Watching the market change

Date: 05 October 2015

Jonno Ingerson, Director of Research, CoreLogic NZ Ltd

It’s an absolutely fascinating time to be watching the housing market. It feels like we are right on the verge of the market changing shape, and in fact it already is.

After several years of telling the same story about Auckland values increasing rapidly while much of the rest of the country stagnates, we finally have a different story to tell.

It’s now about values rising in other areas while there are signs of activity in Auckland slowing.

For a few months now we have been reporting on Aucklanders moving to Tauranga and just south of the border into Waikato District with values rising in those places as a result. So that’s not new. We have also been talking about activity picking up in Hamilton, so that’s not new. But the rapid increases in values there is new.

A quick look at some numbers for those who like them. Based on the latest monthly QV House Price Index, nationwide values are up 12.6% annually. But that’s a bit of a meaningless number given regional variances. Auckland is up 22.6% annually or 6.7% over the past three months. That varies across Auckland with the fastest increases in Papakura at 11.4% and Manukau at 9.0% over the past three months, to Auckland central at 5.4%. This shows more interest around the outer parts of Auckland as affordability bites closer to the CBD. But the big news is the increase in Hamilton which according to the index is up 9.0% over the past three months. Not only is that the fastest rate of increase in Hamilton since the monthly index series starts in 2004, but when I look at the quarterly index that goes back to 1989 there is no time since then that Hamilton has risen as fast in three months. And remember that the monthly index is based on the previous three months of sales. When I look at sales in the past month they are increasing at more like 6% per month!

Meanwhile there are the first signs of Auckland activity slowing. Over the past few weeks there has been an increasing number of auctions not reaching reserve, along with fewer bidders at auctions and lower attendances at open homes. The lack of action from Chinese buyers has been commented on by some real estate firms. That could well be a direct result of the wobble in the Chinese stock markets about a month ago. To support those stories we are also seeing a slowdown in the number of valuations on Auckland properties. This valuation activity closely tracks subsequent purchases so a slowdown in valuation activity should mean we are going to see a slowdown in sales. A few weeks ago the number of new listings surged but in subsequent weeks this too has weakened. These things may not sound much on their own but this is the time of the year when valuations, sales and listings all tend to trend up strongly in the run-up to Christmas.

There are other things that might be cooling off activity in Auckland. The Reserve Bank and the Government have announced a range of measures intended to slow down Auckland’s rapidly rising prices.

Investors are the most active buyers in the market and many seem to blame them for the rapidly increasing prices. The Reserve Bank has changed the rules to ensure that when the main banks lend to investors that they need to have a 30% deposit. That won’t have a major impact as according to the Reserve Bank’s own figures a relatively small proportion of investors currently borrow with a low deposit.

Over the past few years we have seen an increase in the proportion of Auckland properties selling within two years. New rules which came into effect on October 1 mean that any sale of a property within two years will be liable for capital gains tax. But only if it is not owner occupied. So again this is aimed at investors speculating on short term capital gains.

Another change that came into force on October 1 is the requirement for foreign buyers to have a New Zealand bank account and IRD number with a link back to their home country tax number. This is to enable the Government to officially track for the first time the number of foreign buyers in the market. Our feeling is that it is unlikely to have a dramatic effect on slowing foreign buyer activity.

If word on the street is to be believed then sentiment may be changing too. Most people do not know or understand the new rules, and their impact on the market is unknown. Then there are the increasing media stories about Auckland slowing, the likelihood that interest rates may yet drop further, and what seems to be a self-fulfilling idea of a slowdown in demand. People are now talking about an Auckland slow down.  That could well be self-fulfilling.  

The big question remains then; have values started cooling off in Auckland? Not according to the QV House Price Index they haven’t. Some real estate figures have shown the median sales price to have dropped, but there are two things to think about there. One is that the median sales price tends to drop every year between July and August, the other is that the mix has changed in recent months with more activity at the lower end and less at the top. That changing mix will pull the median down. Our own analysis of the latest sales using a variety of different techniques is yet to show any conclusive sign of a slowdown in values. The difficulty when watching for a turning point in the market is that month to month measures can be noisy so picking a real change from the noise is difficult. You would expect the slowdown in activity should translate to price changes. Watch this space.

Meanwhile, the Reserve Bank has loosened the LVR speed limit rules outside Auckland. Banks will now be able to have 15% of their new lending to customers with less than 20% deposit. That’s up from the current 10%. This does two things. One is that it allows local buyers in the regions back into the market. The second is that it is drawing Auckland buyers to the regions like a magnet.

It makes sense really. First you have Aucklanders who have seen their property dramatically increase in value over the past few years. So it is looking more and more attractive to sell up and move to a cheaper part of the country. If you can. Think Tauranga.

Then there are the investors. The rules tighten in Auckland but not elsewhere, like Hamilton. Just an hour or so south on the motorway, where property prices are far lower, rental yields far higher and demand strong. And our buyer classification analysis clearly shows Auckland investors entering the Hamilton market for the first time and pushing out first home buyers in the lower and middle parts of the market. Hence values rising the fastest over the last three months that we have ever seen since 1989.

It isn’t just Hamilton where activity is picking up. Valuation activity and sales have picked up dramatically almost everywhere south of Auckland through the Waikato and Bay of Plenty where we know there are Auckland based buyers active. Then in the South Island Marlborough, Central Otago and Queenstown are busy too although it is not yet clear who the active buyers are.

This increased activity has yet to translate to increasing values. So far the only other areas appearing to be accelerating in value are Whangarei at 3.9% over the past three months and Dunedin at 2.2%. Still much slower than the areas in and south of Auckland but picking up.

There are so many moving parts at the moment that predicting where this will land is really tricky. It also relies to a great extent on word on the street and consumer sentiment which is both impossible to predict and incredibly fickle. If potential buyers and sellers in Auckland start getting spooked then some heat in the market could come out very quickly.

My pick is that Auckland value growth will slow a little in the coming months while other areas pick up through until December.

Tags: CoreLogic, Property