auckland revealed that new housing construction is moving ahead with infill development a rising trend. KiwiBuild will help to drive even more infill housing, making more efficient use of inner city land (not to mention removing some poor quality housing). However, new sections still seem pretty expensive and transport infrastructure is a problem.

CoreLogic research analyst Kelvin Davidson writes:

The shortage of housing in Auckland is clearly one of the biggest issues in NZ’s residential property market at present (and it will probably remain one of the biggest issues for some time to come). This Pulse sets out some observations from an ‘on-the-ground’ look around Auckland’s various sub-markets last week; some positive surprises, but also some reasons for concern.

On top of that, it’s easy to see that infill development is on a rising trend. And that’s backed up by our data. As chart no. 2 shows, five years ago, the change in the dwelling stock in Auckland over a 12-month period was similar to how many dwellings were consented. Lately, however, the stock has been growing more slowly than dwelling consents – illustrating that rising shares of consents have been granted to replace older houses that have been demolished. The pattern in Auckland has been much starker than in Wellington, for example, where the stock change has stayed consistent in relation to dwelling consents (see chart three).

Wellington housing stock change and dwelling consents

 (Sources: Stats NZ, CoreLogic)

 

 

But even though there are some positive factors on the supply-side in Auckland, housing affordability is still poor. And that’s despite no obvious physical shortage of land (e.g. look at Pukekohe with its large numbers of new, empty sections). Thus the question naturally arises – why isn’t supply moving even faster? Three obvious hurdles exist here. Firstly, although the land physically exists, it doesn’t seem to be available at the ‘right price’. Sections priced in excess of a hefty $500,000-600,000 were easy to find. Secondly, part of the reason why land is still expensive will be the need to develop the infrastructure to support new housing, especially transport. Finally, it’s the well-known builder shortages and capacity constraints in the construction industry.

- Kelvin Davidson

In the year to date, the median prices paid by first home buyers for two or three-bedroom properties in Auckland, Queenstown and Wellington have been above the KiwiBuild caps. That potential “discount” from buying a KiwiBuild property makes it easy to see the scheme’s appeal to buyers, and that’s before you even factor in that a KiwiBuild property is new but there’s no guarantee of a new-build out on the open market.

FHB median paid prices for 1-bedroom properties, YTD 2018 (Source: CoreLogic)

CoreLogic research analyst Kelvin Davidson writes:

One of the key talking points of the KiwiBuild programme is the price cap by bedroom number and location. Within Auckland and Queenstown, these are $500k for one-bedroom, $600k for two-bed, and $650k for three-bed (or more). Everywhere else, the cap is $500k regardless of bedroom count. So how have actual prices paid by first home buyers (FHBs) lately compared to those caps?

- Nick Goodall, CoreLogic NZ

 

Wellington City and Tauranga showed similar, if slightly smaller, bounce-backs in value, with 1.9% and 1.4% quarterly growth respectively, to the end of September 2018. 

 

Nick Goodall said, “The Reserve Bank of NZ has reported an upturn in gross new lending over the past few months. Perhaps this is in response to continued competitive mortgage interest rates, with buyers acting with a renewed market confidence.” 

 

Goodall adds: “Both first home buyers and investors remain active. First home buyers continue to take advantage of the availability of their KiwiSaver funds, while investors appear undaunted by yet more announcements which are likely to impact their profitability.”

 

 

“Despite KiwiBuild ballots opening, and subsequently being touted as potential ‘lotto wins’ for the successful applicants, first home buyer activity remains strong, suggesting not everyone is hanging their hopes on entering the market via the Government scheme,” he said.  

 

Meanwhile, values in Auckland dropped 0.7% over the last three months, driven by a greater weakness in the more expensive areas of Auckland City (-1.1%) and North Shore (-0.8%). Much further from town, Franklin was the only Auckland area to see growth over the last three months (1.2%).  

 

In Wellington, anecdotes of continued growth in the market are backed up in September’s index results. Values are up 1.9% over the last three months in the City, while Upper Hutt saw a slight drop in quarterly growth rate (to +1.8%) but it retains the highest annual growth figure for the region of 8.8% (above Wellington City’s 8.5%). 

Across the other main urban areas, a relatively distinct trend has appeared, with the four lower value centres topping the annual value growth rate chart. Whanganui (average value $260k) joins Invercargill ($277k) at a rate of 13.4% over the last 12 months.

 

Palmerston North ($406k) and Gisborne ($325k) also saw property values grow by more than 10% over the last year as competitive mortgage interest rates support affordability for those who can satisfy bank lending criteria. 

 

Napier’s annual growth rate has now dropped below 10% for the first time since May 2016. Nick Goodall said, “Fifty per cent growth over the two and a half year period between October 2015 and April 2018 was always going to impact affordability, and with an average value now exceeding $500k that certainly seems the case.” 

 

Values grew 2.6% over the last three months in Hastings, perhaps a reflection of the slightly better affordability as the average value is almost $50k lower compared to its Hawke’s Bay neighbour.

Meanwhile a minor lift in values in the Queenstown Lakes District could reflect a late surge before the Foreign Buyer Ban is enacted, however longer term prospects for the popular tourist district appear to be less prosperous.  

 

New Plymouth values continued to track sideways. Clearly there’s more to the region than just mining, but future growth will likely remain constrained as people consider their future employment prospects.

 

Mr Goodall said, “The QV House Price Index for September illustrates there are still pockets of strength in the market as we head into the warmer, often more popular, months for market activity.” 

 

While some of the macro-economic factors (GDP growth, net migration) which influence the property market, are weakening, we can’t ignore the influence of credit availability and with banks dropping mortgage interest rates, and subsequently increasing their loan book, demand is holding up.

 

“The short term supply situation, as measured by properties on the market, also remains low across most of the country, excluding Auckland. And while we’ve seen the typical spring lift begin to occur already, overall levels are historically low, which means some price pressure persists for those properties currently on the market”.

 

 

Annual change in dwelling values, Territorial Authorities

Main Urban Areas

 

 

The more medium-to-long term supply situation (as measured by construction of new properties) is seeing some positive progress. We’re seeing record levels of building consents being issued in Auckland and the reality of KiwiBuild in improving the affordability of new builds is starting to become clearer. However we know all too well about the deficit created from years of under-building (combined with strong population growth) and this shapes the over-arching outlook of values holding up for the time being.

 

Two factors to watch are the labour market and property investor activity. 

 

The labour market is currently pretty strong but could be unduly influenced by overseas factors, not to mention a reduction in business investment locally.

 

“While there are no signs of property investors fleeing the market, or even pulling their demand completely back, the industry is becoming less attractive, particularly to new entrants. With profitability reducing, some investors are considering their options and some are now widening their net to include commercial property”.  Mr Goodall said. “This has flowed through to an improved level of demand for commercial property but also poses a question about the sustainability of this demand, depending on how the investors’ experience in commercial property goes, bearing in mind that some banks have raised concern about the need for better understanding between the two types of investments.”

 

In summing up, Mr Goodall explains: “Market activity remains somewhat constrained; however there is cause for optimism, in the form of a recent increase in credit flows. This appears to be relatively unique to NZ and we wouldn’t expect it to continue to increase exponentially, especially with more information coming to light across the ditch via the Australian Banking Royal Commission”. 

 

“The industry will likely continue to control its standards and keep lending well below the LVR speed limits, which could restrict the pool of people able to satisfy the banks’ criteria to get a mortgage, thus constraining future demand.”