Stable house prices but falling apartment prices

As I’ve eluded to over the past three months – I’ve expected house prices to stay reasonably stable especially entry-level properties where we see very high demand from first home buyers. With mortgage rates below 3% it is cheaper to own than to rent and if things go wrong the system will look after you. For example, mortgage deferrals. It is a no-brainer for first home buyers to buy if they can look through the short-term noise.

However, there will be pockets of the market that are hit harder, and one of the segments is apartments.

A lot of apartments are purpose-built investment properties. They’re small and basic without the amenity that you expect as an owner-occupier. Traditionally, our inner-city apartments have targeted a rental market with tenants that are students and working visa holders.

To be quite frank some of the downtown apartment buildings in Auckland are eyesores.

Some recent examples

At auction this week we saw a few examples of what is happening. A 79sqm apartment in Mt Eden that would appeal to first home buyers sold for $720,000 which was 10% over its CV of $650,000 and $9,100 per square meter.

In contrast a 40sqm apartment in the Volt building with a GV of $420,000 sold for $340,000. It last sold for $378,000 in 2018.

A 53sqm two-bedroom apartment in the Scotia building with a GV of $480,000 (and last sold for $470,000 in 2016) sold for $421,000 and $8,000 per square meter.

That’s a 10% loss in value plus the vendor will have had sales costs.

In calling out falling apartment values, there is almost a sense of inevitability that prices will fall. This is what to expect when you have a surplus of supply and reduced demand. Buyers will be reluctant to catch a falling knife and prices will fall further. Investors are buying but they are doing so on fundamentals and pricing for net yield.

For new investment apartments coming to market, although it is not reported I suspect there will be significant buyer defaults. A lot of these apartments have been purchased for around $12,000 per square meter.

It is a tale of many different markets. I think shoebox apartments (<50sqm) have got a way to fall yet before inner-city apartment prices bottom out.

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