The unintended consequences of curbing house prices

Peter Thompson
The unintended consequences of curbing house prices

More than 470,000 Auckland property owners now know the new Capital (rateable) Value of their house, and for most the result will be pleasing news.

Property values over the past three years have risen significantly, and for most the gains since the last valuation will be substantial.

From the valuation notice, home owners will immediately see the discrepancy that exists between the value of their land and the house. Certainly for traditional style homes, which are free standing and surrounded by a garden, the land will be as much as three to four times more valuable than the house.

This fact underlines why property sells for the price it does in Auckland. It is land values, not house values, which lies at the core of the price issue. It is why Auckland property prices are outstripping those in other metropolitan areas.

And with no short-term end in sight to the growth in population, we can expect the pressure to remain on house prices.

SEE ALSO: Going up? Growth ensures Auckland property values will rise

The Governor of the Reserve Bank, Graeme Wheeler, made two interesting statements in November in relation to residential property prices.

The first was his belief that the Bank’s loan to value regulations (LVRs), which causes lenders such as Westpac to require the majority of borrowers to have a 20 percent deposit, was reducing the pace at which house prices were increasing and the growth in housing credit.

While I have no comment to make on housing credit growth, our own records confirm that house price growth has slowed. From May 2013 to April 2014 (the first 12 months covering when the regulations came into force) the average sales price of properties we sold increased by 10.3 percent. This compared with an increase of 13.2 percent in the previous, comparable 12 month period.

While LVRs may have reduced the rate of price rises, their downside is the impact on first time home buyers and those with a limited ability to raise a large deposit. Many in this group now see home ownership as out of their reach and have subsequently become deeply disappointed and disillusioned. They feel they are being discriminated against in favour of those already in the market or with a greater ability to save.

The Governor has made it clear the LVR restrictions are here to stay until net migration starts to decline. I am in favour of LVRs, but feel the time may have come for the minimum deposit requirement to be eased, perhaps from 20 percent to 15 percent. Such a move would certainly send a positive signal to those who feel shut out from the market.

Mr Wheeler has also commented on his concerns about investors in housing, saying the Bank was “thinking deeply” about whether to introduce measures to discourage practices which saw people buying multiple properties. He gave no specifics as to timing, what was being considered, or whether anything would be done.

The real challenge facing the Governor in looking at putting a brake on housing investment is to prevent unintended consequences, such as pushing up rents.

As a significant property manager, Barfoot & Thompson has extensive records on the returns thousands of investors are earning on their rental properties. Across the City, the average gross return on a three bedroom house is in the order of 3.5 to 4 percent, while net returns would be much lower.

In our most recent survey of landlords (carried out before the Governor’s comments) the consensus was they were prepared to live with such low returns. 30 percent said they did not intend to increase rents in the next 12 months, with a further 50 percent saying any rent increase would be limited to below 5 percent.

Government, and those living in rented accommodation, will not thank the Reserve Bank if an unintended result of an intervention is an across the board rise in rentals.

SEE ALSO: Going up? Growth ensures Auckland property values will rise



Peter Thompson

About the author

Peter is the Managing Director of Barfoot & Thompson. He started out with the company over 30 years ago in the rental division at the Otahuhu branch and continued to move through a number of positions in the firm including sales, administration and management. Eventually he was made a Director in 1997.

Peter is the grandson of Maurice Thompson – the original Thompson in the Barfoot & Thompson team which started out in the early 1920s.

In 2011 Peter was awarded Life Membership of the Real Estate Institute of New Zealand (REINZ).


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