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New Zealand house and park

As we’ve been expecting for some time, house prices have softened and continue to soften. They are down somewhere in the order of 7.00% from their peak. The year-on-year price change has now gone negative in Auckland. Year-on-year we will end up down about 10% before things settle down.

By Goldman’s definition that is a correction. Hardly feels that way in the context of a market that has gone up 47% over the past four years.

House sales down 20% is not news. They’ve been down since October 2016 so activity is down but stable. In the next few months year-on-year headlines will disappear. My feeling is that the market has stabilized. Another indicator is that consumer confidence has rebounded to a 3-year high.

Recent market commentary points to interest rates staying low and we’re going through a strong patch of economic growth with tourism booming and set to stay that way. We’re a great little country, far, far away from global problems. I wouldn’t want to live in South Korea just now!

The tight credit conditions will stay around. The Reserve Bank will be happy with its macro-prudential tools and rightly so. At some point I can see them loosening up the 80% LVR speed limit for owner-occupied borrowers but unlikely in the short term, unless the housing market stalls further.

That’s key: the current housing malaise has been caused by tightening credit criteria. The Reserve Bank wants to stop price appreciation, maybe a slight decline, but it doesn’t want a full-on correction. It is wishful thinking from those predicting a major collapse in property prices.

Our population growth is running at 100,000 per year, and we are predicted to hit 5m people within two years. With that level of growth and us still underbuilding, house prices will remain relatively stable.

So far, we’ve seen vendors remove properties from market rather than sell at lower prices. That trend will continue. In the absence of stress, people simply don’t need to sell, or downsize, or move. What you end up with is a stalemate and lower sales volumes. Sales volumes in Auckland are down twenty percent year-on-year.

However, it’s not homogenous. Section prices have come under more downward pressure than existing dwellings. Land developers are struggling to sell sections. They don’t earn holding income on sections, so ultimately developers must sell even if that means lower prices. The main buyers are building companies, and they will wait for better prices. Build prices can’t drop much, so any price reduction will come from a fall in land prices.

Compounding the risk for developers is a likelihood that some buyers won’t be able to settle. The same may also be true of apartments. At the height of the property market speculators were buying off-plan thinking they could resell before settlement for a profit. That’s not happening and they might not be able to settle themselves. Other buyers have been caught out by much tighter lending criteria. Poor real estate practices and greed are to blame, not the banks.

Apartment developers have historically relied on selling to foreign investors, but these investors can no longer borrow in New Zealand. As a result, there could be a glut of investment apartments in Auckland with no buyer demand. They also won’t be exempt from the 60% LVR restriction having already been sold once.

Build costs are going to stay high. Auckland city is having to repurpose land which is an expensive exercise. The only dwellings getting built are townhouses and apartments and that increasing density will lend itself to higher land values in the inner city. There’s also strong demand from infrastructure projects that will keep labour costs high.

In a soft market there will be opportunities, especially with problem properties. Where properties need to be sold and they have consent issues or leaky issues, or it’s a forced sale, they are likely to sell at a reasonable discount.

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