A Reserve Bank* report released in the past two weeks has seriously undermined a few urban myths about who, and what, is driving Auckland house prices.
The report analyses house sales and mortgage data not readily available to the public. Among its more telling findings are the questions it raises about some strongly held beliefs, including:
Investors dominate sales, and are the ones pushing prices beyond the capability of owner occupiers
First time home buyers are being shut out of the market
A significant numbers of buyers with access to offshore funds are out-competing locals who have to rely on raising mortgage money on the local market (and are consequently hindered by loan to value (LVRs) regulations)
In itself, this Reserve Bank report does not provide us with all the answers. It does, however, open the door to information that until now has been the domain of speculation. It drills down into data needed if good policy decisions are to be made.
It is a report that is worthy of wider publicity than it has received to date, and a full copy can be found here.
Investor market dominated by smaller investors
Investors have always made up a sizeable percentage of the buying market, and prior to the introduction of LVRs in October 2013, they bought about a third of properties sold.
As of July this year, this percentage had risen to 39%, but the report notes three important riders about the 6/7% increase
The primary driver of the investment market since the introduction of LVRs has been smaller investors who own between 1 and 3 investment properties
Some small investors will be reclassified as owner occupiers in coming months (based on the fact that they are really owners who bought before selling)
That investors purchase relatively expensive properties more frequently than cheap properties
That the investor market is dominated by small investors will come as a surprise to many.
First home buyers fighting back
Another not so well known fact is that while the proportion of homes sold to first home buyers dropped immediately on the introductions of LVRs, by June this year the number of sales to first home buyers was sitting at 21% of all sales, the same as before the rules came into force.
Rather than being shut out of the market, first time buyers, in much the same way their parents did, are finding the ways and means to get into their first home.
For the past two years the number of homes sold without a mortgage associated with the transaction has remained constant on slightly under 10% nationwide, underling that there is no class of buyer avoiding the LVR restrictions.
While it does not break out this data, the report notes that the proportion of cash buyers has fallen in Auckland and remained flat in the rest of New Zealand, and that “it appears a large number of these cash buyers are domestic residents”.
The disparity between facts and common beliefs
What the Reserve Bank report demonstrates is that the influences driving sales and prices in the Auckland marketplace are far more complex than some would have us believe.
Auckland house prices have risen at a significant rate. However, this report signals a warning that rather than introducing radical new measures that affect the rights of all to buy and sell what is private property, the Government and those that set policy should base decisions on better, fact based information.
Known facts currently do not line up with many commonly held beliefs.
First time home buyers are not being locked out of the market; buyers with access to cheap foreign money are not outbidding locals who are forced to borrow mortgage money locally; and professional investors with extensive portfolios are not distorting the market.
Although this report undermines my position, I still advocate that it makes sense to remove LVRs for first time home buyers if the home they are purchasing sells for less than $500,000. It could just be the extra support that enables first time buyers to get their feet on the property ladder.
New residential heart of Auckland City
On another topic, towards the end of the month I attended a sod turning ceremony at the Wynyard Quarter marking the commencement of what will be one of the most extensive apartment building projects in Auckland in the past decade.
It was a significant moment in the development of Auckland as this area is destined to be the new residential heart of the central City. It also gives buyers the confidence that the first projects, known as 132 Halsey and Wynyard Central, will be built.
Peter Thompson, Managing Director, Barfoot & Thompson
*A deeper look at recent housing trends: Insight from unit-record data. ANZ2015/6. Reserve Bank of New Zealand Analytical Notes. October 2015.