Are there a large number of cash buyers in the market?

There has no doubt been some anecdotal stories around foreign buyers coming to New Zealand and buying up large – some saying they are forgoing due diligence, others saying they are paying exaggerated prices in order to get the property they want, or both.   Each time there is always talk of foreign buyers trumping locals with cash in hand.  This has been predominantly in the Auckland market, where prices are hot and the competition for property has been increasing.

While we can’t specifically nail down whether sales are in fact from foreign buyers, we can look at the proportion of house sales that were supported by a mortgage.  This then gives us the flip side, the amount that didn’t have a mortgage and were therefore purchased freehold or ‘cash’.

But to see whether this is really unusual or simply normal or relative to the current market conditions, we have looked back over the past few years.

During the boom years of 2004 to 2007 the number of sales was around 7000 to 9000 per month, with the percentage of cash sales around 17 to 18%.  During this time first home buyers and property investors were very active, and they would generally have supported the purchase with a mortgage rather than purchasing with cash.

But with the downturn taking hold around 2008 through to early 2011 the number of sales dropped significantly to around 3500 to 5500.  Consequently, the percentage of cash sales increased to between 20% and 25% of transactions.  At this time, first home buyers and investors were largely absent from the market.

Since 2011 the number of sales has been gradually increasing and the percentage of cash sales has generally been decreasing, sitting around 18% to 20% for the past year.  This is at a similar level to what it was in the previous boom.

If we narrow it down to just looking at cash sales in Auckland in comparison to the rest of the country, we can see that Auckland has a significant lower amount of cash sales in total.  During the boom years cash sales in Auckland were around the 12% to 13% mark, compared to 19% to 23% for the rest of New Zealand.

At its highest in 2008, 20% of all sales in Auckland were cash, but in the period up until 2011 this tended to be in the 15% to 19% range.  Since 2011 the percentage of cash buyers has been declining from around 15% to a current level of around 12%.

This then suggests there no evidence of cash sales dramatically increasing in Auckland, regardless of the level of foreign buyers in the market.

Although the percentage of cash buyers has been declining overall, the number of house sales is still not at the level seen leading to the market peak in 2007, where we saw towards 10,000 sales in a month.  With the market still hot, especially in Auckland and Christchurch, we would generally expect to see further decline in cash sales as the number of sales picked up again.  But with the Reserve Bank’s LVR cap coming into play, interest rates already starting to creep up again, and the reported lack of inventory on the market, this “normal” trend may be bucked in the next year or so.

Check back soon as we investigate whether cash sales are more likely to occur for certain valued homes, and whether there is any further regional variation.