Auckland housing stalemate but not a ‘crash’

Chess pieces

Confidence in the housing market is low and that’s not surprising given the amount of negative press it has had over the past 6 months. Is this the start of the market crash pundits have been waiting for, me included? 

I don’t think so.

This increasingly feels mid-cycle to me. Last cycle we started to get similar headlines in the early 2000s but it wasn’t until 2007 that the market peaked. When I reluctantly purchased in 2003 (it was the wife’s perseverance) I was convinced prices couldn’t keep going up.

We don’t have any of the fundamentals that occur at the end of a cycle – the most noticeable being loose credit. Bank credit is tight. We don’t have anywhere near the same exposure to sub-prime mortgages that the US had in 2007, the country is at full-employment, we are forecasting five million tourists a year over the next decade and interest rates are low (and I think will stay low.)

The biggest clue is that the crowd and the mainstream media don’t predict market corrections.

It’s been a topsy-turvy start to 2017 for sure. The housing market in February was the weakest I’ve seen in a long time but I heard anecdotal evidence that it was broadly felt across several industries. For us, April was also a strange month and that also came through in house sales statistics.

Yes, the market is weaker but something else has changed that makes interpreting this time of the year harder. We’ve changed the way we holiday. A lot of people are working through Christmas and opting to take holidays later in January when the weather is settled. After too many rained-out holidays, I do the same.

We also have Auckland Anniversary, Waitangi Day, ANZAC day and Easter resulting in five short weeks at the start of the year. Great for holidays, not so great for selling houses.

I wouldn’t get too caught up on the house sales statistics for April. The real insight will be in the May statistics, out middle of this month. I suspect the numbers will be weak compared to last year and will stay weak all year with an election coming up in September.

Goldman Sachs came out saying there is a 40% chance of a price correction in the next two years. Before panic sets in, Goldman defines a correction as a 5% drop in prices. To me, a 5% drop is hardly a correction when house prices have increased 70% over the past decade. I think their 5% is sensible if not a bit conservative. I just wouldn’t call it a correction.

Some would suggest we’re in the same position as the US in 2007 which preluded a 30% drop in house prices. In 2007, roughly 20% of the US mortgage market was for sub-prime adjustable rate mortgages where the borrowers couldn’t make repayments. In New Zealand, what little sub-prime market we had, disappeared in 2008. Non-bank lending (ignoring developers) is about $500 million a year against a market of $40 billion a year.

But the argument continues: interest rates are going up. That is what the government and bank economists are telling us so it must be true. If interest rates go up it follows that people won’t be able to afford their mortgages, we’ll see an increase in ‘forced sales’ that will drag down prices until houses become affordable. The 30% fall pundits are almost feverishly waiting for.

Some will pull out graphs of the last one hundred years of house prices and say that it must revert to its long-run mean in terms of income to debt ratios. They might predict a 75% drop in house prices.

Of course, the pro-housing camp has its own mythology about housing shortages, unitary plans and population growth. My favorite argument is that house prices have doubled every 10 years for the past 30 years.

It is reasonable to expect some sort of price adjustment. I think it won’t be that big or last that long. That’s not just my view. Tony Alexander from the BNZ has expressed something similar.

Sales volumes are down by as much as 30% and inventory has increased off historic lows. Auckland currently has 19 weeks of unsold inventory. (During the GFC it peaked at around 50 weeks.) 

But the buyers haven’t gone away. They are sitting on the fence, or still struggling to find the right property at the right price, or they don’t want to have to sell. Under LVR restrictions it’s too hard to keep your existing property if you’re wanting to upgrade and so homeowners are tending to stay put.

Nobody needs to sell. Unemployment is low and less than 1.50% of home owners are behind in their mortgage repayments. The only mortgagee sales tend to be speculators and crime related. Most vendors will take their property off the market, rather than sell at a heavy discount.

In contrast, we have a rapidly growing population, and tourism is forecast to hit 5 million per year over the next decade. That’s not surprising when you think that in the USA alone 10,000 people are turning 65 every single day. Pause and think about this for a moment. 10,000 in the US alone, every single day. The retirement of baby boomers is fast becoming a tourism gold rush. Go AirBnB!

These are not dire times by any stretch.

We have very high build costs and our construction industry is, I personally believe, single-handedly behind NZ’s poor productivity statistics. The sector is seriously bad! That’s partly the way we run local government, monopolistic material suppliers, and a lack of scale. It’s also managerial incompetence and a lack of accountability. Nonetheless, the issues in this sector are real and it’s not changing. There is no risk of over-supply anytime soon!

So, we’re in a stalemate with low sales volumes and static prices.

The longer this goes on, the more pent up demand will flow back into the market when confidence eventually returns. We have roughly $250 million of approvals which is consistent with 2015 and 2016. 

The tighter credit conditions are working (and that’s a good thing) but we need much higher levels of building activity, or a change in immigration for the current ‘reset’ to be sustainable.

I have consistently expressed concerns about the property market and have done so for years. To me, land prices are too high. Buyers have speculated on prices and failed to understand construction costs and risks. There are plenty of speculators sitting on undevelopable land that at some point may need to sell and take a loss. It’s all well and good buying a chunk of land and getting a resource consent, but ultimately someone still needs to build it, and someone needs to live in it. That’s where I expect to see a price correction – the premium to come off sub-dividable land as investors realise it is simply uneconomic to develop or hold, but that’s on the fringes of the market and for most people is meaningless.

For sure, there will be people who lose on property over the next two years, but I absolutely don’t see this as a full-blown market correction. 

As such, there is increasingly some good buying in the current market if you are brave enough to go against the prevailing ‘wisdom.’