Tyler Durden states in Fight Club: ‘On a long enough timeline, the survival rate for everyone drops to zero’.
Some market commentators would have you believe the same about property prices. There is a significant amount of press at the moment about the woes faced in the property market. Few of these stories provide context.
Between June 2008 and June 2018 house prices in New Zealand rose 81%. It wasn’t uncommon to see house price increases of 10% – 20% year on year in most main centres around New Zealand and in particular Auckland. The price inflation was rapid in Auckland in January 2017, earning Auckland the title of 4th least affordable city in the world.
Needless to say, this runaway growth could not continue. People’s pockets are only so deep and I don’t know many people whose income rose comparably to their asset values. A slow down or even fall was inevitable.
That being said, the fall won’t continue forever. Yes, we are seeing a slowdown in property sales and a fall in prices in Auckland, but NO it isn’t bottomless and certainly not permanent. There are many factors to this market sentiment: bank capital restrictions, restrictions on foreign investment, low yields, stagnant wage growth. These things are key drivers to the inflation of homes and must now catch up.
Banks are currently feeling the pressure of the Royal Commission in Australia, Responsible Lending Standards and proposed new capital requirements. These factors are all pressuring banks to review their lending criteria and appetite, restricting the funds available. Particularly for investment properties.
Banks will however, after a period of deleverage and slower growth, lend again. They will grow their books and will come back to the market. Interest rates aren’t expected to fly through the roof back to the pre-2007 levels and New Zealand banks’ capital requirements ensure they are safe custodians. This return may just take some time.
Yields will come back to the market also as banks tighten their lending criteria and capital gains slow. In the market, the focus will be reverted back to yield and return on investment. There is also discussion around ringfencing with residential investments with losses no longer so easily passed through. Expect rental rates to increase and yields to return.
Residential properties will again have to wash their own face. Again – this will take time.
Wage growth is also coming back into focus. The tail end of last year was replete with discussions around minimum wage, teacher and nurse strikes and the minimum living wage. I expect wage growth to catch back up with inflation and house prices over the next 3 – 5 years. In November 2018, Auckland’s average wage to house price ratio sat at 9.74x. Expect this to fall with wage increases.