January housing statistics were bleak, and Barfoot & Thompson’s results from February are not much better. January house sales were the lowest since January 2008. Now Barfoot is reporting its lowest February sales numbers in 16 years at the same time as listings are jumping. The average house price has dropped from $865,000 to $820,000, a fall of 5% over the past four months. That sounds worse than it is, as prices typically fall over the summer break. More noticeable is the fall in sales volumes and an increase in listings.
This doesn’t come as a surprise, as we’ve been talking about tightening credit conditions for some time. It is panning out largely as expected, so let’s go back over what we’ve said previously.
Everyone knows that Auckland house prices are high and it’s disappointing to see so much of our hard-earned income soaked up by mortgage debt.
House prices have been fundamentally driven by:
- High immigration putting pressure on housing supply
- Low interest rates making it easier to borrow
- A lack of supply creating more competition
- Speculative investment (especially off the back of the unitary plan) but also due to the influx of cheap money from Asia
- An unwavering belief that prices will increase
House prices cannot increase faster than incomes indefinitely – this is a mathematical certainty. If house prices go up faster than incomes, then proportionately more income is needed to service debt.
GDP (income) growth is roughly 3.5% p.a. However, on a per capita basis, it is only 1.5% p.a. so we are hardly getting richer. At a macro level, house prices have been fundamentally driven by lower interest rates.
Modern economies have grown off the back of debt-fueled consumption. Our mortgage book has increased from $61 billion in 2000 to $232 billion now. As more of our income is diverted to debt servicing, we consume less. That’s why economic growth is stalling and why Reserve Banks will keep interest rates low.
Much has been made of increasing interest rates, but for the most part it is misleading. Long-term interest rates in the United States have increased by 0.64% from 1.84% to 2.48% but talk of higher rates is already starting to wane.
Locally, the Reserve Bank is pushing up bank funding costs to increase mortgage rates, but wholesale interest rates are not moving nearly as quickly. The Reserve Bank has itself signaled that the OCR is unlikely to change until 2019.
We do not have generalised inflation that would warrant higher rates and there are still large deflationary forces at work that will be around for decades to come. I think the prospect of increasing mortgage rates is overstated.
Auckland is still close to full employment and that doesn’t look like changing anytime soon. In the absence of unemployment, low levels of inflation, and low interest rates, there’s nothing ‘fundamental’ that will push prices lower.
We still have high levels of immigration and that doesn’t look like it’s changing. Our relatively stable economy is attractive as is our lifestyle and environment. In some ways, it is an expensive place to live and in others it is not. There is so much we take for granted, like a garden, local parks, or simply a view. I always laugh when Kevin from Grand Designs UK gets excited about seeing a few trees from an upstairs window.
Which brings me to the last and most relevant driver – speculation. A lot of the heat in the Auckland property market over the past few years has been based on the prospect of capital gains. Put another way – leverage and greed.
Just about every type of asset market behaves the same way and normally it ends badly. Markets tend to overshoot and crash when the economy eventually tanks. The difference right now is the economy looks solid.
The Reserve Bank has been doing its bit to rein in house price inflation. Initial macro-prudential tools were not enough, so in mid 2016 they coerced banks into stricter controls around foreign based income, which hit the Chinese market hard. They then introduced a 40% deposit requirement for property investors. The double punch has finally winded the market.
And as a result, we are seeing lower sales volumes and prices starting to fall. Some of the most speculative investing has occurred in South Auckland. It is where property spruikers and agents have always coerced naïve mum and dad investors into buying. For the last couple of years ‘quick flicks’ have plagued the South Auckland market and left prices artificially high. But now, buyers have simply disappeared. Investors don’t have the equity to buy with 40% deposits and face lower valuations on their existing portfolio. First home buyers don’t exist in the same numbers down south.
Prices will fall but won’t collapse. The economy is simply too strong and most vendors will take a property off market rather than sell at a low price.
West Auckland and parts of the North Shore have become a buyer’s market and will soften in the short term. My barometer for West Auckland is Te Atatu Peninsula. It’s a popular suburb with high income first home buyers. Regardless, there are now 64 listings in the Peninsula which is a big jump up from a couple of years ago.
That said, our mortgage application volumes are ahead of the same time last year. The difference is that clients are sitting on the fence and not in a rush to buy. At some point, they will surge back into the market like they did after a slow patch in 2014 when LVR restrictions were first introduced.
The Auckland market is amorphous. Local drivers are very different.
We still have 5,000 new immigrants arriving into the city each month. Unless we see an increase in unemployment or a big drop off in immigration, I don’t think the slow-down in the market will translate to a major market correction, more a price adjustment. As a reference point, Vancouver went into similar territory late last year and whilst the city had a significant drop in sales volumes, prices have only edged 2.8% lower over the past 6 months.