Questions put to me about the New Zealand housing market by the London Financial Times for a feature they were preparing caused me to reflect on what has happened to our market since the 2007 global financial crisis.
While always conscious that the level of change over the 9-year period has been significant, I found digging into the changes, and then explaining why they occurred, was an interesting exercise.
It also made me reflect on what might occur if there was another major price correction.
When viewed across a 9-year time span, the conclusion can be drawn that the 2007 global financial crisis had no lasting impact on the housing market.
The areas most affected at the time were the number of properties sold and the number of real estate agents employed.
In Auckland in the 12 months following the crash the number of properties sold fell 40%, and it took six years (till 2012) for sales number to surpass those in 2007.
When it came to prices the correction was shallow and short-lived. The average sales price fell by 5% in the first 12 months after the crash, but within two years prices were regaining lost ground and had surpassed the 2007 average price within four years.
In effect, the majority of home owners sat tight when prices retreated, and waited for prices to recover.
Is that what would occur again if there was another price retreat?
Certainly those that did sit tight have benefitted enormously and since 2008 prices have increased year-on-year, and are now 70% higher than they were pre the 2007 crash.
In the past three years, the average sales price increases in the 12 months ending September were, for 2016 10%, 2015 13% and 2014 12%. This gives an average price increase between September 2013 and September 2016 of 40%.
It is a point those who constantly predict a doomsday type future could well reflect on.
Another major point often referred to by those who ‘worry’ about current prices is what will occur when house mortgage interest rates ‘inevitably’ rise.
In the lead up to the 2007 global financial crisis floating mortgage rates were between 10% and 11%, a far cry from today’s Westpac rate of between 5% and 6%.
The Reserve Bank’s latest position on interest rates would suggest that mortgage rates are unlikely to increase anytime soon. If the market could live with 10% rates around the time of the global financial crisis it suggests if rates did increase it might not be the threat many perceive it to be.
Another aspect I needed to look at for the Financial Times was the price differential between Auckland and other centres.
Latest statistics* note that Auckland, Northland, Waikato/Bay of Plenty, Taranaki, Wellington, Nelson/Marlborough and Otago all set record median sales prices in September.
Compared to the country’s other main population concentrations Auckland’s median price is 72% higher than Wellington’s, 78% higher than Waikato/Bay of Plenty’s, 90% higher than Canterbury/Westland’s and 179% higher than Otago’s.
These are significant differences.
Estimated 30,000 properties short in Auckland
We know that in the past decade the number of residential properties built in Auckland has not kept pace with population growth, and it is estimated that the City is some 30,000 properties short of what it needs to meet demand.
With population growth continuing to outpace the rate at which houses are being constructed it is unlikely that the supply situation is unlikely to be reversed over the next few years. Hence higher house prices.
But what is drawing increasing numbers of people to Auckland while other centres offer such significant price benefits?
The conclusion I reached is that Auckland’s combination of future economic prosperity in the form of work opportunities and the multiple lifestyle benefits of the region are a more compelling magnet than the negatives of higher house prices.
People live in Auckland out of choice. And based on current trends, that situation is not about to change.
*The Real Estate Institute of New Zealand
Managing Director, Barfoot & Thompson