Infometrics chief forecaster Gareth Kiernan said yesterday the economic consultancy saw “scope for a 12% drop in property values by the end of 2020”.
That turned into this heading: House prices to fall 12% by 2020.
A 12% price fall in 3 years – or a multitude of trend changes? I interpolate:
Some have fallen that much this year while others have been taken off the market because the windfall window has passed. How & what you measure makes a big difference.
When the America’s Cup was first touted as coming to Auckland in the 1980s, my house’s value – along with every other house in the neighbourhood – rose overnight by a million dollars. But few houses actually went on the market to catch this windfall, a handful of homes sold at escalated prices, the cup event didn’t come and the market shot back to where it had been. Did homes drop in value? They didn’t in reality rise.
Auckland was unusual in the wake of the global financial crisis of 2008 – on Quotable Value’s figures, a drop from double-digit price growth in 2007 to a decline of about 7% both nationally & in Auckland in 2008, followed by a 3% turnaround nationally in 2009 – and a rise of 7.3% for the year in Auckland.
By late 2011 – the year housing consents bottomed – Auckland’s house price index was above the level of the previous peak in late 2007, but on low turnover.
Through to late 2016, both prices & turnover rose. Turnover is now down, and you can see vendors facing hard decisions at auction. Yet, at auction this week, some apartments sold at high price levels – above $10,000/m² for secondary stock that’s now “old”. That can be attributed partly to the rising cost of construction for new developments.
The unitary plan has put another factor into the pricing equation, the ability to intensify sections that previously might have been able to take only 2 townhouses. This potential can raise the apparent value of standalone houses throughout suburbia, though it’s actually a change in land values.
Mr Kiernan raises mortgage rates as a factor below, suggesting a rise could keep some buyers out of the market. Higher interest rates or increased supply over the last 15 years, or both, would have suppressed prices. Supply is starting to increase but, while net immigration keeps rising, that supply will still fall short. That could encourage price rises while, at the same time, ordinary local buyers will tot up capital & mortgage costs which will show prices for them must come down.
Over the last 4 years, New Zealand turned – swiftly – from a net outflow of 39,000 migrants/year to Australia to a zero outflow, and a little more slowly to a net inflow of almost that number (33,900 in 2016) just into Auckland.
Those migration tides can reverse again just as quickly but, as I’ve suggested below, other factors come into play and one of those is amenity for new developments.
Kiernan: several risks hanging over economy
Mr Kiernan said the solid outlook for growth – a prediction of 3%-plus gdp growth over the 3 years to June 2019 – masked several risks hanging over the economy: “Mortgage holders in Auckland look particularly vulnerable to even modest interest rate rises that are likely to occur in the next 2-3 years. Debt-servicing costs in the city now take up a greater proportion of income than in 2007, when mortgage rates reached 8.7%. A future rise of 1.5-2 percentage points in mortgage rates would clearly stretch many borrowers in Auckland and squeeze potential buyers out of the market.”
Infometrics predicts that wholesale interest rates will gradually rise further in the next few months and that the Reserve Bank will start increasing the official cashrate by mid-2018.
“Net migration & population growth will be easing at the same time as interest rates start to rise, and this cocktail could be the catalyst for a housing market correction. Apart from the stresses on the market in Auckland, underlying demand conditions in some other regions do not justify current high prices, and we see scope for a 12% drop in property values by the end of 2020.”
Looking at the wider economy, Mr Kiernan turned first to employment: “Despite the unemployment rate edging up to 5.2% in data released this week, the labour market has been tightening across the board. The capacity constraints that have previously been most intense in the construction & tourism sectors are becoming more widespread.
“Infometrics expects to see increased wage pressures as firms battle harder to attract & retain staff, with the unemployment rate dropping back below 5.0% in 2017 and continuing to decline over the next 2 years.”
Next up, international politics: “Heightened political uncertainty also has the potential to derail New Zealand’s growth train. At this stage, the main threat to New Zealand from US President Trump’s policy agenda appears to be potential trade barriers against China.
“Mr Trump has talked about 45% tariffs on Chinese imports, which would reduce American demand for Chinese products, dampening economic growth in our largest export market and undermining New Zealand’s export incomes.
“President Trump’s proposal is a significant threat to Chinese & global economic growth, and New Zealand would not be able to dodge the flow-on effects over the following couple of years if trade barriers between China & the US were implemented.
“Closer to home, a change of government or a shift in the balance of power after New Zealand goes to the polls on 23 September could also affect our medium-term economic outlook.”
Bald assertions can take some filling in to make sense. For migration & population growth, the biggest factor is the Australian economy.
In the June 2015 year, Australia’s net migrant inflow was 168,000, down nearly 10% from the previous year, and 40% went to New South Wales. The country’s population rose by 338,000 (1.4%) to 24.1 million in the year to June 2016. Incredibly, those seem to be the latest figures from the Australian Bureau of Statistics.
The New South Wales economy seems to be in better shape than other states’, which may lead to a resumption of higher emigration from New Zealand in the next couple of years. A resumption of growth in Western Australia’s mining sector looks further away than that.
The Auckland construction market looks overheated and, combined with the unusually high level of infrastructure underway, will drain labour from other parts of the country and require imported labour.
One factor in New Zealand’s migration statistics that’s played down is the proportion of migrants from India, many on student visas and therefore seen as not really permanent migrants. I regard that pool of migrants differently, as a revolving supply because many return home, but still showing a net increase of over 10,000/year, at a similar level to the net inflow from China.
Statistics NZ projections
Statistics NZ’s latest regional projections show Auckland’s population growing at just over 1%/year on the low projection through to 2043, and at nearly 2% on the high projection.
One question there is whether the supply of and for housing will increase enough to dampen the increase in its price. The high growth projection for Auckland over the 5 years to 2023 would see the population up by 200,000 to 1.94 million – by an average 40,000/year, which would require an extra 14,800 homes/year to satisfy demand.
Changing trends will complicate values
The trend in new housing is toward less standalone housing and more intensive development, notably lowrise townhouses & suburban units along with retirement village units rather than a high concentration of apartments. Land values based on higher potential may change that lowrise preference.
A combination of the unitary plan allowing more building height, particularly in both suburban & regional centres, and council organisation Panuku Development Auckland’s regeneration programme for as many as 20 centres around the region could see an increase in apartment living as commercial & retail centre amenity improves.
That would shift the pricing focus away from houses in the most expensive suburbs and to different kinds of home. The expensive suburbs are likely to retain their high pricing levels because of limited supply – one reason they’re expensive even on bad days – but housing elsewhere should graduate to new ranges.
To achieve those changes, more amenities will be needed in suburban centres. As a city apartment dweller told me yesterday, Auckland fares poorly in the provision of amenities for apartment occupants compared to many cities in other countries, such as Vancouver & Sydney.
Some developments provide a pool or a gym, many don’t. Rather than an increase in inhouse amenities, and against council budgets which are very unlikely to allow for an expansion of communally owned amenities, the growth of apartment living in suburban centres could be matched by the separate private-sector provision of amenities.
That in itself would produce 2 value changes – one to reduce the value of apartments by eliminating costly inhouse amenities, the other to increase their value for proximity to externally available amenities.
Attribution: Infometrics release, my own economic date, Statistics NZ, Australian Bureau of Statistics.