One million is just another number

Date: 08 September 2016

Jonno Ingerson, Head of Research, CoreLogic NZ Ltd.

The inevitable has happened and the average value of a house in Auckland has gone past one million dollars and…I don’t care.

This latest milestone has led to the Housing Minister being labelled the ‘million dollar minister’, the front page of the papers and the news websites have been awash with breathless stories of Auckland’s unaffordability, and the talkback lines filled with the usual pundits.

Why don’t I care? Because it’s just a number. It’s just one way of measuring Auckland’s house prices. I could give you five others, some of which show Auckland has been beyond a million dollars for a long time, and others which show it is yet to get there.

But they all share the same common theme. Auckland’s house prices have been rising for years and very little has been done that has slowed them. Affordability is now a very real issue for many people. That I do care about.

Nonetheless I’m sure you’re pretty bored with reading another story about Auckland’s rising prices, and I’m as guilty as anyone having written countless articles about it over the past few years.

That story might be about to change, at least for a while.

I’m watching some hard data coming across my desk that suggests the heat has well and truly come out of the market. More on that in a minute.

First let’s deal with the latest QV House Price Index numbers. It’s situation normal, with Auckland values rising strongly again after a dip late last year, most areas within a couple of hours drive of Auckland also going mad, and varying degrees of value increase across the country with the notable exception of Christchurch. If you’re interested in swimming in some facts then jump across here and fill your boots.

Let’s be clear though that these index results tell us what has happened, not what is happening. The monthly QV House Price Index is an extremely reliable and highly regarded measure of value change in the housing stock of an area. It’s definitely far better than an average or median sales price for that. Part of what makes it reliable is that it is based on data from the last three months. That means we can calculate an index for just about everywhere in the country, even the smaller rural areas. But it means that the index is a little slow to turn, a little like me chasing a cricket ball my son smashed back past me. Even if values had begun to turn we won’t necessarily see it in the index for a while. That doesn’t mean that other measures of the market you will undoubtedly be assaulted with over the coming days are any better, as anything more reactive than the QV House Price Index tends to be more volatile, so you’re never sure if an up or a down is real or noise.

What all that means is that we are largely looking at what the market did before the latest intervention by the Reserve Bank, announced on July 19th. There are not yet many sales completed since that date, and those that have been will often have been by people who already had a pre-approval from their bank for a mortgage and were desperate to use it before the new restrictions locked them out. I therefore reckon it’s too early to see any reliable sign of market change based on sales prices, but I am watching them like a hawk nonetheless. For what it’s worth the sales I have seen coming through that were signed since the RBNZ restrictions show no evidence of prices easing.

We have to be looking for other signs that the market is reacting to the new RBNZ restrictions. There are two that I reckon show that the market is cooling. However, they are both weekly which makes them super reactive.

The first is the number of new listings coming onto the market, and the second is CoreLogic’s measure of buyer enquiry through the banks.

In the week immediately following the RBNZ announcement we saw a sudden jump in new listings in almost all regions and they rose again the week after. A jump in new listings is usual for around this time of the year, but it is usually late August not mid-July. So could this jump in new listings have been people, especially investors, believing we have reached the top of the market and so looking to offload properties? I have heard stories of investors dumping large blocks of their portfolios as they think the market has reached the top, so that will be part of the rise in new listings. I think more likely it was an early spring surge in response to rapidly increasing prices across the country.

Then, since that initial surge, new listings have been largely flat. What is interesting about that is that usually at this time of the year they would be surging upwards strongly. This suggests that the new RBNZ lending restrictions have begun to bite and people are not listing because they think it isn’t a good time to sell.

A lack of new listings is the last thing that most markets across the country need right now as the total number of properties for sale is at very low levels, meaning little choice for eager buyers, hence contributing to rising prices.

Our other measure is weekly buyer demand. CoreLogic measures that through the number of bank front line staff running automated valuations for their customers, often to support a lending decision. That demand surged for two weeks following the RBNZ announcement. That makes sense. Potential buyers will have been panicking that their planned purchase will now not be possible under the new rules and will have asked their bank about options.

But since that two week surge demand has either dropped back or flattened pretty much everywhere across the country. Again, that is unusual as we normally see that buyer demand increasing week on week as we get deeper into spring. Those numbers tell me that the restrictions have knocked a block of people out of the market, so for the time being they are no longer able to, or want to go to their bank seeking a loan.

My expectation is that we will see some heat come out of the market across the country in the coming months. You will see that play out through fewer people at open homes and auctions, sales numbers will be weak, and values will not increase as fast as they have been. Previous lending restrictions imposed by the Reserve Bank have had that impact, but they have been short-lived. The tighter lending rules have already knocked out some first home buyers who will now have to go away and save a higher deposit if they want to jump on the ladder. Some investors will likewise be discouraged by the need to have a 40% deposit for any new purchase. Will the restrictions stick for a few months longer this time? Probably not, which is why the Reserve Bank is considering implementing limits on mortgage debt relative to income as well.

CoreLogic’s buyer classification shows the high level of property investor activity across the country. What will cause that to slow will partly be the belief that the market is no longer going to rise. If you had a lump of money to invest somewhere, would you put it into a bank for a tiny interest rate? Would you invest in the stock market which you may be a little afraid of? Would you invest in a start-up company? Chances are that if you’re a Kiwi you will be looking to buy a property. If you were lucky enough to have done that in Hamilton a year ago you have seen that investment increase in value by 30%. So it’s not hard to see why investors are active. Those investors will continue to be active as long as they think values will hold or rise. So far they seem to think so.

Meanwhile first home buyers are still keen to find a home for themselves and their young families. Our laws that allow landlords to kick you out of your rental property at relatively short notice makes renting much less attractive. In parts of Europe you can rent a house safe in the knowledge that you can be there for the long term. First home buyers are beginning to change their behaviour. Take Wellington for example, where in the City values have risen sharply over the past year making that less affordable so we are seeing more first home buyers purchasing in Lower and Upper Hutt and Porirua. Those first home buyers are sacrificing being close to the city, but the housing is a heap cheaper. I would expect that trend to continue.

The big losers right now seem to be people moving from one house to another, especially to upgrade. The costs of moving are now higher, if you can even find somewhere to move to. This group of people are increasingly staying put and either using the low interest rates to pay down mortgage debt, or the added value to fund renovations.

If you pin me down and ask me if I think this is the peak of the market and things will drop from here my answer is no. Give me a year and we’ll see if I was right or wrong.

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Tags: Property, CoreLogic, Auckland, Housing, Real Estate, Property Market, Wellington House Prices, Property Values, Homes Values


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