I have read so many opinions on this topic this year I have lost count! Everyone that has an interest in real estate realises that the property sector is cyclic in terms of its value growth trends. Given that Auckland residential real estate has experienced several years of strong value growth, people are now starting to speculate as to when the next inevitable downturn will hit. As someone working at the ‘coal face’ of real estate in Auckland, here are my thoughts on this topic.

Median house prices in Auckland from September 2011 to the middle of 2016. Source: Real Estate Institute of New Zealand

Before it is possible to predict when a potential downturn may arrive, it helps to understand what factors have been driving the housing market in an upward direction since our country emerged from the Global Financial Crisis of 2007 – 2009. The truth is that there have been many influences, which have all combined to create an irrepressible driving force on prices. Here is my assessment what has caused house prices to hit record levels over recent years…

Demand on housing stock is accelerating.

• Kiwis living abroad have been flocking home to escape economic and social unrest in other parts of the world.
• New Zealand is becoming recognised as a relatively safe and healthy place to live and raise a family by many foreign immigrants.
• This has resulted in a complete reversal of the ‘population drain’ we were experiencing only a few years ago. Statistics New Zealand’s annual adjusted figures showed a record net gain of 69,100 migrants to our country in the year to June 2016.

The supply of land & houses has not kept pace with demand.

• The disjointed local council structures of the past (multiple local City Councils operating under the umbrella of the Auckland Regional Council) lacked a cohesive strategy for meeting the long term growth demands across greater Auckland. The restructuring of regional governance to form the Auckland Super City in 2010, with one Auckland Council, aims to redress this problem. The new Auckland Unitary Plan should allow for a greater supply of houses to meet the increased population demand, but this may take several years to catch up on the current supply shortage.

Record low mortgage lending rates.

• The Reserve Bank of New Zealand has been steadily lowering the OCR (Official Cash Rate) for a number of years now in a bid to stimulate the NZ economy through the post Global Financial Crisis recovery period. This has had a flow on effect of allowing the trading banks to offer very low retail mortgage lending rates. The RBNZ graph below clearly shows mortgage interest rates trending downward from around 2009, through to todays current levels below the 6% mark.

The rapid increase in values has fuelled speculative investment.

• With the well-publicised rapid gains in property values, the Auckland property market has become very attractive for domestic and foreign investors looking to achieve strong short/medium term returns. This has created an upward spiralling gain cycle. What do I mean by this term? Here is a graphic explanation of this cycle:

The more that values increase, the more attractive the property market becomes. This results in a type of ‘self-fuelling’ acceleration. In recent years the Reserve Bank has attempted to curb this speculation and take the heat out of the market by introducing several new regulations targeting ‘investor buyers’. One element of these new regulations is a toughening of bank lending requirements in relation to Loan to Value Ratio Restrictions (LVR’s). These interventions appear to have only had a very short impact period (cooling the market), before investors have stormed back into the Auckland property scene.

So now the big question…I have presented a few of the many factors that have combined to create a ‘perfect storm scenario’ on house prices, but when will the value growth slow down, or even reverse?

My opinion on this is simple and logical. Until one (or more) of the factors driving the market upward either ‘self-correct’, or are altered via intervention, the general state of the market has no reason to change. So very quickly, what could happen to the market drivers to cause a correction in prices?

• Reduced demand for housing:
• Global and domestic factors may reduce the positive net migration to NZ.
• Increased supply of land and houses:
• The Government & Auckland Council are committed to increasing the supply of houses in Auckland via the new Auckland Unitary Plan. This should ease pressure on prices, but may take several years to actually have an impact.
• Increases in mortgage lending interest rates:
• This would reduce the ability for buyers to borrow for residential housing. The problem here is that the Reserve Bank appears to be reluctant to increase the Official Cash Rate for fear of having a negative impact on other areas of the NZ economy.
• Further regulatory intervention by our Government via the Reserve Bank of New Zealand and/or the Inland Revenue Department:
• In reality, this is just about the only area that I can see the potential for an influence on the Auckland property scene. It is obvious that the Government is concerned about the rapid increases in residential property values right across New Zealand (but especially within Auckland). If the market continues to accelerate, watch for further intervention.

My final thoughts…

There will be a ‘market correction’ at some stage. History tells us that this is inevitable. Do I see it coming soon – NO. In my humble opinion, unless there are some unforeseen events around the corner, there is the potential for an extended period of continued value growth ahead of us. I am expecting a strong residential housing market across Auckland for the remainder of 2016 and into 2017. The economics graduates can try to put a stake in the ground as to when the current growth cycle will end. All I can say is, good luck to them…. :)

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