A slow moving market doesn't necessarily mean weak prices

Date: 24 October 2018

 

While Auckland’s property market has been turning over at a relatively slow rate in recent times, listings remain high. This illustrates the city’s affordability problem and its adverse effect on buyer demand, resulting in limited value growth. Wellington has also had a low turnover rate, however, listings are tight and it’s no surprise that the lack of choice for would-be buyers is pushing up values.

CoreLogic research analyst Kelvin Davidson writes:

 

A common assumption doing the rounds in the property market is that an area where houses are turning over slowly (or quickly) will be seeing weak (or strong) value growth. Indeed, there is some tendency for slower moving areas to see slower value growth but it’s far from a universal truth. Why? Because vendors’ behaviour matters just as much as what prospective buyers are doing.

 
Let’s now take a look at the story in the data. (Note: Charts 1 and 2 show the turnover rate - i.e. sales in the past year as a % of the total stock of dwellings - for the recent fastest-moving local authorities, and the slowest-moving*). Generally speaking, the areas in the first chart have had stronger value growth (average of 10.6% across the 10 areas) over the past year than the others (average of 4.0%). This fits with common assumptions.
 
Top 10 local authorities for turnover rate and their recent value growth (source: CoreLogic)
 
However, there are still several exceptions to the rule: so much so that it’s a loose rule at best. For example, 7.1% of Selwyn’s properties have changed hands in the past year, with values only edging up by 0.4%. By contrast, a lower turnover rate in say South Taranaki (6.1%) has come alongside faster value growth, of 8.0%. Then in Rotorua (bottom 10), for example, where the turnover rate has been low (3.9%), values have risen by a brisk 9.6%, faster than half the authorities in the top 10.
 
Bottom 10 local authorities for turnover rate and their recent value growth (source: CoreLogic)
 
The problem with the “rule” is that most people just focus on the demand side of the equation: e.g. low turnover = weak buyer demand = weak values. However, it’s equally possible that low turnover = inactive vendors (not many willing sellers) = potentially strong values.
 
Total property listings (source: CoreLogic)
 
We can see this second side to the argument with an easy comparison of Auckland and Wellington. In Auckland, the turnover rate in the past year has been 4.1%, with values edging up by 0.8%. This low turnover reflects poor affordability and hence restricted buyer demand. Indeed, as the third chart shows, there’s plenty of property available on the market in Auckland (meaning that turnover isn’t held back by a lack of properties to buy). In Wellington however, turnover of 3.9% has been very similar to Auckland, yet values in the capital are up by about 7% over the past year. So it’s no surprise to see that Wellington’s listings situation is currently very tight and the lack of choice for prospective buyers is bolstering prices.
 
Overall, simply equating a low (high) turnover rate to weak (strong) value growth is not always enough. The simple truth is that buyers can’t buy unless there’s a willing seller and, as per the golden rule in economics, it’s the balance of demand and supply that always needs to be considered in assessing market activity and property values.
 
 

Tags: nz real estate, nz real estate update, nz real estate news


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