Property prices in Auckland appear to be at turning point. What happens next is the $500 billion question.
SCAN THE HEADLINES AND YOU’D THINK THERE were two Aucklands. One, a congested, overpriced nightmare, where properties are over-valued and the market is at risk of crashing. The other, one of the world’s most liveable cities, where economic strength, jobs growth and a positive urban environment point to an even brighter future. Which Auckland the city’s population is living in seems to change daily, but the drumbeat of negativity has grown louder recently, on the back of a run of stats that show drops in sales, listings, and confidence in the Auckland property market.
The annual growth rate in Auckland house values to the end of September was 0.8 percent, the lowest it’s been since April 2011, with actions aimed at slowing bank lending to property investors appearing to have worked.
Also contributing to skittishness in the market: a spike in construction costs, uncertainty in the lead-up to and immediately after the election and a promise by the new Government to ban foreign-buyers.
Bayleys Real Estate managing director Mike Bayley says “without a doubt, Auckland’s property market has changed in the last 18 months, but that doesn’t mean the city is no longer worth the attention. Auckland still represents significant value despite its higher prices from a local perspective. That’s because the fundamentals of the Auckland property market are strong.
“Auckland’s economy is strong, contributing 38 percent of the country’s economic output, employment levels are high, and population growth continues to out-strip growth in housing supply.
In addition, mortgage rates, although marginally higher than a year ago, remain low by historical standards and are unlikely to jump, with the OCR projected to remain flat until mid-2019 at least.
“The property market is a lot more complicated than the doomsday scenario requires. To get a housing crash – say a 20 per cent fall or more – you'd need much higher unemployment, much higher interest rates and/or a big oversupply. It's hard to see any of these in the near future.”
90 percent growth
Wind back to the Global Financial Crisis: the warnings that dominated the headlines and property discussions in Auckland between 2008 and 2010 are eerily similar to the ones we are hearing now. Back then, pundits warned that the bubble was about to burst, that house values would crash by up to 30 percent and wouldn’t recover until 2016. If you paid heed to advice that investing in the Auckland property market wasn’t worth your time, you'd be seriously out of pocket now.
Stats NZ figures show Auckland house values have grown 90 percent since the Global Financial Crisis, compared to 33 percent growth in Wellington, 30 percent in Christchurch, 51 percent in Hamilton and 43 percent in Tauranga. That growth closely mirrors rises seen in other highly rated global cities: Melbourne values have grown 101.4 percent and Sydney values 113.7 percent since the GFC, while values in Toronto and Vancouver have jumped more than 100 percent.
All up, the value of Auckland’s residential real estate, including land and buildings, is $500 billion, about 50 percent of the total New Zealand figure.
The property industry is the largest industry in Auckland and accounts for 13 percent of economic activity in the region, two percentage points ahead of manufacturing, the next largest. Recently released figures compiled by the Property Council show the property industry had a “direct impact” of $10.5 billion on the Auckland economy last year, and had “flow-on impacts” of $12.3 billion from increased supplier activity and employee spending.
Chief economist at ASB Bank Nick Tuffley says that although Aucklanders’ confidence in the property market, in terms of price growth expectations, has dropped, “a quieter market is viewed more positively by buyers.”
“When the market was hot, people were scared of missing out. But now, buyers can afford to take their time and do more due diligence,” Mr Tuffley says.
“First-home buyers, who had been competing for the same types of houses as investors, may also feel better off in the current environment. In a booming market, first-home buyers couldn’t keep up with the ever-increasing amount needed for a deposit and the level of debt-servicing required to buy the rest of the house.”
Mr Bayley adds “the Reserve Bank’s plan to relax the loan-to-value restrictions should also encourage new market activity in Auckland, as should the easing of lending rules for property investors.”
From January 1, banks will be allowed to lend up to 15 percent of total mortgage lending to customers with a deposit of less than 20 per cent, up from the existing 10 percent of lending.
Mr Bayley says the slowdown has not changed the overall positive picture in Auckland, where there are currently 105 suburbs with a median house value of more than $1 million, and the share of sales to multiple property owners remains near record levels.
The release of new council valuations at the end of the year saw 68 suburbs spike in value by 50 per cent or more since 2014, with two suburbs rising in value by more than 80 per cent: Drury, up 81 per cent, and Westgate, up 86 per cent. The big increases seen in the outer suburbs appear to have been driven by buyer demand for entry-point housing.
Mr Bayley says “it is estimated that 150,000 more Auckland homeowners have become instant paper millionaires as a result of the new valuations. This matters because much of the confidence in the economy is underpinned by home-owners feeling rich. An increase in a property’s CV allows home-owners to start conversations with their banks about finance options and moving up the property ladder.”
Nick Goodall, head of research at CoreLogic NZ, agrees that the new valuations will have a positive effect on the mindset of owners and may encourage them to approach the banks.
Some economists believe that underlying demand will drive a rebound in the Auckland, as political uncertainty wanes and the new government beds itself in.
The effects of property controls in other popular real estate markets around the world have been short-lived. Following the implementation of the foreign buyers tax last year, Vancouver's real estate prices dropped but then quickly rebounded, surging to a record C$1,019,400 in July — an 8.7 percent jump on the previous year. Demand in the city is still greatly outstripping supply.
Professor John Andrew, a real estate specialist at Queen's University in Ontario, says “the decline in Vancouver's housing market was temporary because the new policy only managed to affect buyer psychology: some prospective buyers sat on the side-lines to see how the tax would play out.
"Any time you've got an uncertain market, that’s always a temporary effect. You've had people saying, ‘Our goal is to cool the market’, and that has made a lot of buyers say, ‘OK, I'm going to hold on, I'm going to wait,’” he says.
Mr Bayley says “once there is more clarity around what effect the New Zealand Government’s ban on foreign buyers will have on the market, buyers will realise the world is still good from a real estate standpoint.”
Mr Goodall believes that Auckland can learn from the experience of other global cities, such as Sydney and Toronto. However, he cautions that there are “different dynamics at work in those property markets, and decisions taken by the new Government may prolong the slowdown”.
Centre of gravity
John Tookey, professor of construction management at AUT, says cities like Auckland will always have huge value from an economic and social perspective, and “if you are from a hyper-congested city, Auckland will feel like paradise – the opportunities and liveability are off the charts”.
He says there is a very straight-forward answer as to why there are radically different views of the city. “People who live in high-quality accommodation and have multiple opportunities for economic advancement will view the city more positively than people who feel shut out,” he says.
What a lot of New Zealanders struggle with, Professor Tookey says, is the notion that the traditional Kiwi dream of quarter-acre living has changed over time.
“The reality is that a quarter acre section with a standalone house and room for the kids to play, all within a glorified village environment, is not a credible proposition for the vast majority of Aucklanders. The challenge for the city going forward is to create the conditions and values of quarter-acre living in a quarter of the space.”
The new Housing Minister Phil Twyford says that given the shortfall of housing in Auckland and the population and growth projections, this city is going to go up and out. The Government plans to build much of the new housing in the city around the transport network. “We want to do density well and build great urban communities for people to live, work and play,” he says.
Despite the challenges facing it, Auckland remains the centre of gravity for business in New Zealand – 184,000 businesses and the Asia-Pacific headquarters of 100 multinational corporations are based in the city – and is home to more than a third of the country’s population.
The rate at which Auckland's population is growing is faster than for any other region in the country and current population projections put the city passing the two million mark within a decade and more than 2.5 million by 2043.
With more than $26 billion worth of large construction and infrastructure projects underway in 2017, Auckland is in the midst of a construction boom which will continue into the next decade, helped by a strong pipeline of opportunities. The redeveloped waterfront, new residential and commercial developments and new transport infrastructure, such as the City Rail Link and the proposed light rail link to the Airport, are all combining to create a city that will become a cultural and economic epicentre for the Asia-Pacific region.
Auckland’s standing in global rankings is already high: it is the fifth most innovative city in Asia and Oceania, 89th most innovative in the world; the fourth most diverse city in the world; and the sixth friendliest. It has held the third spot in the Mercer Quality of Living Index for six years in a row, and was named the eighth most liveable global city in The Economist Intelligence Unit's Global Liveability Report for 2017.
Cities that score best in global liveability surveys tend to be mid-sized cities in wealthier countries with a relatively low population density. These can foster a range of recreational activities without leading to high crime levels or overburdened infrastructure.
In the Economist Intelligence report, Auckland scored 95.7 out of 100 on the liveability scale which measures 30 factors related to safety, health care, educational resources, infrastructure and the environment to calculate scores for 140 cities. The cost of living in Auckland is also lower than in Sydney, New York and London.
Mr Tuffley says Auckland’s long-term prospects are positive, “provided it can continue to make itself reasonably liveable, and balance the benefits of being a large city with the costs”.
“Auckland will continue to experience strong population growth, which means living close to the centre of the city will come at a premium, and that the appreciation in land values will continue to filter out,” Mr Tuffley says.
“There’s no doubt that Auckland has experienced a certain amount of growing pains in the last four or five years. Auckland, like Melbourne and Sydney, has become increasingly attractive to the rest of the world. The attributes that New Zealanders take for granted – a relatively small population, an impressive outdoors environment and better air quality – are ones that people from other countries put a lot of weight on.
“Auckland needs to start thinking of itself as a global city, and plan effectively for the pressures population growth and migration have put on the city and its infrastructure.
“Better coordination between local and central government on housing and infrastructure development will improve matters. The Waterview Tunnel is an example of a project that’s actually made a material difference to Aucklanders’ lives, improving traffic flow between the city and the airport. Other transport projects, such as the Central Rail Link and extra tracks for the southern railway corridor, will have a tangible effect on the city.”
Mr Bayley says “Auckland’s ambition and growth have made it a world-class city. There are costs to this but factors such as quality schooling, safety, the friendliness of locals, job prospects and a better all-round quality of life will support ongoing demand for residential property.”