The true market price of a house is always what a buyer is prepared to pay to the owner for possession.
Council capital valuations (CVs), professional valuations and real estate agent estimations, normally based around set formula and recent local property sales, are simply guides.
As each property is unique, as are the requirements of both the buyer and seller, it is a wrong assumption to say that these price estimations are what should be paid, and that to pay anything higher is to pay ‘too much’.
Some economist and commentators say that Auckland housing is ‘over valued’ based on historical comparisons tied to the average wage or the percentage of a person’s monthly income required to pay the mortgage. While these comparisons are interesting, ultimately price is what a willing seller and willing buyer agree on.
The most effective hand brake to the two parties agreeing on a price that is out of hand is the lending practice of banks.
Through their mortgage lending practices banks determine whether they will lend sufficient money to a person to enable them to conclude the transaction. That decision is normally based on the applicant’s financial wealth, and ability to service repayments over the period of the loan.
Based on the low number of mortgagee sales in 2013 and this year the banks are keeping a tight grip on this.
So what might appear to be a high price to those without all the facts, to the buyer who wants the house, and the bank that lends the money, the settlement price can be a perfectly sound financial transaction.
Calls abound at present for more direct intervention by Government and regulators to control prices and among the proposals being advocated is barring non New Zealand residents from buying homes, and placing restrictions on property investors as to how many properties they can own.
In other words, they want to artificially depress prices by excluding some people from the market.
There will inevitably be unintended downsides associated with any form of intervention. For example, in introducing the 20% LVR ratio the Reserve Bank has created a situation where those not already in the housing market are being shut out of home ownership.
Personally, while in favour of LVRs, I believe the time is right to start easing the requirement, perhaps reducing it to 15 percent.
Perhaps the biggest unintended downsides of further intervention in the market will be to take away from the existing owners of Auckland’s 470,000 properties the opportunity to sell their property at the best market value possible.
By far the majority of existing property owners own only one home, and have diligently managed their financial affairs over many years to ensure they could meet their mortgage commitments. They bought on the open market, had to meet what the market rate for their property was at the time of purchase, and over the years have paid a variety of interest rates, some extremely high.
For many, achieving a market value for their home represents their ability to better fund their retirement years.
In seeking to solve a problem being faced by one group, it does not seem reasonable to impose a penalty on another.
Economists and commentators have widely different views as to why property values continue to rise in Auckland. For me, the most compelling is the case made by the Ministry of Business Innovation and Employment.
It makes the point that since the start of the global financial crisis in 2007, a period of seven years, Auckland has grossly under invested in building sufficient new homes to meet its population growth. It estimates that currently the City is 18,000 dwellings short of what is needed for the City’s current population.
Building activity at present is around 10,000 to 12,000 new dwellings a year, so it would take some 18 months to build enough new homes for the City to catch up with its current needs.
Meanwhile the population will have continued to grow rapidly, and with forecasts predicting it will continue to do so for the next few decades, the chances of the City getting ahead of its housing challenges in the next few years is not looking good.
The Government, the City Council and private investors have numerous initiatives underway to address this problem over the medium term. These responses are far reaching and will over time ease the situation. However, in the next few years there will be more people seeking homes than available supply, and that can only lead to a continuation of prices increasing.
The current system is certainly not broken, and the handbrake in the form of our banks is keeping things in check. Trying to artificially reduce Auckland prices with intervention carries with it the potential to create far more negatives than positives.
Westpac has info and tools to help you navigate the house hunting process: