A turning point in the market, but which way?

Opinion by Jonno Ingerson
A turning point in the market, but which way?

There are some really interesting things going on in the property market at the moment.

One thing that is getting a lot of attention lately is how fast Auckland values are continuing to rise. According to our house price index, values in central and west Auckland have increased 5.2% over the past 3 months. Previous times when values rose that quickly were back in 1994 and 1996, and in 2002 and 2003.

SEE ALSO: What’s so different about Auckland?

The reasons for Auckland’s recent increase can be variously put down to a lack of choice for buyers, strong net migration, good consumer confidence, low interest rates, and investor activity.


What about the rest of the country?

Consider that Auckland is the only place that is pushing up national values; let’s look to the rest of the country. Values in the rest of the main centres are increasing only very gradually, and in most provincial areas are flat.

In recent months the actual number of sales has been the highest since 2006 or 2007, but let’s put that in context. Sales activity dived during the GFC and we have only very slowly been climbing out of that hole. So while we may be seeing sales volumes well above the last few years, it is off a very low base.

Furthermore if you represent that number of sales as a percentage of the housing stock at the time then you get a different picture. There are more houses now than there were in 2006 so even if the raw number of sales is the same, the percentage of the housing stock turning over is currently lower. Apart from the GFC, the current level of sales turnover is the lowest since our records begin back in the early 1980s.


The impact of movers and shakers

Compared to more buoyant times in the market, the current number of sales by all buyer types is lower. However, the number of people choosing to move house has dropped more than the others.

Of these movers, there has been a particularly significant drop in the number of people upgrading by moving to a more expensive house.

We know that there has been a real change since the GFC with more people now focusing on reducing debt. It also may be that in Auckland in particular that the jump in value required to upgrade is a step too far for many.

A possible alternative to upgrading is people undertaking significant renovations, however our analysis of building consents does not suggest that this has been happening any more than usual.


Will things pick up?

March is normally one of the busiest months of the year for sales activity. Over the past 35 years March has most often been the most active month of the year, with November not far behind. So we should expect to see March sales numbers above January and February, but looking at various other indicators of market activity it doesn’t look like there will be a spectacular increase. April will be lower due to Easter, May will bounce back a little, but then we are into the quieter winter months.

We have already started to see a seasonal fall in the number of new properties coming onto the market each week. In Auckland where buyers are struggling to find suitable properties, this is only going to make matters worse and lessen the choice. A lack of supply typically means upward pressure on prices.


Where the RBNZ fits in all this

Despite sales activity being weak, values across the country being mostly flat, and fewer people choosing to upgrade and instead pay down debt, the Reserve Bank is still concerned about the financial stability of the banks. Their concern largely stems from rapidly rising Auckland values and any exposure the banking and New Zealand financial system may face if Auckland values drop significantly.

There are a couple of things that the RBNZ is considering.

One is tightening up the rules around the amount banks can lend based on the borrower’s income. While this loan to income ratio is already considered by the banks when approving a loan, these new restrictions will make that rule be more firmly applied. This will potentially hit Auckland buyers harder as property values are much higher there relative to incomes than in most other parts of the country.

The RBNZ is also currently consulting with the banks on making them treat loans to investment properties differently to owner occupier loans. Once identified separately then it may be possible to apply different rules to these investor loans, potentially making interest rates higher on them. The devil is in the detail as to what exactly constitutes an investment property.

There is still water to go under the bridge before these things may come into effect, but indications are that it may be as soon as mid-year.

So it feels like we are at an interesting point of the market. I was expecting volumes to begin increasing again and a more normal buyer mix to return. However that now looks less certain and potential RBNZ changes may change the game significantly.

SEE ALSO: What’s so different about Auckland?


Jonno Ingerson

Jonno Ingerson is Director of Research at CoreLogic, and regularly provides the latest data and analytical insight on the property market throughout the country.

CoreLogic is a leading property information, analytics and services provider in New Zealand, and provides clients with innovative, technology-based services as well as access to rich data and analytics.



, , , ,